Passive fund race: Big players steal a march on smaller peers
Over 95% passive AUM with top 10 AMCS; opportunities exist in ‘smart beta’ space
Amajority of the smaller fund houses have steered clear of passive funds, even though their bigger associates are engaged in a pitched battle for dominance in the passive space.
Of the total 43 fund houses, 18 are yet to come out with an equity passive fund, including some mid-sized asset management companies (AMCS) like Canara Robeco and Parag Parikh Financial Advisory Services. There are several reasons for this. One, smaller AMCS are still focused on completing their bouquet of active offerings. Two, they do not see how they can make their products noticeable.
“We don’t see a differentiator in the passive space. If there are already multiple Nifty50 or Nifty Next 50 funds out there, what is the point in coming out with the same offering? In active, you can be different, even if the fund category is the same,” says G Pradeepkumar, chief executive officer, Union AMC.
Passive funds in the two variants — index funds and exchange-traded funds (ETFS) — are simple mutual fund (MF) products that mimic their benchmark. Like a Nifty50 index fund or an ETF, they have the same stocks and weighting as in the Nifty50. As a result, every Nifty50 index fund - be it from AMC A or AMC B - is indistinguishable.
Given that all major AMCS have these products in the market, the rest of the companies see no reason to come out with a homogeneous offering.
The top 10 AMCS have a near-total dominance in the passive space. Together, they have passive assets under management (AUM) of ~4.2 trillion, which is 96 per cent of the total money in index funds and ETFS at ~4.4 trillion. Even if one were to disregard the institutional holdings (which mostly belong to the Employees’ Provident Fund Organisation) in SBI and UTI MFS’ Nifty50 and Sensex ETFS, ICICI Prudential MF’S Bharat 22 ETF and Nippon India’s CPSE ETF, the top 10 AMCS’ share in passive AUM still comes in at 85 per cent.
While smaller AMCS are dismissive, mid-sized AMCS (beyond the top 10 AMCS) have struggled to corral together inflows in their passive funds.
Of the 35 Nifty50 index funds and ETFS in the market, for instance, only nine have AUM in excess of ~1,000 crore, and these schemes belong to the six major AMCS — SBI, UTI, Nippon India, HDFC, ICICI Prudential, and Kotak. “When the products are similar, customers tend to go for the bigger brand. Distributors, too, prefer to recommend products from the top fund houses since it makes the job of convincing investors much easier,” says Vijai Mantri, co-founder and chief investment strategist, JRL Money.
Navi MF, a new entrant to the MF industry, is the only small-sized AMC with some presence in the passive space. It has done so by differentiating itself on the cost front.
The AMC was the first to launch passive funds with an expense ratio as low as 0.06 per cent. As of November 21, the AMC’S Nifty50 index fund had an AUM of ~571 crore - 14th highest among the 35 index funds and ETFS based on the Nifty50.