Motilal setting out to define India’s ETF market

If there is one outfit in India that’s determined to deepen the nation’s exchange-traded funds (ETF) market, it’s the mutual funds arm of Motilal Oswal Financial Assets.

India’s ETF market is, after all, a nascent seven years old and boasts just 32 products. Overall there are 44 fund management firms in the country, of which 14 (or 32%) have launched ETFs.  

Among these, 12 have listed gold ETFs (the exceptions being IIFL and Motilal), and 10 have launched a combined 20 equity ETFs, according to Value Research data.

Gold products dominate the landscape, both by volume and value. At the end of December last year, gold ETFs accounted for $1.8 billion in AUM, compared with $332 million in equity ETFs.

While India’s mutual funds industry is still exceptionally small, at $132 billion in overall AUM (excluding fund of funds), ETFs still only make up 1.6% of the universe.

Ironically the biggest player here is Goldman Sachs. It moved into the market last year by acquiring ETF-focused Benchmark Mutual Fund and as such inherited and rebranded nine ETFs, including the industry’s largest at $610 million by average AUM (Goldman Sachs Gold ETF).

The expectations are that Goldman will bring actively managed funds onshore when the equity market turns around, perhaps in the second half of this year, although the bank declined to meet AsianInvestor on a recent visit to Mumbai.

But right at the forefront of the drive to expand India’s ETF market is Motilal. “My simple take is that there is not enough product out there,” says Nitin Rakesh, managing director and CEO of Motilal’s asset management business.

“Unless there is enough product, there is not going to be enough uptake. We want to create enough product that people can use in any market condition, whether ETFs or passive products.”

Its funds business was established in 2008 as the last of four operating subsidiaries under Motilal Oswal Financial Services, after the asset management practice (2003), investment bank (2005) and private equity (2006).

Initially Motilal was set up as a sell-side broker-dealer and is best known for its equity research capabilities. As such it boasts a discretionary managed accounts business with around $350 million in AUM for long-only equity clients.

But at around $75 million in AUM, its funds business is finding it difficult to achieve scale (and it’s not alone there). “Differentiating yourself from the 3,000 mutual funds out there without having a track record you can publish is a gritty business,” explains Rakesh.

“It made no sense to launch another asset management company with the same set of products. The only way you can compete then is by paying higher commissions, which is not the right way to build an asset management business.”

Instead Motilal chose to focus on a niche segment. “In India ETFs have not defined their own niche yet, except for gold ETFs,” he adds. “It will take a while, but in a number of ways we can define what that niche will be because we are trying to be pioneers for these products.”

Motilal currently has three ETFs listed in India under their MOSt Shares platform: a large-cap fundamentally weighted product with the S&P CNX Nifty Index as underlying (-3% over one-year);  a mid-cap ETF linked to the CNX Midcap Index (-9%); and a Nasdaq 100 ETF (+16.5% over six months).

Without going into detail, Rakesh indicates he would be interested in listing an ETF gold fund for the mass retail market, although hints that it would be one with a difference.

“It would likely redefine the whole ETF market,” he predicts boldly. “All the other [gold ETF] products are physically backed and look and feel like each other. We potentially want to create more of an accumulation product than a pure play on the gold price.”

He says Motilal is also considering launching a money-market ETF this quarter (awaiting regulatory approval) that targets retail,  high-net-worth and corporate investors, and which may even issue a debit card against it for the retail class.

Evidently Rakesh is the right man to broaden Motilal’s and India’s ETF horizons, having spent six years at an India unit of State Street – the largest ETF provider by AUM in Asia-Pacific, at $11.3 billion.

Motilal recently closed fundraising on an indexed fund that seeks to replicate benchmark 10-year government bonds, while a hold-to-maturity bond product is also a possibility.

Essentially Motilal is taking a punt that passive mutual fund products will eventually take off in the country. Rakesh estimates that the passive investment segment makes up less than 2% of India’s total asset base, compared with about 15% for the US and 6% for Europe and Asia.

He adds that Motilal is hopeful India’s funds distribution model will also continue to evolve towards fee-for-advice, enabling independent financial advisers to charge clients a flat fee for portfolio advice.

“We have taken a big bet that we are going to expand the [passive] market as we enter it,” he concludes. “We will expand the market and grow with it.”