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The South America, Africa, Asia and the Middle East(SAAME) region is expected to see the highest growth ratesover the period to 2020.Alternative and exchange-tradedproducts (ETP)Globally, the alternative assets segment has grown andevolved at a rapid pace and the considered global view is thatalternatives and ETPs will grow at a faster pace in the future.The Indian asset management industry is virtuallysynonymous with mutual funds and exchange traded funds(ETFs) and alternatives are yet to find significant traction inour environment.It might well be truethat domestic fundmanagers haveoutperformed globalfund managers inmanaging investmentinto Indian capitalmarkets.While it is a given that not every asset manager should or willoccupy all segments of the industry, there is an opportunityto widen the offering and to bring on board alternativeproducts relevant to and that leverage the existing skill setsand capabilities of the Indian market.Global alternative assets in trillion USD1413.0 CAGR129.3%AuM in trillion USD10120101.71.56.7 CAGR10016.28087.5% 59.4 8.8%1.610.4%35.9% 6.460402037.30.63.912.919.9018.5% 21.03.6%17.5%-1.2%14.8% 30.12.0%2004North AmericaLatin 0 From 2012 to 2020, the growth rate of global AuM willbe lower in non-SAAAME regions than in SAAAMEregions. This is because the rise in wealth is greater inSAAAME than in non-SAAAME regions. In addition, the market is more mature in non-SAAMEthan in SAAAME regions.2.50.31.11.131.5%24.1%Hedge funds5.1%Asia Pacific32.6%200449.4Middle East and .52.11.414.9%10.5%2.50.0%3.5%2007Private equity9.4%2.54.88.4%20122020Real estate Alternative assets are expected to grow by 9.3% until2020. The growth of alternatives will be driven by existingand emerging HNWIs and SWFs. Despite significant regulation of the sector, thedemand for alternatives will continue to grow.Investors in search of greater alpha will broaden theirexposure to include alternatives, especially in thecurrent low yield environment.Indian mutual fund industry 9

Cross-border distributionThere have been significant moves by Asian and LatinAmerican (LATAM) peers in the area of global funddistribution, with a significant number of cross-borderregistrations. PwC believes that regional blocks will emerge–North Asia, South Asia, LATAM and Europe–across whichproducts will be sold pan-regionally. As these frameworksdevelop, asset managers will need to look again at theirdistribution challenges and strategies as access to and fornew investors becomes a reality.UCITS registration growth in Asia and LATAM (2006 to 2012)KoreaTaiwan328259Hong hAfricaSingapore93204Number of x- border registrations in the end of 2012Number of x- border registrations in 200610 PwC864

Retail distributionThe distribution models continue to evolve and so do theassociated cost/fee structures. This is taking place onaccount of not just downward pressure on costs but also tobetter align distributors and investors.Recently the Financial Services Authority in the UKundertook an exercise to study and recommend changes toretail distribution models and practices. This exercise wascommonly referred to as the Retail Distribution Review.The global perspective: Conclusion Over half of the AuM of the global asset managementindustry is in areas other than traditional mutual funds.Mandated and alternative assets comprise almost 60% ofthe total industry AuM and the latter segment is growingrapidly. The asset management industry is growing to astature comparable to banking and insurance. Investors are showing increasing interest in and demandfor alternative investment assets. Distribution models and the costs involved are constantlybeing re-examined. Distribution is expected to go ‘glocal’. Technology continues to remain critical.We believe the six gamechangers in the asset managementspace to be as follows: Asset management will move centrestage. Distribution will be redrawn such that regional andglobal platforms will be redrawn. Fee models will be transformed. Alternatives will become more mainstream, passives willbecome core and ETFs will proliferate. There will be a new breed of managers. Asset management will enter the 21st century.While the debate about Indian AMCs accessing thedomestic pension corpus will continue, a significantportion of global pension and insurance funds isallocated for investment in Asian capital marketsincluding India. The opportunity to render investmentadvice to such fund managers is immense. Weunderstand that it will not be easy to win such mandatesbut the effort would be worth it. It is estimated that 17 to20% of Indian market capitalisation is held by foreignfunds. However, a remarkably small fraction of thesefunds are advised and managed by Indian assetmanagers.Indian mutual fund industry 11

