‘I am a buyer in India. I am looking for long-term gains’

At 41, Robert Higginbotham says he is not averse to investing in equities despite the current mayhem, given that he has two decades of work-life ahead. At these valuations, India is a good buy, feels the London-based president of Fidelity International, overseeing operations in the UK, Europe, Middle East and India. He also sits on Fidelity International’s Global Operating Committee.

Though Higginbotham moved into his current role in 2007, his association with India stretches back to as early as 1997, when he played a key role in putting together Prudential’s alliance with ICICI Bank in their then fledgling insurance venture.

In his short visit to India, Higginbotham spoke to DNA on a broad array of issues ranging from the investment environment, issues facing the mutual fund industry and the broader
market trends. Excerpts:
 
How have things changed since you last visited India?
The environment has clearly got a lot worse after I came here in July last year. The period between September and December was tough. I would say we have got through that pretty well. The environment in terms of flows got better than what we were expecting, and therefore we look forward with a little bit more optimism than maybe we could have predicted back in December or January. Our commitment to the Indian business is just as strong as it was a year ago and two years ago and three years ago.

What is your assessment of the current scenario in the markets? Where does this resurgence we are seeing since March come from?
Cash was being stored up for the eighteen months since August 2007, when the credit environment first began deteriorating. With interest rates going to near-zero levels in many markets, eventually customers were going to see the buying opportunity. In March 2009, when the markets hit bottom, people started seeing the value. We are seeing cash being committed back to markets.

How have inflows into India funds been?
Pretty strong. It’s largely aligned to the way markets have behaved. If you see the European indices like FTSE or DAX, since November they have largely been range-bound. However, if you see the Asian markets, they have seen much larger growth, lot of European investors have been looking to take part in this growth have invested in Asian funds. Some of the sophisticated investors, who wanted specific portfolios, have made investments in China and India.

Do you see the Indian earnings scenario improve considerably in the next couple of quarters?
I think we are saying wait and see. That mirrors our view on lot of things. We saw Singapore out of recession; while that’s good news, oil is below $60, reflecting a bleak global economic outlook. We don’t really know which way we are going now.

Are you deploying funds?
Yeah, we are buying at these levels.

Where is the smart money going?
Customers who are still nervous are still looking for yield. Corporate bond funds are doing well. A third of customers are buying opportunities. Most people who have missed the lows in March are looking at the recent downturn as an opportunity to get in. There are more customers in that camp than we saw during the 2000-01 bear market.

So do you expect a faster recovery?
We are going to see at the current level continue till about the end of the year. I don’t see a V-shaped or W shaped recovery. We will see gradual recovery towards end of this year in to next year. So, it could be a longish U. However, one must remember that the markets are sufficiently nervous. Any bad news could get a pretty adverse reaction from the markets.

Where do you see Fidelity India 5 years down the line?
We will be looking to manage about $5 billion in five years. We are about $2 billion. That, for us, would be fairly aggressive growth. At present, we have about 60% of our assets in equity. Most of our competitors have far less. Retail equity is where we will be concentrating. If you have to take care of post-retirement life, you have to take risk. When you think of risk instruments, equity has an important part. So, equity as a category will grow. Though we have a significant part of our assets coming from Institutions and corporations, our focus would be retail equity.

Given that a number of businesses are available at attractive valuations, would you be open to growing inorganically?
The simple answer is, not really. And that’s not because India is in some way unattractive. Fidelity … we are probably a slightly strange company. We are a private business which means we tend to grow organically because we are not subject to the same pressures that a shareholder-based company might have to —- which is to prove growth in the short-term, which is often what tends to drive acquisitions.

Sebi has made radical changes in the way mutual funds are distributed. Even in the UK, the Financial Services Authority (FSA) has made some similar changes. How do you view the changes?
The FSA has said something similar to Sebi — that the consumer must know how much he is paying. It is important for customers to know that they are buying advice and they are buying products. Historically, these two have been bundled together. And the customer doesn’t understand what he is paying for. So the regulator has said clearly that you can still pay commission but you should make it clear to the customer that this is what the adviser is being paid and this is what you are paying for the product. So they are forcibly unbundling things — of which we have been a big fan of.

Will it help the industry which is still at a growth phase?
In the long term if the customers know what they are paying for, they will develop confidence and they will save more. On the other hand, if they do not know why they are being charged, they will not have the confidence and ultimately they will not trust you with their money.

But when insurance companies are free to act the way they do, what difference can these changes make?
It is critical that the ruling is absolutely same across all investment products that a customer can buy. If you have different regulators looking after different products, one of those comes up with something good for consumer, what we tend to see is money flowing from that industry to those where there is less transparency.
Ultimately, that is not good for the consumer and not good for the industry as it creates an unlevel playing field.

Do you see money shifting out of the industry in the short term?
It is a risk. It may not happen on August 1. But there is a risk of money moving from a good value, transparent product to a less transparent product.

Do you see costs going up for the AMCs as a result of this rule?
Possible. We are having a number of conversations with banks, distributors and independent financial advisors and discussing various possibilities. We can see a scenario where you see an increased churning and less persistence. And, there is a concern that it will lead cost pressure for asset management companies. But none of this is clear as yet.

One of the criticisms of the mutual fund industry here is that though they do lip service to long-term performance, they remain slaves of net asset values, whereas the insurance industry is more focused on the long term, so the churn is less….
We would not believe that daily NAVs create performance pressure. Of course there is performance pressure created by other parts of the market. Too short-term a focus will only push up trading volumes, which will increase costs. We give our managers 3- 5 years kind of timeframe to judge performance.

Where do you see the funds industry in India move in the coming days in terms of distribution network and newer products?
There is a range of different factors, all of which are positive for industry. We have to work with regulators to get the structure of distribution set-up right. We have a number of new products lined up over the next two years. Some of them would be India-focused fixed income and equity products, while others will be feeder funds that invest in international products. We see growth in this space where we can provide Indian customers investment avenues overseas.

Does the diversification argument hold water when global investors are flocking to India?
Every investor, no matter Indian, American or Japanese, tends to have home market bias, mainly for reasons of psychology, comfort and familiarity in names of companies one is investing in. But everybody understands diversification. In terms of risk-reward, it is a basic principle of investing. There would be always interesting sectors and market cap ranges that are delivering 15-20% kind of returns. I believe investors would be glad to have such a choice.

One last question, where are you putting your money professionally and personally?
Fidelity, what other answer  can I possibly give you?

In terms of regions and asset classes?
Personally I am a buyer of Europe. I am a buyer of Asia and India specifically. I am not into yield. I am 41. I am looking at long-term capital appreciation. At these, valuations I feel equities are attractive.