The Hindu Business Line : `We are keen on bringing some funds from the global range into India'

When we decided to set up a business, the acid test was whether 20 years from now the business will still be valuable, and the answer is a loud `yes'. — MS ASHU SUYASH, MANAGING DIRECTOR AND COUNTRY HEAD, FIDELITY INTERNATIONAL.

Even as several of the largest global houses in the fund management business begin to stream into India, Fidelity International has already established a firm foothold here. The three equity funds that it has launched in the last two years have made an impressive start. In an interview with Business Line, Ms Ashu Suyash, Managing Director and Country Head for the India operations, provides a perspective on the mutual fund industry and the various asset classes that remain unexplored in the Indian market.

Excerpts from the interview:

A majority of the equity funds under-performed the indices last year when a lot of money chased a few stocks. Is this underperformance just an aberration or are active funds going to find it increasingly difficult to beat the indices, as is the case internationally?

The reality is, in bull markets, especially in countries that are becoming favoured destinations, you will find the more liquid stocks getting more and more attention, as it is easy for any new player to understand those names than the others. Therefore, you can have a situation where passively managed index funds (and there again it depends upon which index) deliver better performance. But that does not hold true when you start talking of returns through multiple cycles. We have one fund that is two years old (Fidelity Equity) and two funds that are a year old and all are top performers. But the two-year fund outperformed its benchmark by a huge margin — about 10 per cent. The ones that are yet to complete one year are marginally above benchmark. When you are looking at casting your net far and wide for the best ideas and that, too, in a rallying market, the out-performance takes a while to show up. But it does eventually show up.

We have seen Indian households increasing their investments in equity funds on the back of a four-year rally. Do you think this trend will continue?

In 1995-96, the amount of household money that came into mutual funds was half a per cent but now it is four per cent. Any fundamental investing change takes a long time. The traditional investor has to come to terms with the fact that mutual funds are (a) not deposits, and (b) not direct equity. If we were to do an analysis of most markets with a large asset management industry, the big growth has always come in the bull markets. So it should be no surprise that it has happened here.

Usually there are three big drivers for the growth of mutual fund industry in any market: One, a friendly tax regime. Two, strong markets, because that is when confidence builds. And, three, pension funds and open architecture unit-linked plans. In any market you will find that these are the main drivers.

We have seen two factors here in India. We do not have pensions. We have many ULIPs, but they are all closed architecture products. They seem to have replicated what could easily have been done by taking mutual funds with a track record and adding an insurance package to it. At the moment, there is not much choice either. That's a big driver.

If you were to talk about the next 10-15 years, I see the domestic industry having huge potential, as the penetration is still low and the demographics is favourable. When we decided to set up a business, the acid test was whether 20 years from now the business will still be valuable, and the answer is a loud `yes'.

What plans do you have to expand your product offerings?

I think from a Fidelity perspective, we started with domestic business because we know that it is very important to have a strong domestic proposition. The global and international proposition is a diversification opportunity and helps give investors more choice.

We are keen on bringing some of the funds from the global range into India. When we talk about diversification, it is from an asset class point of view — in India, most of the real estate opportunity is in physical form. There is definitely scope for real estate funds. Likewise when you talk of natural resources, there is again opportunity. It is important that investors are able to look at multiple asset classes and multiple countries. As and when guidelines come out, we will try and bring in those customer propositions that really add value and give a lot of choice. We have about 1,000 funds and picking from that is not going to be hard. There are two priorities right now. Apart from continuously coming out with equity products that add value, we will be developing the fixed income range.

The second is offshore funds, which we have begun with the International Opportunities Fund. But there again we are waiting for the guidelines on the $100,000 limit. We spend a lot of time on each product.

We do a lot of analysis. It is not about launching another fund. We are fundamentally a research-oriented firm. We need to make sure that our stock coverage is there, that there is a high level of comfort that the product will have a long shelf-life. This is not to say that at a global level we do not have sector funds. We do have sector funds and they do quite well.

It would be nice to have products that treat the entire world as the investment universe, so you do not remain concentrated on one market. So sometime down the line we might look at some products like that. But the launches will be done in a tempered manner.

Will your recently launched International Opportunities Fund focus on emerging markets?

The International Opportunities Fund will focus on Asia-Pacific (ex-Japan). About 65 per cent allocation is to India and 30 per cent is focused in opportunities both in developed Asian equities and emerging markets.

The idea is to look at international opportunities where some key themes are playing out. The most important themes that are playing out are those linked to disposable income and income drivers — leisure, tourism, financial services, IT-hardware and electronics. Disposable income is a big theme and not limited to India. Asia is a big play on it, because 50 per cent of the world population lives in Asia. The one theme that is true for India and the rest of Asia as well is infrastructure.

The third theme is natural resources and alternative energy. The reality is with that kind of a population base and good GDP growth rates you are going to see a strong demand for natural resources and with that in limited supply, alternative energy becomes an investment opportunity as well.

So some of the themes between India and Asia are very common. Some sectors are not at play in India because we do not have listed companies — such as in mining and alternative energy. This is a product that is not just about diversification, but about opportunities and, hence, the 65-35 allocation assumes significance. If it was just about diversification, then we would have done a standard global diversified fund.

Do you see potential for new products such as capital protection or even gold ETFs (exchange traded funds)?

The response to such products has not been encouraging till now... Gold ETFs, from an asset class perspective, merit consideration. But we do not have plans for that in the near future. If you take a step back and look at every household's exposure to gold... it is quite large. So you have to ask the question: Do they need more? The reality is, people who go after the touch-feel experience of gold are not going after gold ETFs. I think it is important, but not something we are going to launch in a hurry. If you talk about products such as capital protection funds, they are not straight-forward products. And we wonder if investors understand that one can still lose money.

The category tends to under-perform bull markets and still loses value in bear markets. But it is far less volatile and there is a good chance you will get back your money. That is, really, the summary. But will people understand? Hard to tell. Generally speaking, these products are considered as alternatives to fixed deposits.

Probably if you are moving from deposits, you move to cash funds, bond funds and then diversified equity. I do not think the natural shift is capital protection. These are interesting ideas, but they are not mainstream propositions. We will like to see mainstream propositions go on the shelves before we launch niche propositions, which tend to have a much smaller appetite.

There has been no move on real estate mutual funds. Is it too early for the Indian market?

I think there is a lot of work yet to happen at the property level, before property funds take off. We do not even have clarity on indices, valuations, stamp duty. That is if you are talking about brick and mortar propositions. If you talk about propositions linked to multiple financial instruments, equity, debt, etc., the number of players is very limited. I am not so sure that you can create a diversified portfolio yet. So, that entire sector has some room to go, but it is a mainstream asset class and is something that we do have in our global range. But we usually tend to add a product to our range when that sector evolves, when you can a truly create a diversified proposition can be created and we are convinced about transparency, and so on. That would be interesting to see. I know there is a lot of talk going on but there is lot to be resolved in the underlying investment per se.

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