How are things coming through? You guys are building the institutional company brick by brick?
The regulatory processes are all in place. All approvals and registrations are in place and the AMC is registered as White Oak Capital Asset Management. In terms of status, we are now engaged with the regulatory process to file for our first set of offer documents for approval for the launch of equity-oriented funds. So somewhere in the first quarter or at least the first of 2022, we will maybe hit the road.
Now that asset management is almost becoming a consumer staple item and SIP is becoming a part of every household with each passing month, the margin structures are coming down. How are things shaping up for this industry as a whole?
You put it very interestingly from consumer durable it has become consumer staple. It has become a mainstay. Now having a SIP and saving every month has become par for the course for most people who understand capital market participation in the right way or a structured regulated manner is the right way to go. In the early days, of course, the mutual fund distributors and asset management industry did a lot of hard work.
Always say when a product or industry is in a very early stage of its evolution, it is all about distribution. People do not know too much about it so whoever reaches the consumer first that product is bought. When the industry evolves a little bit, then it is the big brands that win. But mutual funds are now at the next level of maturity, where merit is winning in the market place so now it is all about performance, the kind of perception of sustainability of performance or the promise of performance and product innovation. There are a lot many players coming into the market purely because the industry has become more meritocratic. Of course, digital medium, social media and the media at large has also made it more democratic with the availability of information analysis.
Where will the margins move? Do you think they will hover around this place or volumes will be the key? Do you think they will slide from current levels?
I think they will stabilise. We are getting to equilibrium. For example, look at equity mutual funds, fixed income mutual funds — there is a huge amount of diversity because you are talking from overnight funds to corporate bond funds or funds with, say a 10-year duration profile etc.
If you talk about equity, there are two-three things to keep in mind. In the last three years when a lot of regulatory changes have happened — up fronting of commission, amortisation of those upfronts and then the TERs have been cut because TERs have been calibrated according to the size of AUM. The second is that alpha is not infinite. Every fund management style and every type of product has an optimal capacity. So what type of size can you manage is very important because it is not like you can have an infinite size and still produce the kind of alpha that you would like to produce.
Hence, one has to arrive at an optimal combination of how many assets you can manage and what type of net retention or net yield you can make on those assets. So in a long-term sense, equity mutual funds actively managed should stabilise at about 50-60 bps of net earnings to any manager. India will be lower compared to many other markets, but the current market scenario and the trends of the industry, equity mutual funds on a net basis should give an AMC about 50-60 bps that is active funds and then passive again it varies depending on the kind of specialisation of the product or whether it is a commodity. Passive, again, is like fixed income. It can have a very wide range depending on the product.
Where are we in the market cycle now after three good years? Now it is becoming mainstream and there is talk of a new capex cycle starting. Where do you see the Indian markets and economy right now?
Frankly, I do not see it as a too good year because 2020 was not exactly a good year. First, we had this massive crash and then eventually, along with the year-end of 2020, people realised that the world did not end. So it was more like we undershot heavily, and then we recovered. 2020 was more like the year of panic and then some recovery.
The only year where well, yes, people have on merit made money is maybe 2021, and I am not in the camp currently, which says that just because we made some money in 2020 and 2021, so by the law of averages or by mean reversion 2022 has to be a bad year. We are still in the early stages of an economic recovery or maybe not the commencement, but yes, early stages. If you were to divide it into three parts, we are still in the 33 percentile kind of thing. Look at valuations, the earnings trajectory, that investment activity has yet to pick up or is likely to pick up. All of those things put together tell me we are in the early stages as of yet.