HSBC India's new AM chief shocked by stunted industry

The newly appointed CEO of HSBC Global Asset Management’s India business has expressed surprise at the slowness of the mutual fund industry’s growth domestically.

Puneet Chaddha describes himself as “a rank outsider” to the industry, having most recently worked as head of commercial banking for HSBC in India. He took up his present role last month after incumbent Vikramaaditya transferred to London as head of business strategy.

“I am surprised this industry has not grown more than it has,” Chaddha tells AsianInvestor from HSBC’s office in Mumbai. “Have I seen a large number of initiatives encouraging more fund houses to be set up, or existing fund houses reaching out to the larger base of the population? No, I have not.

“I notice with a sense of bemusement that investors are looking at mutual funds as another stock rather than as an asset class. They track the stock prices and NAVs of individual companies, and they are also tracking the NAVs of fund houses. But these are different vehicles, and over the longer term tracking NAVs on a daily short basis you will be disappointed.”

Already Chaddha says he has noticed a large number of distributors have a transactional approach to business, with a large number looking at fund switching. “It is an area where we have got to be careful, because customers will develop a transactional mindset and that is not to the benefit of investors in the long term.”

From August 1, 2009, the Securities & Exchange Board of India (Sebi) stipulated that upfront commissions could not be charged to investors by fund houses, which had been using this entry load to pay distributors and increase business. This was seen as encouraging portfolio churning, leading to a proliferation of products.

Now investors must opt to pay distributors a fee for their advice, so the onus is on the distributor to prove the value of what it is offering.

“If [the fee] is automatic, there are a lot of people who will pay without questioning,” notes Chaddha, “but if it’s discretionary then people will think about it.”

As a result distributors have told asset managers they still require a fee to distribute their products, meaning fund houses have had to dip into their own management fee structures to pay commissions from their own resources.

“I think that has fundamentally changed the nature of the industry, because clearly the amount you can use to pay distributors commissions and the amount of losses you can take is limited,” notes Chaddha.

“In some ways the move [by Sebi] was excellent in that it created more transparency, it controlled runaway costs. But my understanding from speaking to industry participants is that the industry found it a challenge to adapt to because it was implemented quickly.”

Coming as it did at a time when equity investors worldwide were counting their losses following the collapse of US investment bank Lehman Brothers, India’s mutual fund industry suffered and the past two years has seen a distinct flattening of revenues.

Chaddha believes the way forward is aligning the interests of investors, distributors and fund houses. “That can be done if you really take one common promise, which is that they will do things from a long-term perspective.

“There must be a balance between upfront and trail [fees], so distributors also get rewarded for sustainable business rather than just transactional flows.”

Asked how he plans to increase the penetration rate of investors buying into mutual funds, particularly in equities which account for most of his business division’s almost $1 billion in assets, he points to several factors.

He says his team is using the power of the HSBC network to allow customers to carry their creditability cross-border, noting that HSBC GAM India is set to launch a new Brazil fund this month, which he sees as a step in the right direction.

“We are going to make more such international offerings available because we think the Indian market is now recognising the need for diversity of a different kind,” he says.

Chaddha is potentially also looking to consolidate existing products and has asked his India team to review its entire product portfolio to become more familiar with the customer segment and to identify emerging trends in buyers.

Further, HSBC India is also exploring ways to extend services to smaller towns in the country, neatly termed as “financial inclusion”. And Chaddha says HSBC wants to play a role in deepening the bond markets in India.

“The liquidity crisis has shown us that having thin markets does not help anyone. I want to spend a lot of my time working with industry bodies and the regulator to see how we can bring India to a point where it’s comparable with the best in the world.”

Chaddha recalls a time when he was running a custody business and one million dollars would still fill up a room and it took nearly 45 days to settle a trade.

“If someone told us at that time that years later you will have just a few depositaries, rolling settlement and real-time processing, you would have looked at the guy and said, ‘listen, I think you are smoking something’. But the reality is we are there, and I hold out that the asset management space will be similar.”