Taking stock:A view fromthe outsideShare of the investment poolWhile the industry has grown significantly andthere is much to be satisfied about, there areopportunities for improvement too.While the AuM has grown from approximately470 billion INR as on 31 March 1993 toapproximately 8,250 billion INR as on31 March 2014 (reflecting a CAGR of 14.6%over the last 21 years), the Sensex has grownfrom approximately 2280.52 as on 31 March1993 to 22,386.27 as on 31 March 2014(reflecting a CAGR of approximately 11.5%).Quite naturally, the growth of the Sensexand the AuM feed off one another and thus aportion of the AuM growth can be attributed tothe growth of underlying stocks and indices.Perhaps it might be useful to revisit the broadsavings and investment basket to help us reviewindustry progress and growth.The industry has seen net flows ofapproximately 4900 billion INR from 2001to 2014 (an average of 352 billion INR perannum). The change in the financial assets(gross financial savings) of the householdsector in FY2012-13 was approximately109,69 billion INR, of which mutual fundsattracted 274 billion INR (approximately2.5%). Compared to this, the amount held incurrencies was approximately 10%, the amountinvested in deposits approximately 56%,life insurance gathered approximately 16%and pensions and provident funds gatheredapproximately 14.5%. Moreover, change infinancial assets accounted for only a third oftotal household savings, the remaining twothirds held in physical assets such as gold andreal estate. Would it therefore be fair to say thatmutual fund products do not enjoy what might12 PwCbe called a ‘fair’ share of the wallet? Are the mutualfund products competing successfully againstalternatives such as FDs, gold and lately real estate?Mutual fund penetration in India is low ascompared to global and peer benchmarks. The AuMto GDP ratio stands at 7 to 8% as compared to aglobal average of 37%. Even the SAAAME economyof Brazil, considered a peer emerging economy, issignificantly ahead, with an AuM to GDP ratio of45% (Source – AMFI, ICI FactBook 2013).Increasing mutual fund penetration will largelydepend on increasing investor awareness atgrass-roots level and providing access to financialservices to the still largely unbanked population.In its effort to increase investor awareness, theindustry and the Securities and Exchange Boardof India (SEBI) have launched several initiatives.These include literature and campaigns topropagate financial education to various investorsegments (including potential investors), suchas school and college students, homemakers,executives, etc.The two-pronged approach of increasing awarenessof and access to financial products and services hasand will go a long way in increasing the penetrationof mutual funds in the country.While it might be uncharitable to compare this withsimilar data from western economies, importantlessons can be learnt from them as well, whenlooking forward.

Investor mixAuM by geography (2013)The asset management industry held 39.5 million folios ason 31 March 2014, which has declined from around 47.6million as on 31 March 2009. The composition of the sourcesof investment for the industry as a whole in 2009 and in 2014is given here. This shows that the industry has not managedto improve the share of retail and individual investors in theAuM of the industry over the last decade.The charts below depict AuM from three perspectives – by investortype, by geography and by investment type. Typically, corporateshave the lion’s share of the total AuM, which is concentrated in thetop five cities. Most of the investments have been found to be inincome funds followed by equity.6%5%3%Top 5 citiesNext 10 citiesNext 20 cities13%Next 75 citiesOther cities74%AuM by geography (2014)Break up of AuM by investor type (2009)6%51%Corporates5%3%Top 5 citiesNext 10 citiesNext 20 cities13%Next 75 citiesFIIsOther citiesBanks/FIs5%1%21%High net worth individuals*Retail74%22%Break up of AuM by investor type (2014)49%CorporatesFIIsBanks/FIs2%1%High net worth individuals*Retail21%27%In the immediate period since the above, there has notbeen a discernible change in statistical trends as yet. Theindustry AuM from towns other than in the top 15 wasapproximately 871.4 billion INR as on 31 March 2012 andwas approximately 1126.5 billion INR as on31 March 2014 (reflecting a CAGR of approximately13.7%). This translates into 14.84% and 13.65% ofindustry AuM in the respective years.Yet, it is true that there are investible surpluses availablein cities beyond the top 15, at least more than what hasbeen tapped by the asset management industry so far.The share of AuM from the top metros has remainedrelatively high and recently SEBI has amended relevantguidelines to improve the economics of selling to investorsin cities other than the top 15. This was done to revitalisemechanisms for reaching the larger mass investor in Tier 2and 3 towns, not only through distribution economics butby enabling distribution through multiple channels such asretired government employees, etc.Indian mutual fund industry 13

