Mukesh Ambani’s newly demerged entity Jio Financial Services, about which hardly anything is known, is widely expected to disrupt the US$540bn (billion) Indian mutual fund (MF) business. It has formed a 50:50 joint venture entity with giant US fund house BlackRock to 'transform India’s asset management industry' and 'democratise access' to options for Indians by delivering 'affordable and innovative investment solutions'. Analysts and commentators are excited by how Jio will exploit the huge footprint of Reliance Retail's 18,500 stores and Reliance Jio’s 448.5mn (million) strong phone subscriber base. Can Jio MF really disrupt the MF business?
Human beings tend to spot a pattern even in a sample of one. That’s why the word 'disruption' comes to mind. Hasn’t Reliance disrupted the telecom business? So, it will disrupt any consumer business it gets into. But has Reliance Retail disrupted the retail business? It is just one more retail chain. Other online and offline businesses and even kirana stores are thriving. Its last innovation to stitch together kirana stores through JioMart does not seem to have delivered the much-touted disruption.
Disruption, the Much-abused Word: Disruption was coined by the late professor Clayton Christensen to explain a very specific outcome of a very well-defined trend in a specific industry context. It went like this. One, in an industry dominated by a few players, a small, new player comes in with a low-tech product with low margins, but serving a new but narrow market segment. Two, the dominant player is unconcerned because it is at the 'low-end' of the business serving a fringe market. Three, the challenger keeps growing fast because it is serving a new, unmet need that turns out to be large, making more and more cash profits with which it ultimately challenges the core business of the dominator. None of these conditions applies to the MF business of Jio.
Constraints of Demand Creation: Forget about disruption, even fast growth is impossible in MFs because of three reasons that come in the way of higher demand. One, MFs are highly regulated and cannot create much demand on their own. MFs cannot offer radically different products or make false promises (puffery) that consumer companies can. They cannot launch marketing gimmicks or use celebrity endorsements. Second, there is no natural demand pull for mutual funds, either. Like insurance, MFs are sold not bought. MFs are always fighting investor inertia. Three, MFs, by definition, are market-linked products and so their performance moves up and down with market cycles and, along with it, investors' interest in MFs. If the market is in a prolonged lull, there is nothing a fund company can do but wait for the cycle to turn.
In a country where fixed deposits are the No.1 investment choice, there is an instant disappointment when MF schemes underperform bank deposit rates over a year or two. Four, demand for MFs is generated by large mutual fund distributors (MFDs) such as banks, where bank-sponsored MFs have the edge. This is why the three biggest MFs are bank-sponsored. The incentives for MFDs are regulated; no one can throw money and buy loyalty. Hence, the cross-selling opportunity of Jio (using Reliance’s retail customer data and phone subscriber base), is overrated, apart from the fact that Reliance customers will have a million different influences going into the decision to buy or not buy Jio MF schemes.
The Supply Side: No doubt, Jio MF schemes will take off with a bang and gather a large amount of assets initially. The total pie is expected to grow too as the financialisation of India picks up pace. The ratio of mutual fund assets under management (AUM) to India’s GDP is 16% which is pretty low compared to the global average of 63%. But this pie has to be sliced among the existing 45 players and the three savvy new players coming in (Zerodha, Bajaj Finserv and Jio). More big players will, no doubt, enter the space.
Any Investing Edge?: Jio MF will, supposedly, harness big data, machine learning (ML) and artificial intelligence (AI) and, of course, Aladdin, the tech platform of BlackRock. All this sounds like so much mumbo-jumbo. The key issue to pull in money over the long term is investment performance. While MFs are hard to sell, one of the positive aspects of the investment sphere is that performance is transparent and in black and white. No technology, ML or AI is useful, unless the fund performance is top-notch.
While the Jio press release about the joint venture talks of BlackRock’s “deep expertise and talent in investment management, risk management, product excellence, access to technology…,” BlackRock’s MF schemes are not decidedly the top performers in the US. I am waiting to see how Jio MF schemes buck the market trends and deliver much higher risk-adjusted returns. If they had known how to do this, it would have been proprietary and secret; super profits would not have been handed over to retail investors for a fee of just 1%.
Passive Vs Active: Of course, there is a lot of speculation that Jio, like Zerodha, will launch passive fund products (that follow an index) such as exchange-traded funds (ETFs) but these are low-cost products and require massive volumes to break even. In many other countries, passive products have become more popular than active funds, but not so in India because MFDs have little incentive to sell them.
In short, while Jio MF will undoubtedly grow in size and quite rapidly, it will have to cross multiple hurdles to even emerge as the market leader, far from 'disrupting' the MF business.
(This article first appeared in Business Standard newspaper)
This is why I like Moneylife.
"" If they had known how to do this, it would have been proprietary and secret; super profits would not have been handed over to retail investors for a fee of just 1%.""
If Jio Financial, through smart and efficient operations, is able to lure existing mutual fund holders to switch, the existing AMCs will have to shape up or ship out. The end result, overall, will be good for investors. It can, through hard selling, convince fixed depositers to divert their money to the stock market, but it cannot create new companies. In this scenario, more money will end up chasing the same ultimate pie. Which means the price of the pie will go up leading to a bull run like never before. At some point, the market will correct itself – no guesses on who will initiate this move. As always, the last ones to enter will end up losing their shirt.
Reliance is known to skirt around regulatory restrictions while launching its businesses. Remember how TRAI looked other way when Reliance Jio mobile service was launched as free service for 3 months, then extended to six months (and maybe more). So, one has to wait and see what Jio Financials produces from the Jin (Aladdin). If Blackrock has ".............deep expertise and talent in investment management, risk management, product excellence, access to technology.......etc." then how come its performance in yesteryears (in JV with DSP) was one of also ran and it exited the country over 5 years ago, after being in the JV for almost 10 years?
Completely agree with your view point. These guys are notorious for breaking the rules or force policy changes through friendly government sources. As for Blackrock, the less said the better.
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"" If they had known how to do this, it would have been proprietary and secret; super profits would not have been handed over to retail investors for a fee of just 1%.""