CEO Speak 08th Jan 2013
Pricing will play a key role in shaping distribution models
Anthony Heredia, CEO, Morgan Stanley MF


Anthony Heredia looks back at 2012 with some satisfaction, and towards 2013 with a lot of hope and optimism. His fund house has turned in a robust investment performance in 2012, with Morgan Stanley Growth Fund having a great year in 2012. His key challenge this year is to sustain this performance and work with his distribution partners in bringing in flows commensurate with this performance. Anthony shares his views on emerging industry trends, his market and business outlook and how he sees distribution shaping in the year ahead, post the recent regulatory changes.

WF : What is your outlook for equity and debt markets for 2013? What are likely to be the key drivers for both markets?

Anthony : Our outlook on debt markets is positive. We see interest rates coming off during the year, and that should augur well for duration portfolios. On the equity side, we are optimistic, but feel that returns will come more from stock picking, than broad market calls.

WF : What is your business outlook for 2013 for the mutual funds industry? What are likely to be the key drivers?

Anthony : I think, the key driver, particularly in the first half, will be sales of fixed income funds. We have already seen this emerging as a trend in the last quarter of 2012, and it will continue to develop. For equity and hybrid funds, underlying markets continue to be a key factor. If we see positive markets in the first quarter, I think flows will start to come back.

WF : How has 2012 been for Morgan Stanley MF? What have been the key hits and misses of the year?

Anthony : The year has been good for us from two perspectives; investment performance and AUM growth in non-liquid funds. We made a change to the equity team managing Morgan Stanley Growth Fund (MSGF) in early 2012, and also re-organised our investing efforts in general. This has resulted in all our funds delivering either Q1 or Q2 performance, through most of 2012, with MSGF, being a standout performer. AUM growth has also been commensurate, our non liquid AUM is up 25% YTD. The disappointment has been the liquid fund, where in spite of performance, AUM has remained static. Being a small fund (Rs. 500 cr AUM), we haven't been able to attract flows from large corporates, and we need to figure out a way to get past this hurdle in 2013.

WF : One of the biggest issues the industry is facing is the relentless redemptions and closure of equity folios. Is there anything meaningful that can be done to stem these outflows or do we just have to wait for equity markets to break out into new highs for investors to gain confidence in the market?

Anthony : I think we need equity markets to continue their positive trajectory, for this trend to reverse. Outside of this, industry using its investor education funds, as early as possible to create some pull, will also help.

WF : How do you see the RGESS products doing in this tax season Jan-Mar 13? How do you see this product category growing in the future?

Anthony : I think this product category has great long term potential, although I do not see significant traction in the coming quarter (Jan-Mar 2013).

WF : Expectations are building up that tax sops will come in this budget to incentivise investors to channelize their savings into equity funds and away from gold. There is talk of a separate Rs.100,000 limit for ELSS products, there is talk of tax breaks for pension products from the MF industry. Do you have any expectations from the budget on these fronts? To what extent can tax breaks promote a regular flow of retail savings into mutual fund products?

Anthony : I would peg this more as 'hope', than expectation. To that extent, I hope that the budget does create a separate category for ELSS funds, which has even larger potential than RGESS in my view. On the rest, I expect a status quo.

WF : What are going to be your focus areas on investor and distributor education during 2013?

Anthony : Our focus will be primarily on distributor education and we will additionally do investor education, in partnership with distributors. We have three focus areas in mind; 1) Continue our Thought Leadership efforts through 'Connecting the Dots', which is a series that looks to provide relevant market insights on equity markets in general, without any fund house bias 2) Equip our sales team with facts and market insights, so that when they engage with distributors, they add value beyond the usual discussions on commissions and business environment and 3) Use some of the investor education funds to create awareness through advertising on mass media.

WF : How do you see distribution models evolving in 2013 given the various regulatory changes impacting distributors including B-15 focus, direct plans and the expected advisor regulations?

Anthony : I see pricing playing a key role in shaping the distribution models in future. The new regulations gives us the flexibility to tailor revenue models much closer to the specific distribution channels need, and that should help build a more sustainable business, not just for us, but also for distributors. An example would be an all-trail model for distributors rather than transaction based model. In terms of B-15 focus, for us the situation is slightly different. We still have work to do, in terms of building a large presence in the first 15 cities, and so our approach will be uniform across cities, rather than just B-15. On direct and advisor regulations, I think it is early to gauge its impact, but it is vital in both cases that we as manufacturers work alongside our distributors to deal with the impact, rather than take a 'hands-off' approach.

WF : What are your key priorities in 2013?

Anthony : Our key priority in 2013 is to communicate our investment performance story to distributors. Given our scale and size, the number of distributors who actively sell our funds is still small, and our priority will be to expand the number of active distributors, and continue our investment performance story. We are very clear that smaller players, such as ourselves, can only compete for market share on investment performance. In 2012, our only priority frankly, was to make sure the best investment talent of Morgan Stanley Investment Management India was integrated across our product range, so that investment performance in all our mutual fund schemes was optimal. In 2013, our key priority is to continue this investment performance, and work with distribution partners to get flows commensurate with that performance.

WF : What are your key messages for your distribution partners as we welcome the New Year?

Anthony : Our message is simple: We have many challenges, but we have to choose whether we look at these challenges as a glass half empty story, or glass half full. We would prefer the latter outlook, and hope we along with our distributors, make sure we fill the remaining half of the glass in 2013.