We need a level playing field for distributor compensation

We plan to have around half a dozen products by the end of this financial year. We launched our first scheme,Shinsei Liquid Fund,a few weeks ago. The new fund offering NFO of our maiden equity fund,Shinsei Industry Leaders Fund,has just opened for subscription. This fund will invest in companies that are leaders in their industries based on three parameters market share,growth and profitability. Our analysis shows that such companies tend to outperform their peers. The fund will have a portfolio of about 25 to 35 stocks that will be a mix of large and mid cap companies.

Besides these two products,we are awaiting approval of another fixed-income scheme,Shinsei Treasury Advantage Fund,which we shall launch soon thereafter. More products will be launched both in the fixed-income and equity category in the future.

Being a late entrant,how do you plan to carve a niche for your mutual fund house?

First of all,we believe that there is significant potential in the mutual fund industry. The market is huge and over a period of time the penetration level of mutual funds will go up. The ratio of assets under management of mutual funds to Indias GDP is about 10-11 per cent. In the developed world this figure ranges from 20-70 per cent. In FY 2008 just 7.7 per cent of gross household financial saving was invested in mutual funds in India compared to 26 per cent in the United Kingdom. So we believe there is enough space for new players.

Over a period of time we plan to create a differentiated product offering that will fulfil the needs of diverse sets of investors. We will aim at consistency of performance.

Shinsei in Japan has used technology in a very effective manner. We will leverage that experience to provide world-class customer service to our clients.

Since our business strategy is based on having diverse revenue streams,we are confident that we can compete effectively in the market.

Tell us about your parent company.

Shinsei Bank is a diversified Japanese financial institution that provides financial products and services to both institutional and individual customers. In March 2009 the bank had consolidated assets of about US 120 billion. In Japan it has a strong distribution network that includes various categories of outlets like financial centres and consulting spots. Shinsei Bank has over 6 million active individual customers and is known for its innovative use of information technology.

Incidentally,the bank also has a strong India connection. A number of Indian bankers hold senior management positions in the bank. In fact,the chief financial officer of the bank,Rahul Gupta,is the first Indian to be appointed on the board of a Japanese bank. Shinsei Bank also works closely with a number of Indian technology companies on a regular basis.

Do you believe that valuations are getting stretched in the Indian market?

The fact that the Indian market has gone up quite a bit in the past three months has led a lot of people to feel that valuations are beginning to get stretched. However,if you discount the market through the prism of longer-term earnings estimates,which look exceptionally good,there seems to be decent upside potential. We firmly believe that the long-term trend is upwards but there will be periods of consolidation and correction on the way. One also has to remember that we are much more integrated into the global markets today and valuations in other competing markets will also have a significant effect on the attractiveness of the Indian market.

On a more micro level,our market has today become more of a stock pickers market. We believe that there is significant value in a number of counters even at current levels.

What are your expectations from Q1FY10 corporate results?

Q1FY10 corporate results that have been declared so far have surprised us pleasantly. But for select sectors like Oil and Gas,earnings have by and large been above expectations. We believe this trend will continue. The result of the cost rationalisation resorted to by Indian industry across the board is showing up in the results.

By when do you expect that earnings growth,say for the universe of Sensex stocks,will return to trend levels?

Cost rationalisation,initial signs of demand pickup and the gradually improving global outlook suggest that earnings growth will return to trend levels within the next three or so quarters.

Foreign institutional institutions FIIs have brought in about 6.42 billion into the Indian market in the April to June quarter. Do you expect this to sustain?

We see sustained inflows into the Indian markets by FIIs throughout this fiscal. We do,however,believe that inflows into the markets will not be at the same pace that we have seen in the April-June quarter. There is enough money in the system.

On what factors will sustained inflows depend?

Investments by international investors will be directed towards countries that provide a higher growth rate in a stable manner. Since India is at the forefront of the global recovery,we will see sustained inflows into our markets. Furthermore,FIIs in general tend to have a longer-term view. And from that perspective,India looks like a great investment destination. All of this,however,presupposes that there are no further global shocks.

What are some of the new models under consideration by distributors for charging fees from customers or getting reimbursed by mutual fund houses?

Currently,various fee models are being considered charging a fee on each transaction is one,charging an annual fee from the investor is another,and so on. There is also some discussion on the quantum of trail fees that fund houses pay distributors. However,the coming months will show us what actually works in the market and how this whole matter affects the distribution of mutual funds. It is still early days.

Having a level playing field in terms of distributor compensation across investment products is most essential. Ideally,this should be the case across different investment products and also within the same category. This will ensure that investors make investment decisions based on their financial needs.