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Here’s Why Nirmal Jain Is Bullish On AMCs

The Indian asset management industry could surpass the trillion-dollar milestone in the next 10 years, says Nirmal Jain. 

Employees are reflected in a glass panel as they use desktop computers while monitoring data at a securities brokerage in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
Employees are reflected in a glass panel as they use desktop computers while monitoring data at a securities brokerage in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The Indian asset management industry could surpass the trillion-dollar milestone in the next 10 years.

That’s the word coming in from Nirmal Jain, the founder and chairman of IIFL Group. “The Indian mutual industry around $300 billion plus. You look at the U.S. mutual fund industry, it is around $16 trillion. 30 years ago, it was only $200 billion. So the trajectory for growth is very clear,” Jain told BloombergQuint in an interview. India’s strong economic growth, and growing financialisation of savings will aid the industry’s growth, he added.

It (AMC industry) can be one of the fastest growing industries or segments in the financial services sector in the next 10 years.
Nirmal Jain, Chairman, IIFL Group

Jain attributed HDFC Asset Management Company Ltd.’s strong listing to a number of factors including the industry's prospects, the management's track record, and the brand value.

HDFC AMC is one of the exceptionally good stocks in the sector and whatever premium it has earned is well deserved.
Nirmal Jain, Chairman, IIFL Group 

Watch the full conversation here:

Edited excerpts:

How does the runway for AMC businesses in India look like for the next 5-10 years?

The AMC has very bright prospects over the next 5-10 years. It can be one of the fastest growing industries or segments in the financial services industry in the next 10 years. In terms of betting on people, the business requires high-quality people. I have not inherited an institution to build people, but if you have to build an institution then you take people as partners. That is the model which we always followed. We are very excited to have some exceptionally good people on board.

Today’s HDFC Asset Management Company Ltd.’s listing is a landmark event in the mutual fund industry. I don’t know the numbers in terms of multiples and valuations but as an investor if I have shares of any good quality company like HDFC Ltd. or HDFC AMC, then I would rather hold because at whatever price or value that the market gives it, the future is still (bright).

It is basically a combination of several things--the industry which is very good, the management team which is very competent and has a tremendous track record, a brand which stands for trust and credibility. There are so many companies listed under the HDFC Group and we have seen how they have done. A fourth factor is that they build the critical mass and distribution network the fair way.

The relationship all of them have is very transparent and cooperative. Many a time, the industry leader can become arrogant but that is not the case here. The entire management is always down to earth and always trying to learn to do new things. So, given all that, it is one of the exceptionally good stocks in the sector and whatever premium it has earned, is well deserved.

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Coming back to the industry, there are a few things that have happened there. Mr. Parekh was talking about Brazil’s AMC industry at around 26 percent of their GDP, while India’s may be at around five percent.

Most of the developing countries have seen their AMC industry grow to a much larger proportion of their GDP than in India’s case. So, it is clear that the mutual fund and AMC industry has to grow.

So, why should it grow? Demonetisation has been one of the key triggers. Prior to that many of the industry players would not pay taxes and if you don’t pay taxes, then that money can be channelled very easily into real estate or gold but not into financial instruments. It was a lose-lose scenario. But that has changed because of demonetisation, because of the digital trail. So, money has to come to financial instruments and financial securities.

Within financial instruments, if you look at bank fixed deposits, they give you 6-6.5 percent fully taxable which hardly protects you from inflation. Now comes mutual funds, and within that equity and debt. The mutual fund industry, thanks to SEBI’s efforts, is trying to reduce the cost and do as much disintermediation as possible and to make sure that governance and disclosures are of very high standards and the charges are as low as possible. Then it gives you much better returns over any time period.

Now in stock markets, most of the people who come directly to equity lose money - especially retail investors.

Systematic investment plans is the right way because you earn every month, save every month; then why not invest every month? It is always time in markets that has made money and not timing the market.

Even very smart investors, when they take a call on the markets, more often than not, don’t end up taking a great call. It might look good for a few days, but when you look back, you try to book profits and miss opportunities.

A mutual funds is the only instrument where in small basis points you can get an expert with lot of access to all the information and manage your money. So, AMCs will grow for sure.

