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Few days back, the managing director of a leading Indian asset management company (AMC), while interacting with investors and answering queries about market performance, policy changes, and asset allocation, was asked a rather pertinent question. The question was about the disruptions one could expect in the financial markets due to Artificial Intelligence (AI). The fund manager said “AI is coming faster than we can expect, and ‘Quant’ has started replacing Fund Managers.” He said he believed that Indian fund mangers' “Gary Kasparov moment of playing against deep blue” had arrived.
Influx of individual investors Data analysed by Association of Mutual Funds in India (AMFI) in December 2017 reflects on some very interesting points. First of all, the total assets under management by the Indian AMCs increased by 32.5 percent to Rs 22.60 trillion (approximately $350 billion) over the last year.
Secondly, the industry added over nine million investor accounts (measured by the number of folios) to achieve a total number of 62 million investors, of which, individual investor accounted for 99.4 percent. The total value of assets held by individual investors registered a growth of 50.29 percent.
Thirdly, with total asset of Rs 11.44 trillion, individual investors now hold majority of the industry assets – 50.6 percent – surpassing the share of assets holding by the institutional investors for first time since December 2016 and 67 percent of these individual investors’ asset are invested in equity related schemes. This highlights a clear trend - capital inflow in to the Indian AMCs is strongly driven by the individual investors and bulk of this investment is going into equities.
But there is another unique trend emerging – the growth of investment from outside T15 (top 15) cities. In December 2017, B15 (outside top 15) cities registered a 50.44 percent growth in total assets over the same period last year. Also the share of individual assets in the B15 locations went up to 27.71 percent in December 2017 from 24.85 percent in December 2016. This shows that the industry has begun to tap into the saving potential hidden in the hinterlands and many including I would believe that this is beginning of a new trend – the rise of individual investor.
Opportunity comes with risks
Demonetisation was a big factor behind the surge of capital inflows in financial products like mutual funds. But was it the primary one? Probably not. I see this as result of multiple factors -- falling interest rates; stock market performance; lukewarm returns on gold and real estate bolstered by more awareness about this investment tool.
Additionally, increased disposable incomes of middle class consumers and product innovation like systematic investment plan (SIP) spurred strong interest from retail investors who are keen on alternative and aspire for higher return over traditional means.
These new investors are creating deep impact across the manufacturing and distribution arms of the industry and leading to disruption. To begin with, fund managers are already on their toes to meet the investors’ expectation of relatively higher return – the alpha - an expectation that will continue to grow as the industry grows. Additionally, the proliferation of retail investors is leading to commoditization of the traditional high rated products. For AMCs to differentiate in this already crowded market place, retain the existing customers; and cater to diversified investor preferences calls for continuous innovation which is supported by speed and accuracy.
India has the highest expense ratio in the world. In the pursuit of winning more investors it is inevitable that the AMCs will try to reduce the cost of investment and expense ratio will go into a downward spiral. If recent media reports are to be believed then SEBI is already planning to take steps to reduce the expense ratio or at least tweak the way it is decided by linking it to fund’s performance. The writing on the wall is clear; prudent cost management will be a priority for AMCs even as their profitability has started improving.
Given this, it will be imperative for Indian AMCs to leverage technology to drive innovation, speed and accuracy. The industry has already taken the first steps to adopt “passive style” of fund management. For many fund houses the starting point has been adoption of a hybrid model that leverages Quantitative tools to augment their existing fund management and research expertise and improves scale. Digitization of the pre and post trade functions; to not only to bring in transparency in operation but also drive cost and operational efficiency is already in the CIOs to-do list. The next step would be to execute on the plan and seamlessly integrate these functions with rest of the systems.
The unprecedented growth in the number of the new investors is also putting the traditional operations, advisory and distribution models under stress. It’s an opportunity for the CTOs to disrupt and future ready these processes as they embark on the journey of complete digitization. By leveraging APIs or creating enterprise applications on top of Open Platforms or moving some their processes to cloud, they can build the future applications faster and with less investment thereby solving challenges of compliance, risk management and product innovation.
Servicing an ever growing retail investor base with extremely low average ticket size of INR.80,000 could be very daunting unless the sales and distribution function is ready to deploy technology-led solutions. The experience of Japan’s insurance underwriting shows that AI (artificial intelligence) has come of age and looks promising. Today’s growing digital environment presents opportunity for the industry to create disruptive solution for their distribution functions and Robo-advisory is already gaining traction. Its ability to leverage big-data, machine learning to predict consumer behavior and use of analytics, automation and natural language processing capability to offer solutions and service customers is making it more and more popular. The low cost Robo-advisory model can take sales and distribution mission further and help increase penetration in the semi-urban and rural markets, where ticket size is relatively small.
Asset Management 2.0
Increasing commoditization and demand for speedy innovation would lead automation in manufacturing functions and COOs will push wider adoption of automated advisory and distribution solutions to rationalise cost of workforce expansion and customer acquisition. This transformation has already begun. But it is yet to be known how the Indian Fund Managers would play against the “Deep Blue”. We all know that Gary Kasparov famously lost but, at least for now coexistence seems a better strategy.
By Aniruddha Chatterjee, Head – Buy Side business, Thomson Reuters, South Asia