AI300: India spearheads AUM growth in the region
Institutional investors in India enjoyed a 14% rise in assets under management (AUM) increase in 2016, courtesy of uncertainty as a result of the country’s demonetisation scheme last year, AsianInvestor’s latest AI300 survey shows.
This year’s list of the annual top 300 institutional investors in the region saw India’s AUM expand faster than the likes of China, Japan, South Korea, Australia, Taiwan, Hong Kong, and Singapore. Overall AUM growth across all countries in the region was just under 3% between 2015 and 2016.
Indian asset owners’ AUM also grew much faster than in 2015, when it rose by just 1.24%. The faster pace was largely a consequence of the Indian government’s demonetisation efforts late last year, said Gopikrishna Shenoy, chief investment officer at privately-held SBI Life Insurance.
“It’s more lack of avenues, more of formal money getting into the system, which is actually make people invest,” the insurance executive told AsianInvestor.
On November 8, 2016, the Indian government invalidated all 500 and 1000 rupee notes to combat the shadow economy and flush out so-called “black money”—undeclared cash wealth that could be used to fund criminal activities.
As a result, nearly 99% of the currency removed from circulation last year has been replaced, the Reserve Bank of India, said in its August annual report.
“Demonetisation actually brought in a lot of money [to institutional investors like insurance companies],” Shenoy explained. “This money that was deposited into the banks actually finally found its way into the financial system, so it is more of a financialisation of existing savings which people had.”
Insurance companies were one of three institutional investor types to record major AUM growth in India last year, according to AI300 data. Pension funds’ AUM grew by 51.2% in India last year, while commercial bank assets rose 20.5%, and insurance companies expanded 12.3%.
These three types of asset owner also accounted for the highest growth across Asia Pacific in general, with the AUM of each rising 5.4%, 4.2%, and 5.9%, respectively.
Mutual fund rise
A key beneficiary of the impact of the asset shift caused by demonetisation has been India’s mutual fund industry.
Its AUM rose to a then-historical high of Rp17.5 trillion ($268 billion) in March following the introduction of demonetisation, and further increased to hit Rp20 trillion by end of July, according to an RBI study released this August.
The same report said Indian private insurance companies saw premiums nearly double in November last year compared to the same month in 2015. The companies enjoyed a 20% year-on-year growth in premiums between November 2016 and June 2017.
Slow regulatory reform in the property sector has also made Indian investors think twice about where to put their money. The government passed the Real Estate (Regulation and Development) Act in March 2016 to address industry inconsistencies in project delays, price, construction quality, legal title, and other unfair practices.
Each state and territory is responsible for implementing the new regulations, but implementation has been erratic. “Many states have not appointed their regulatory authorities, so the market itself is getting into a kind of slow growth,” said Shenoy. “People don’t want to, or people are hesitating to, invest.”
Residential sales in the top eight cities in India in the second half of 2016 fell 46% over the previous year due to demonetisation, real estate consultancy Knight Frank said in a report. The country’s property sales recovred slightly in the first half of this year, rising 11% compared to the previous six months. But year-on-year they remained down 11%.
With real estate proving unappetising some investors have considered financial products, said Shenoy. “The mentality of an investor is to try to take some risk,” he said. “People who have been in commodities and real estate have been thinking, ‘why not in mutual funds, why not in insurance companies?’”
SBI’s expansion
SBI Life Insurance has been a key beneficiary of these asset trends.
The life insurer grew its AUM by 24.6% in 2016, after expanding by 5.5% in 2015. Its total AUM reached $15.2 billion in 2016, up from $12.2 billion the year before. Shenoy attributes half of the growth to premium income, which includes renewals, new policies, and business premiums, and half to interest and capital gains.
The absolute premium growth has been in excess of 30% the last two years, he said. “This year, first quarter, we have grown more or less a similar number, so I don’t see any reason premium growth is actually not going to contribute.”
SBI’s asset allocation is roughly three-quarters in debt and one quarter in equity. Shenoy admits that there are challenges, noting the fluctuating yields in the 10-year Indian government bond over the past 12 months, but he said equity gains in oil and gas, financial services, commodities, and retail sectors helped.
For example, the Nifty energy index, the National Stock Exchange of India’s (NSE) measure of 10 energy companies on the NSE, rose 31% in the 12 months to October 10.
Given the performance of premium income and the markets, Shenoy is confident in SBI’s performance until the end of this year. “I don’t see any reason why the AUM growth should not grow the way we have grown in the last two to three years.”
Despite its debt and equity, Shenoy said that SBI is also developing a small alternatives portfolio, including venture debt, venture equity, property, and company loans. Private equity is also an attractive sector for the Mumbai-based insurance company, a joint venture between the State Bank of India and BNP Paribas Cardif.
“In private equity, we find that there is room to make money, and there is room to know this company and take part in the growth.”
As of now, the alternatives allocation is miniscule, around 1% of SBI’s portfolio, but Shenoy sees potential for future growth. “We will take more exposure there,” he said. “It’s a promising area to invest in.”