India’s not so avant-garde Vanguard 🛡️

Mutual funds are underperforming and that’s starting to show up in ripple effects

This is edition 261 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

We explain why India’s mutual funds are raising fees in their index-tracking funds–another symptom of globally underperforming active fund managers. Southeast Asia is finally getting closer to taking major tech companies public—but not the way anyone would have imagined just a year ago. And the out-of-office email is making a bold comeback.

India’s Vanguards are going in the other direction

In India, last week, a couple of things connected to the mutual fund industry took place:

  1. On Thursday, S&P Dow Jones Indices released a report which said that 80% of Indian large-cap mutual funds (the ones that buy stocks in the largest companies of India) have not been able to beat the stock market index (like the Nifty 50) in 2020. 
  2. On Saturday, Twitter was flooded with the news that two of India’s largest mutual funds—UTI and HDFC—had hiked the fees (known as expense ratio) in their index-tracking funds by 80% and 100%, respectively. 

Let’s understand this issue of underperformance by actively managed mutual funds and the fees charged by index-tracking funds a little better in a global context.

The global mutual fund industry has seen a tsunami of money flowing into index-tracking funds. All thanks to the failure of active fund managers to beat the stock market index and deliver extra returns. This inability of fund managers to consistently deliver performance is something John Bogle saw happening way back in 1976 when he set up Vanguard and its first index fund. 

The role of the index fund is simple—give investors the ability to invest in an index of stocks without breaking their head over which fund manager would do well. And save on high fees which most actively managed mutual funds charge. 

As investment products come, it is the humblest of them all. And as the money poured into these funds, the scale-effect also allowed the index-funds to offer lower and lower fees. So much so that in 2018, global asset manager Fidelity even launched a no-fee index fund, which raised US$1 billion in its first month. 

Source: Financial Times

Now contrast that with Indian asset management companies UTI and HDFC raising the fees on their index funds. It might seem like a foolish business decision, when their global peers are cutting fees, but maybe it actually isn’t.

First, the Indian capital markets regulator, the Securities and Exchange Board of India (Sebi) has set limits on the fees that mutual funds can charge. Even on index funds, at 1% of the assets under management.  So despite the rise in the fees of the index funds, it’s well below the prescribed limits set by the regulator. Heck, the AMCs can increase these fees by another 100% and it would still be fine. 

Second, even from the perspective of competition, while the Indian index fund industry is gaining momentum, it isn’t the only game in town yet. There are only 29 index funds in the country, compared to 1000s of actively managed funds. The first index fund tracking the Nifty 500 index (which is a more diversified list of 500 stocks) was launched by Motilal Oswal Mutual Fund in 2019. And it still only manages assets worth a measly Rs 130 crore (US$17.3 million). To date it remains the only index fund which gives exposure to the 500 stocks. Oh, and its fee is 1%. Not a low-fee by any means. But with no competition, there’s really no incentive to drop it.

And third, the growth in the assets managed by some of these index funds has been superior to the growth in actively managed funds. Three years ago, the HDFC Nifty Index Fund managed only Rs 300 crore (US$40 million). That has risen exponentially to Rs 2,750 crore (US$368 million) today. With active mutual funds suffering from underperformance, with no way to increase fees in that segment, and no real competition in index funds, an increase in fees could nicely pad the bottom line. 

The y-axis is the assets under management of the index funds in Rs crores , Source: Twitter

And that’s crucial for both HDFC and UTI since they are listed on the stock markets. 

In the past one year, the stock returns are 16.5% and 23% respectively. On the other hand, the Nifty 50 index has delivered over 60% returns. In an industry that experts believe will boom over the next decade, the early signs of what investors really think about the asset management business are there for everyone to see. And it’s the same globally.

Tellingly, the shares of most big investment groups have underperformed the broader stock market this year, falling by an average of 2.4 per cent compared with the S&P 500’s 10 per cent gain. Over the past decade BlackRock — the world’s biggest provider of ETFs — is the only US asset manager whose shares have beaten the S&P 500.

Long-term share price underperformance is a statistic that won’t appeal to India’s listed mutual fund companies. And that means that in the interest of the shareholders, fees could be heading up, rather than down. Quite unfortunate for index-fund investors.

PS: If I’m being honest, these asset management companies aren’t the Vanguards of India by any stretch of the imagination. They are active fund managers who survive on higher fees. The Vanguard of India is not here yet.

