At just INR1500 crores ($327.8m), ING Invest-ment Management may still be a minnow in the grand scheme of the Indian mutual fund space, but it is the market leader in what is tipped by some as the next hot strategy: multi-manager.
Funds of funds (FoFs) have long existed in India but it was only when ING launched its ‘OptiMix’ multi-manager FoF portfolio late in 2005 that in-vestors were given the chance to invest in FoFs that would allocate to underlying managers from a mix of fund houses rather than homogenous FoFs offering a selection of funds from within their own house’s fleet.
To date, ING remains the only firm to offer inde-pendent FoFs that invest without bias in a broad range of underlying Indian managers. ING manag-ing director and CEO Navin Suri says the time is right for other fund managers in India to develop their own multi-manager FoFs. “We will forever be the first, but I hope we don’t stay the only one for too long,” he says.
ING’s multi-manager portfolio is still relatively small in terms of AUM, at around A400 crores ($87.4m), but is very diverse. The fleet comprises seven OptiMix funds investing across a range of fixed income and equities strategies, taking in ‘best of breed’ funds from a broad range of houses including the likes of HDFC, Birla Sun Life, Pruden-tial and Templeton. “We have practically all man-agers signed up – it just depends who is relevant to a particular strategy,” says Suri.
Ahead of the times
In addition to conventional FoFs, ING also offers a ‘manager to manager’ (MTM) product which combines PMS managers together into a mutual fund format. “The idea to launch a multi-manager capabil-ity in India was novel and significantly ahead of its time. We thought it was time to simplify and upgrade the FoF model for the distributors as well as for investors,” says Suri.
“I welcome at least a couple more firms coming on board as that will help expand the market. Many managers have this capability globally and over the next 12-18 months there will be a significant focus on FoFs, especially from manufacturers.” According to Suri, industry leaders expect al-ternative products to be a driving force of growth in the next 12-24 months and for FoFs to be the most attractive strategy within the alternatives bracket.
“Multi-manager is a huge priority for ING, and we haven’t been in a better spot than we are right now,” he says. “Regulations are in our favour, distributors are thinking about FoFs and the strategy works for the investor. We just need to quickly find a way to communicate this to as many distributors as possible, and have been very active in the last six months.”
Some of ING’s multi-manager FoFs have al-ready started to see an influx of capital. In the last two months, two of the firm’s FoFs added A170 crores of net new assets – an equity FoF almost doubling in size to A95 crores and a fixed income FoF growing multiple times over from A3 crores to A140 crores.
According to Suri, a number of firms were considering developing multi-manager products in India a few years back but the popularity of the strategy waned in the wake of the financial crisis. “In 2006 distributors were very interested in multi- manager and we raised a lot of assets, but after that they began to lose interest,” he says.
Suri believes this malaise was caused by two main factors. The first was investor greed in the face of rapidly rallying markets. “Distributors were unable to convincingly explain to investors why the return on a multi-manager product is not like a top performing single manager fund,” he says. The second was a lack of incentives for distribu-tors to sell FoFs. “At that point in time a FoF prod-uct in many ways obviated the distributor,” Suri says, noting that by removing the need for regular manager review and selection, FoFs removed the distributor’s ability to appear to add value to the investor.
Further, with the commission structure back then rewarding gross sales it was in the dis-tributor’s financial interests to move its customers from fund to fund. However, this dynamic changed when front- load distributor commissions were outlawed last year, as there is now significantly less incentive to move investors’ money across multiple products.
“Distributors are realising that it makes sense to allocate their sales teams’ time more towards ac-quiring new clients or winning new assets from existing clients rather than moving the same money a few times over,” Suri says. “That one pri-mary change has made FoFs a lot more logical for distributors now.”
Indeed, SEBI appears to be a fan of FoFs. Ac-cording to Suri, SEBI thinks the choice of 3000- plus schemes in India is confusing for investors, and the regulator is keen to encourage the consolidation of investor portfolios. In August, regulations were introduced that increased the expense ratio FoFs could charge to 2.5% from 0.75%, meaning manufacturing the products has become considerably more economical for fund houses.
“I hear there is a chance there will be at least a couple more firms in the multi-manager space in India in the next 12-18 months,” says Suri. But perhaps the most important selling point for FoFs – and one that has largely been over-looked by distributors and investors to date, de-spite the damaging experiences of the last few years at the hands of market volatility – is their ability to offer investors downside protection.
Finally, Suri says, people are waking up to this benefit. “It is unbelievable how the crash has just been forgotten in India,” he says. “The big challenge is to get investors to appreciate that while a FoF - would probably limit your upside, it would also help limit your downside. It will take two or three years before people appreciate that, but distribu-tors are beginning to like the idea of the cushion FoFs inherently provide when markets go down.”
ING’s OptiMix range, which has experienced mixed performance over the last 12 months (see box), invests only in high-quality funds using a complex manager selection process in line with ING’s global protocol. “We have a very open archi-tecture, we’re very independent and we have the same filter for every manager. Funds have to be best of breed to be able to qualify, and ING single manager funds go through the same filter,” says Suri.
“We are very unbiased and that advantage is unique to ING,” he adds. “FoFs are not new to In-dia but the managers who run them invest in their own underlying funds, so objectively one would argue there is a bias in the manager selection it-self. Multi-manager relieves that bias.”
Suri says ING seeks managers with comple-menting styles and consistent performance, and describes the universe of Indian mutual funds as healthy in terms of governance, nascent in terms of sophistication and very nascent in terms of in-novation. So far, the firm’s multi-manager range has ap-pealed almost entirely to Indian individual inves-tors, with a considerable amount of recent interest coming from big-ticket ‘super-rich’ high net worth individuals (HNI).
“That’s the traditional model of any new idea getting adopted,” says Suri. “It starts with super-HNI and sits there for eight to 12 months, then comes to HNI. Two to three years out it reaches ‘mass affluent’ and then a year later retail.”
However, Suri believes the portfolio could soon appeal to foreign institutional investors. “Institu-tional investors globally tend to prefer FoFs over single funds and India is a favoured destination – three years out I think the institutional market in India will develop with investors from outside seeking exposure to India through multi–manager capabilities. We are already seeing that happen within our own network and are participating in a few RFPs right now from institutional investors in Europe,” he says.
“All in, we are in a very beautiful spot. We are the only ones in the country and have the most experience, so even if competition starts we have already been doing this for five years. More im-portantly, there are now an increasing number of distributors that want these solutions.”