50-60 bps is not the right cost for direct plans

Swarup Mohanty


Mirae Asset Global, India

  • Swarup believes that direct plans of active equity funds have now become way too cheap – market should hopefully settle higher over time. Current direct plan TERs make the RIA proposition attractive in the near term.
  • Distributors have displayed great business acumen over the years and will grow their businesses despite margin challenges. Structural upswing will help expand volumes to compensate for margin compression.
  • Mirae Asset is making sound progress in evolving from an equity powerhouse to a full service asset manager.
  • Up next is its maiden ETF launch, followed by an Equity Savings Fund launch.

WF: How are business volumes in recent months of heightened market volatility – for you and for the industry, when compared with 2017 and early 2018, when everything was going right? Is there evidence of substantial retail investor apprehension that can be seen from flows?

Swarup: I think there was a fair amount of knowledge of the possible volatility in the market and the business plans were drawn based on this anticipation. So at Mirae Asset, we have not been very surprised with the markets. If you remember, we had stopped fresh purchase in Mirae Asset Emerging Bluechip in Oct 2016 citing possible liquidity issues in Midcaps in the forthcoming times.

We have been communicating continuously on the virtues of buying Equity at these levels and I am extremely thankful to our partners who have accepted the logic of our call and have supported us with inflows. We follow the calendar year of accounting and this has been a good year for us. We have seen flows from across investor and distributor class, from retail to institutional and from MFDs, RIAs, Private Banks and Consumer Banks. Our SIP book too has grown to above 260 Crs per month. It has also been a year where our Debt AUM saw reasonable growth too. We were also able to launch our first fund on the AIF platform in the form of a Real Estate Fund. So overall, it has been a step forward towards becoming a diversified asset manager in India.

WF: Margins in asset management and distribution will shrink consequent to introduction of new TER slabs and ban on upfronting and other forms of distributor compensation. What parts of the eco-system are likely to face the most challenges and which parts of the business do you see losing and gaining market share in the coming years as a consequence?

Swarup: I do believe that cost discussions and any correction thereof is part of all businesses and we cannot be isolated from that. I see the new TER as that intervention where we have to revisit our business plans and restructure them to the new regime. People who are able to adapt to this quickly stand to benefit and grow manifold. We, at Mirae Asset, have always been a supporter of the trail form of remuneration and had moved to it in 2011. We do not have a single rupee of clawback in our system. Our SIP book is also built on a trail model of remuneration. So we are happy with this change.

We are, as an industry, standing on the threshold of a structural upswing and acceptance of our products in the country and that is the best possible news that could have happened for us. If we are able to provide our investors a good investment experience the volumes could swing in a manner which could put all cost issues into the back seat.

WF: You are launching a Nifty 50 ETF – your first fund in the passive space. Given your phenomenal track record in the active equity space, what factors are driving your entry into the passives space?

Swarup: As I said earlier, we are an Asset Manager and in that capacity, we should be showcasing strengths in all areas of Fund Management. The Equity heavy AUM led to build a strong balance sheet for the AMC and now we are ready to venture out and build a complete Asset Management Company in the times to come.

The passive space is a natural progression for us. We believe that it is a separate business totally and we need to build track record as a good passive house too. It is also a business with we need to learn at our end too. It is with this thought in mind that we launch our first ETF, the Nifty 50. The launch date for our Nifty 50 ETF is 19th November. We would start with this fund and slowly graduate to getting more pedigreed products in that area. Mirae Asset globally manages USD 30 billion in ETF assets, making it one of the leading ETF managers in the world. Please note that Mirae Asset acquired Global X (the leading passive manager in US). They are known for some very innovative products in the ETF space. We intend to find synergies in the future between them and us and get some products to India on that side too.

WF: We are entering a phase in India where some of the best actively managed equity funds will be available at ridiculously low TERs of 50-65 bps for direct plans. How do you see this impacting:

  • Distribution businesses – especially those that focus on HNI and mass affluent investors
  • Growth of passive funds

Swarup: At the outset, I do not think 50-60 bps should be the right cost for Direct Plans. These are not active fund costs and it makes the business of active fund management pretty unattractive. I do agree that these are initial trends, but the market should settle at a higher cost than this. I believe that MF industry is fundamentally a business of advice and I do not see much change in that. We have seen enough changes in cost structure in the past but we have seen the serious distributors only growing their business in this phase. Most of our distributors have excellent business acumen and I see them only growing in this new regime. Yes, the new Direct TERs pose a good opportunity for the advisory business to take off and I do see it benefitting the RIAs in the near term. If they can develop a good advisory track record they could build a long term sustainable business with these TERs.

I believe that the passive investor and the active investor are two different profiles. The common denominator of the two would be a very small percentage at the moment. For the shift to happen, the broad alpha of the market has to decline. I do not think just costs would shift the active investors to becoming passive ones. India is still a structural growth story and the days of active fund management are still alive and kicking. The growth of passive investing would start as a separate vertical and I see a lot of Equity broking clients moving there before the active fund investor. It is a market which will see huge activity in the near future when some parts of the Equity market will start losing alpha on a sustained basis.

WF: What other product launches are you looking at in the near term to complete your product basket?

Swarup: We launch a product only if we see merit in it and we have the capability of managing it. We do see the Hybrid category as a good space for investors with a lower risk appetite. We already have our aggressive Hybrid which has crossed three years of track record. We do believe that the Equity Savings category to a good category for the retail Debt Investor. If the fund is managed at a reasonable cost, it can deliver good post tax returns. Hence we are launching the Mirae Asset Equity Savings scheme now. We plan to launch the NFO for Equity Savings Fund from 26th November till 10th December. We will start a discussion with the market on the virtues of this fund like we did when we launched the Healthcare fund recently. I hope our partners give us a patient hearing on what we have to say about our fund. This would complete our product basket for this calendar year.

WF: How are your plans shaping up on taking Mirae Asset from an equity powerhouse to a full service asset manager?

Swarup: I think this year has been the year of expansion for us at Mirae Asset. We have taken strides in building our Debt AUM this year. Our Cash Management Fund reached a peak of 3500 Crs of AUM this year. We also successfully launched our first Global Fund on the SICAV platform and currently advice assets of over 800 million in the offshore space (both in Debt and Equity). We launched our first Real Estate Fund on the AIF platform and are in the process of entering the ETF space this month. So from being known as a predominantly Equity Fund house, we are slowly but surely graduating into a full service fund house. The key going forward is to now recognise each part of fund management as a business in itself and build good track record of products in each of them. We see a transformation in the behaviour of advisors and investors in the country. Finally we see good products being rewarded and if we can build a strong product line, we see a great future for ourselves.

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