Friends in high places take Southeast Asia’s tech giants public

In Southeast Asia, an important pathway is being laid. But this isn’t bricks and mortar, the construction isn’t infrastructure, it’s the railing for digital giants to rise up and prosper by going public on the stock markets. But instead of the regular ride—an initial public offering (IPO)—three of the region’s biggest players are taking routes less traveled.

Since there’s limited precedent for public Southeast Asian tech businesses, they’re doing it with a significant amount of help from well-placed friends.

In the case of ride-hailing firm Grab, that friend is a SPAC (special purpose acquisition company) by US investment firm Altimeter Capital—a late stage investment company that’s backed the likes of Uber and Twilio in the past.

The Financial Times reports that Grab—which is Southeast Asia’s highest-valued tech firm at a valuation of US$16 billion—will merge with an Altimeter SPAC to go public on one of New York’s stock exchanges at a valuation that could hit US$35 billion. The deal, as reported, would also give Grab an infusion of US$2.5 billion.

All told, it would be the largest SPAC deal to date anywhere in the world.

Another deal is already brewing in Southeast Asia, with travel booking startup Traveloka—an Indonesia-based company backed by Singapore sovereign fund GIC and online travel giant Expedia—also reportedly close to merging with a SPAC. In this case, it is Bridgetown, a Hong Kong-based SPAC started by PayPal co-founder Peter Thiel, according to Bloomberg.

The deal could see Traveloka’s valuation jump to US$5 billion—it was last valued at around US$2.75 billion—and give it a very decent US$500 million in capital. That’s in addition to the chance to tap public markets for more money in the future.

Finally, because we are talking about helpful friends and three is a crowd, there’s also the case of Gojek and Tokopedia, two of Indonesia’s top digital players. Gojek, a rival to Grab, and e-commerce player Tokopedia are moving close to completing a much-anticipated merger deal. Bloomberg reports that the transaction now only requires investor approval, after the two sides hashed out terms.

The ultimate goal of the union is to go public. It’s a little early given that the merger isn’t complete and things can change quickly—you’ll recall Grab-Gojek were once said to be close to merging—but we understand the original goal is to list the merged entity both locally in Indonesia and in the US market.

We’ve written about the unfair advantage that Sea—the Singapore-based firm behind e-commerce service Shopee—enjoys as a result of being listed on the NYSE. It’s able to raise money quickly from public market investors in a huge market like the US, and the rise of its share price—which was outperformed only by Tesla last year—has given it oodles of cash, to the point that it even put US$1 billion aside to form an investment fund.

Sea is clearly the inspiration, or perhaps even threat, that’s driving these three deals. It’s not a secret that these four companies have long aspired to be public businesses, but the way they are going about reaching their goals is not something that would have been anticipated. It promises to set some fascinating precedents for other emerging digital players from Southeast Asia. Furthermore, if the listings go well, US interest in Southeast Asia listings and SPACs could surge.

Suddenly there are alternatives to the long and hard slog of an IPO, which Sea went through in 2017. Especially if you can call on friends in the right places.

What does out-of-office mean anymore?

Ask anyone who went back to the office after a period of pandemic-induced remote work, and they’re likely to heave a sigh of relief. Why? Well, remote work blurred the lines between home and office. With lockdowns the world over (and location-specific lockdowns still happening to this day), managers might have been tempted to think, “My team won’t be out drinking at a bar on a Friday night, so let me shoot them an email with work that needs to be done.”

And since remote work was new to almost everyone, no one wanted to seem like they were slacking off. Ergo, the blurred lines between work and home.

But what’s making a comeback is the out-of-office email reply. Once reserved only for long holidays, it came with an almost apologetic, “Hello, I’m sorry I can’t reply to your email since I’m away for personal reasons.”

The out-of-office email is now finding a bolder, unapologetic voice in certain quarters. 

“I am balancing work with the care of two children at home, so response to emails will be slower than usual.”

“Because of home-schooling I am working flexibly and may send emails at all hours. Please don’t feel you need to reply at once.”

“I will be out of the office and NOT checking email until I return. Because of the volume of emails we receive, please assume that yours is likely to be unread or even deleted.”

Here’s to more honest out-of-office emails.

PS: If you have used an out-of-office email or any such response during remote work, do write in to [email protected]. We’d love to read them and even feature some of them in future editions. 🙂

That’s a wrap for today.

Don’t forget to write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back tomorrow.

Stay safe,
[email protected]

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