AuM by Investment Type (2014)The amount of data andinformation needed to bepublished by the mutualfund industry is significantlymore than for any otherfinancial product. The utilityvalue of it as perceived by aninvestor needs to beascertained.Income20%16%3%2%1%1%1% 0%0%56%Liquid/ money marketBalancedGiltFund of fund investing overseasEquity (other than ELSS)Equity (ELSS)Gold ETFOther ETFInfrastructure debt fundSales and marketingProduct basketOver the years the industry has developed an extensiveproduct basket covering various investment opportunities.However, the 80-20 rule applies. Over 80% of the AuM is inless than 20% of the product categories. Is there room forsimplification of the product basket?AuM by Investment Type (2013)Income21%13%Liquid/ money marketBalanced3%2%2%1%0% 0%0%56%GiltFund of fund investing overseasEquity (other than ELSS)Equity (ELSS)GoldOther ETFInfrastructure debt fund14 PwCThe industry has been operating on what we know as the‘open architecture’ distribution model, with no tied agents.Although the ability to invest directly now exists, theindustry is largely reliant on the distributor fraternity at thefront end.Over the years, the distribution economics have beenchanged to correct a few anomalies such as churn, etc.However, as things stand, the number of AMFI registrationnumbers (ARNs) has declined from around 82,015 as on 31March 2011 to 58,167 as on 31 December 2013.The industry needs to analyse this trend in all its aspects.Unfortunately, there may not be a ‘one-size-fits-all’ solutionthat will work.

The StatusQuoWhen we take stock along the above lines,several aspects seem to surface. Share of the investment pool: Theindustry has no doubt grown but it is yet totake away significant market share fromother traditional investment products.While all fund houses make concertedefforts at investor education with campsand campaigns, the products of the industryare reaching nowhere near the kind ofprimacy in the investor’s mind.Tax and indexationbenefits are rarelywell communicatedto or understood byinvestors. Investor mix: The investor mix hasremained almost static with non-retailparticipation remaining high and the bulk ofinvestors coming from the top 15 cities. Alternative products and advisory model:While the industry offers a wide variety ofmutual fund products, only a few garner thelion’s share of the AuM. Non-mutual fundproducts and services (alternatives andadvisory) are yet to take off significantly. Distribution: The industry has always workedwithin the ‘given’ of an open architecturedistribution model and while a few efforts havebeen made at exploring additional anddifferent channels of distribution, they havenot significantly augmented the existingdistribution structure.Lowering costs hasnot led to discerniblecorrespondingincreased inflows intomutual funds.As the industry embarks on its third decade,this presents an opportunity to assess andchart new exciting courses by challenging thestatus quo with the objective of catapultingthe industry into the next level of growth andtaking it to the position that it enjoys in otherdeveloped economies.Challenging the Status QuoStatus Quo one: Share of the investmentpoolWhile expandingbeyond the top-15cities is a positive step,it requires theorganisation to beoperationally gearedto do this successfully.This remains a stark issue for the industrydespite tireless efforts by all constituents.The industry still garners less than 3% ofthe incremental investible surplus from thehousehold financial savings pie.As the culture shifts from savings toinvestments, there is an opportunity to gainadditional market share. However, this willrequire appropriate and relevant products,pricing, positioning and sales.Indian mutual fund industry 15

