India's exchange-traded funds industry may still be nascent and small, but some players are busy looking to export the country's products to other markets and introduce new types of product. One such firm is asset management and financial services firm Motilal Oswal.
The company – which launched the country's first fundamentally weighted ETF in July 2010 – is looking at cross-listing some of its five ETFs on other Asian exchanges, says senior vice president Anubhav Srivastava. His team is in discussion with officials at Japan Exchange Group about listing its MOSt Shares Midcap 100 ETF on the Japanese bourse in the form of a Japanese depositary receipt.
Motilal Oswal is also in preliminary discussions to find a distribution partner in Japan, including with a retail online trading platform that would allow Japanese retail investors to trade ETFs online.
In addition, Srivastava is working with the delta-one teams of investment banks to broaden distribution of the MOSt ETFs to other areas outside Japan, such as Hong Kong. (MOSt stands for Motilal Oswal Securities Transaction).
Such moves are not surprising, given that India's ETF industry – like those elsewhere in Asia – is struggling to build the kind of scale seen in the US or even Europe. The first ETF, the Goldman Sachs Nifty BeES was launched in 2002, and the total AUM of India-listed products stood at $1.7 billion as of November 30, across 39 ETFs, according to data provider ETFGI.
In a country where equities have little place in the average Indian's savings pot – only 0.3% of India's $200 billion financial savings is invested in stocks – it is hard to imagine ETFs built on a 'smart beta' equity strategy chiming with local retail investor demand. (Smart beta is basically a strategy that tracks a non-market-cap-weighted index.) Gold is still widely preferred as an asset class – some suggest that gold products account for 70-80% of the assets of ETFs listed in the country.
But Srivastava says the MOSt Shares M50 ETF, based on the 50-stock S&P CNX Nifty Index, has attracted significant interest from retail investors, though it has not yet racked up substantial AUM.
Motilal Oswal also runs a $15 million gold ETF and has a total of $35-40 million in ETF assets; it also manages $66.5 million of mutual funds assets, as of September.
Srivastava has substantial experience in quantitiave finance and says his knowledge of modelling over-the-counter derivatives has been instrumental in managing ETFs. While these products might look simple, he says, they are often very much quant-driven instruments.
“As an ETF provider, there is a lot of back-end work you need to do before you file your listing application,” he notes. “Just like structured credit valuations, you need to do scenario analysis to figure out which products you can use to back up ETFs – whether it’s structured products, derivatives and pair-trading strategy. And how you hedge these instruments?”
For its MOSt Shares M50 ETF, Srivastava’s team uses filters based on fundamental analysis of factors such as price-to-book, price-to-earnings and dividend yields to divide the Nifty's 50 stocks into four buckets.
The team ranks these stocks based on their fundamentals (as opposed to market capitalisation), slotting roughly half of them into the category representing the least attractive names. The other half will be spread across the top three-ranked buckets. The top bucket – containing the most attractive stocks – has the highest weighting in the portfolio, with the weighting falling for each of the buckets below. The least attractive bucket has a weighting below 1%.
Motilal Oswal also has private equity business and provides sell-side services such as investment banking, retail broking, institutional equity sales and wealth management. Over the past year it has brought together all its businesses into the new 12-floor building on Gokhale Road, Prabhadevi.