NEW DELHI: India’s $442 billion asset management industry is finally having to reckon with the passive investing juggernaut.
After decades of sluggish growth, the number of accounts invested in index-tracking or exchange-traded funds more than doubled to 5.6 million in the year to April. Passive products now account for nearly a quarter of equity assets under management versus about 16% two years ago, data from the Association of Mutual Funds in India show.
That compares to more than 50% in the US.
The foundations for the boom were laid by a series of regulatory changes preventing active fund managers from gaming the league tables. What supercharged it was the Covid-19 pandemic which, like elsewhere, stoked a retail investing surge that’s seen millions of new young day traders pile into Indian equities via online apps. Their interest is now spilling over into ETFs, creating an opening for an up-and-coming asset manager to become India’s own Vanguard.
Zerodha Broking Ltd, a Robinhood-like operator that’s become India’s biggest broker, is awaiting regulatory approval for an asset management company that will focus only on passive investing.
The purpose is to “offer a simple-to-understand product to first-time investors,” said Nithin Kamath, chief executive officer at Zerodha. “Like how Vanguard’s retirement fund in the US made it simpler to invest.”
Malvern, Pennsylvania-based Vanguard is best known for the passively managed index-tracking funds pioneered by founder John Bogle. It has no plans to enter the Indian market at this time, a spokesperson said.
Passive focus
With well-entrenched domestic players, India has historically been a tough market for the big global asset managers, and some of them have exited the local industry after wracking up losses. The likes of Fidelity International and Goldman Sachs Group Inc. have sold the Indian units of their fund-management businesses in the past decade.
“In India, while people have launched passive investment products, the focus hasn’t been passive as most of the revenue is generated from active funds,” Kamath said. “We feel there is an opportunity for passive-only asset management company in the country.”
Angel Broking Ltd, which also runs a low-cost stock trading platform, also plans to foray into the asset management business by floating a mutual fund focused on tech-based passive investment products.
The aspirants hope to rapidly accumulate scale in the ETF market in the same way that their low-cost and often free services -- together with accessible online platforms -- helped them upend India’s stock-broking industry.
Like elsewhere in the world, one of the main drivers of the rush to passive funds is cost. Fees for index funds in India are typically around 0.1-0.2%, while for actively managed funds that can be 1-1.5% of assets.
20-year wait
“These are very exciting times, something that I have waited for for nearly 20 years,” said Vishal Jain, head of ETFs at Nippon Life India Asset Management Ltd., who was chief investment officer at India’s first passive investment fund back in 2001. In March 2020, he had 1 million clients invested in ETFs. Now it’s 2.3 million. “What had taken 19 years between 2001 and 2020, we did in just the last one year.”
The rapid development in ETF investments is also owing to regulatory reforms.
In 2017, the Securities and Exchange Board of India acted to prevent money managers from loading large-cap funds with mid- or small-cap stocks in a bid to generate better returns than their benchmarks. The following year, authorities mandated performance to be disclosed against the total return index of the corresponding benchmark, as opposed to the price index which didn’t include dividends.
Together, these reforms made the underperformance of active funds suddenly much more visible to ordinary investors. The S&P BSE 100 Index, a gauge of India’s big companies, beat 100% of actively-managed large-cap equity mutual funds in the second half of 2020, according to the data from S&P Dow Jones Indices.
“It’s now reached a tipping point,” said Anish Teli, managing partner at QED Capital Advisors LLP in Mumbai, an investment firm catering to high-net worth individuals which offers both active and passive options. “The regulator’s measures were a catalyst in bringing the advantages of passive investing out more starkly.”
As a seasoned financial expert deeply immersed in the intricacies of global asset management and investment trends, I find the recent developments in India's asset management industry particularly fascinating. The surge in passive investing, as outlined in the provided article, is a testament to the evolving landscape and the impact of regulatory changes, coupled with the unique circ*mstances of the Covid-19 pandemic.
The shift toward passive investing in India is not a mere coincidence but a result of a confluence of factors that I've closely monitored and analyzed. Here are the key concepts and factors associated with the article:
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Passive Investing Boom in India:
- The article highlights the significant growth in passive investing in India, with the number of accounts invested in index-tracking or exchange-traded funds (ETFs) doubling to 5.6 million in the year to April.
- Passive products now constitute nearly a quarter of equity assets under management, compared to 16% two years ago, according to data from the Association of Mutual Funds in India.
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Regulatory Changes:
- Regulatory changes in India have played a pivotal role in fostering the growth of passive investing. The article mentions that a series of regulatory changes were implemented to prevent active fund managers from manipulating performance metrics, leading to a more level playing field.
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Covid-19 Pandemic Impact:
- The Covid-19 pandemic is identified as a catalyst that supercharged the growth of passive investing in India. The article notes that the pandemic fueled a retail investing surge, with millions of new young day traders entering the Indian equities market through online apps.
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Entrance of Zerodha Broking Ltd:
- Zerodha Broking Ltd, often likened to Robinhood, is positioned as a key player awaiting regulatory approval to launch an asset management company focused exclusively on passive investing. This move is seen as an opportunity to cater to first-time investors by offering a simple-to-understand product similar to Vanguard's approach in the US.
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Cost as a Driver:
- Similar to global trends, one of the primary drivers for the rush to passive funds in India is cost. The article notes that fees for index funds in India are typically much lower (around 0.1-0.2%) compared to actively managed funds (1-1.5% of assets).
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Market Dynamics and Global Comparisons:
- The article draws parallels between the Indian asset management industry and global counterparts, especially the United States, where passive investing has a more dominant presence (over 50% of equity assets).
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Regulatory Reforms and ETF Investments:
- Regulatory reforms, particularly in 2017 and 2018, are highlighted as key drivers for the rapid development in ETF investments in India. These reforms aimed at ensuring transparency and preventing managers from deviating from benchmarks.
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Visible Underperformance of Active Funds:
- The regulatory measures have made the underperformance of active funds more apparent to ordinary investors. The article cites an example where the S&P BSE 100 Index outperformed 100% of actively-managed large-cap equity mutual funds in the second half of 2020.
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Tipping Point and Catalyst:
- The article concludes by suggesting that the passive investing trend in India has reached a tipping point, with regulatory measures acting as a catalyst in highlighting the advantages of passive investing more starkly.
In essence, the article paints a comprehensive picture of the dynamic forces shaping India's asset management landscape, combining regulatory changes, the impact of the Covid-19 pandemic, and the strategic moves of key players like Zerodha Broking Ltd.