Product relevance: The industry offers a basket ofproducts which at times seem over-crowded andcomplicated, yet the front-line sales function remainsunclear about the right product for each type of investor.A mis-sold product is unlikely to deliver the benefits needed,desired or expected and will probably lead the investor not toreturn. Pricing: With respect to the asset management industrythis refers to the charges and costs associated with theinvestment. In this respect, while there is a tremendousamount of information available from the assetmanagers, most investors are likely to be unaware ofbrokerages incentives, etc.Positioning: In any market product-positioning is acritical aspect; how to position the product in anovercrowded space; in a way that attracts greaterattention as compared to competitors.Traditional alternatives such as FDs and gold have continuedto dominate and recently, real estate investments haveattracted a large portion of the investible surplus. Thechallenge for the asset management industry is to enhancethe visibility and profile of its products in the mind of theinvestor. This means communicating the relevance of theproducts and their benefits.Additional tax exemptionsover and above current taxexemptions for investment inmutual funds will create animmediate ’pull’ demand forproducts and all taxpayerswill become mutual fundclients with almost nilacquisition cost.16 PwCThe development of mobile technology and the emergenceof social media offer individual investors innovative waysto access and scrutinise the investment fund industry.It also presents a new challenge for the fund promoterswho are required to evolve their marketing strategy andaccommodate, leverage these new communication channels.For instance, in the UK, one of the biggest fund distributors isalready proposing an application on iPhone allowing clientsto acquire information regarding fund price, performanceand management fees on a range of more than 1000 funds.Clients will also have the opportunity to invest through thefund platform.It is already possible to very specifically target a desiredaudience set through social media analytics. This enablesmarketing teams to focus their messages toward the desiredtarget audience more specifically and tailor the messagesappropriately.Status Quo two: Investor mixIn many ways investor mix is related to market share. Anycorrection will involve accessing new investors, whichwill go some distance towards tackling the investor mixissue as well. The regulator has actively been encouragingthe industry to go to the investors beyond those in thetop-15 cities. Incentive structures are in place and regularmonitoring of outcomes is required; the impact of the thrustis yet to be seen in a significant manner.Perhaps simple low-cost products (debt funds, for example)will be good starting points for first-time investors. Asignificant number of retail or prospective investors perceivemutual fund investments as surrogates or equivalents tostock ownership. First-time investors can be encouraged tostart with simpler, relatively low-risk products, which aremore yielding than alternatives such as FDs. An investorneeds to evolve towards investing in higher-risk productsand to construct his or her portfolio appropriately. Such anevolution can be mutually rewarding for investors and forasset managers.Status Quo three: Alternatives and advisoryThe vast majority of funds under management with theIndian asset management industry are invested in traditionalmutual fund products. While some fund houses haveadditional activities such as advisory services for foreignfunds, PMS, this still is a small beginning.

Even within this, the number of schemes that spawnedover the last decade is large leading to operational costsand inefficiencies. Statistically, a handful of scheme typeshave consistently garnered the largest share of the AuM; theindustry needs to better leverage costs and skills by broadbasing its product and service offerings.It also needs to better leverage the costs and skills by broadbasing the product and service offerings.As noted earlier, from a global perspective, industry peersacross the globe employ a far wider solution-offering andthus are able to tap a wider basket of investors.A recent trend saw the real estate sector draw a lot of theinvestible surplus from the HNWI segment. The potentialintroduction of the REITS infrastructure investment trusts islikely to permit investors to participate in the yield productsof the sector.Status Quo four: DistributionThe distribution challenge has remained a point ofdiscussion over the years. While the rules of the game havenow changed to eliminate aberrations and anomalies,some issues remain. Fund houses have enabled the directinvestment route but only a small percentage of freshsubscriptions are generated through this window.Often, a comparison is drawn between the compensationstructures for distributing competing products vis-a-vis thoseoffered by the asset management industry. However, oncethe blend of up-front and trail compensation is consideredand keeping in mind that the AuM for trail computation cannaturally grow in the long-term, the difference over a periodof time is not as wide as it might appear at first glance.The challenge really lies in aligning interests between thethree stakeholders; investors, fund houses and distributors.As long as the fund is paying commission to procure AuMthere may be issues of interest alignment and the revisedcompensation structures; a blend of up-front and trailcompensation which partially addre

The global aggregate AuM is expected to exceed 100 trillion USD by 2020! The components of that figure are expected to grow. Significant growth is expected in mandated AuM as well as alternative investments. AuM in trillion USD 16.1 25.4 27.0 41.2 18.7 28.8 30.4 47.5 2.5 5.3 6.4 13.0 0 20 40 60 80 100 120 2004 2007 2012 2020 Mutual funds .