Within the AMC, in India, the index funds have not grown much. Alternative investment fund is a new category that appeals to larger investors. The concept is that with minimum one crore ticket size you are attracting only HNIs. They are smart, and they understand compliance. They can take slightly more risk and your regulatory oversight will not be as stringent. Everything comes at a cost. You make regulation very tough and the product becomes less flexible. Retail investors may not have access to products which are more flexible or dynamic as they cannot assess the risk. So, that is one category which will come up very rapidly. Over a period of time, we will see India's opening up. Today we are passing through a turmoil where global market, geopolitical situations, oil are playing spoilsport. But when you look at the next 10-20 years, we see India opening up. So, there will be funds which invest outside India.

How big do you think the Indian AMC business can become?

Indian mutual industry around $300 billion plus. You look at the U.S. mutual fund industry, it is around $16 trillion. 30 years ago, it was only $200 billion. So the trajectory for growth is very clear. It will multiply many times.

If we look at 10 years down the line, then it can become few trillion dollars, couple of trillion dollars possibly. 

The Indian economy is $2.5 trillion, which will become $6-7 trillion in next 10 years’ time. Mutual funds will be a sizable part of it. In terms of relative to GDP, you will see it becoming 25-50 percent of GDP. So, mutual fund industry per se will grow very well. But as it grows it will have lot of innovations, lot of new products.

When index funds come into the markets in a big way, then they have lesser revenue pie and fee income. Obviously, the industry has to grow, and good players will do very well. The other trend which we have seen is that few large AMCs have survived but then there are many individual good fund managers who have their own credibility and brand. They will set up boutique firms with themes and then they can grow as per their performance.

The top five players have around 60 percent of market share currently. The next five have another 20 percent, and the rest have the last 20 percent. Do you believe that over the next 10 years, the top five players will have a disproportionate share of revenue and mind space?

The top five players will have a larger share for sure. But it’s difficult to say whether the share will rise from where it is right now.

In wealth management, we take many boutique firms or boutique fund managers from platform and distribute their products. Our objective while doing wealth management is that the customers should get the best, and not necessarily the house product.

What about the AMC business?

In the AMC business too, there is enough opportunity to grow. Obviously our endeavour would be to take it among the leading players and we already have an alternative investment fund, in which we are the leading fund managers. The other categories will also grow as we get the talent and the team for the business. The pecking order may change over the next 10 years, as that’s what has happened in most of the economies and industries.

I think there’s already a concentration (of market share) in top five or ten players...the concentration in the hands of top five players will continue. It is, however, very difficult to say whether they’ll still command 60 percent of the business, or not. But one thing that’s certain is that they will have the lion’s share, and they will do well. What’s noteworthy is that what brought someone to a level may not take them to a higher level. It’s a question of how innovative most of the AMCs are, because your past may not guarantee your future in the case of mutual funds.Same applies to the managers and the AMCs as well.

But I’m sure that the well managed AMCs with tremendous brand value will certainly do very well, and they will definitely benefit from the tailwinds that the sector possesses. This tailwind will grow very rapidly. For instance, with 7-7.5 percent real growth...which means 11-11.5 percent growth in nominal terms, is itself phenomenal. That compounds very well.

HDFC AMC listed at a substantial premium to global and Indian peers. That may look expensive based on FY19, FY20 valuations. Would you believe that with a seven-eight year view, these AMCs might still be an attractive play?

Many high growth sectors and players in India would come in at a premium to their global peers, due to the visibility of a solid growth. It’s not a growth which is very fragile, or one that can be challenged easily. Look at HDFC Bank Ltd., for instance. Even some ten odd years ago, it was commanding a premium to many of the global players like Barclays Plc or Deutsche Bank AG. Today, it has given remarkably higher returns, which is why the premium has expanded.

I think it’s the Indian economy which is the real story. Leave HDFC AMC aside, there are many good firms whose growth is such that they deserve a premium. And despite that premium, the long-term investors with a 10-year horizon or so, according to me, would still make money. Because the kind of growth that you can get in India is very difficult to find elsewhere.