India’s true sunshine sector

As of this writing, the NIFTY is trading slightly below its lifetime high of 10,477 points, nearly doubling from 5,517 in early September 2013.

In the same period, NIFTY Price-Earnings has risen from about 16 to over 26, a zone considered to be significantly over-valued compared to median values.

The Calm Investor | NIFTY PE
Source: craytheon.com

Price multiples expansion typically accompanies improving prospects for earnings growth in times of general optimism. The problem, for India, has been the lack of translation of that optimism into earnings growth.

While the NIFTY (Price) has risen by 17% annually for the last four years, NIFTY Earnings Per Share (EPS) has risen by just under 3% over the same period.The Calm Investor | NIFTY Earnings GrowthKeep in mind the NIFTY itself is a product of survivorship bias i.e. NIFTY constituents that show poor earnings and share price performance are replaced by better-performing companies. (5 things not commonly known about the NIFTY).

Since the NIFTY is meant to be representative of the overall Indian economy, it’s safe to say most sectors are still awaiting that long-expected turnaround in earnings growth to catch up with valuations.

However, there’s one industry, that has not seen any such growth problems. The Indian Mutual Fund Industry.

The Calm Investor | India MF AUM Growth

As of Sep 2017, Mutual Funds have INR 2,040,302 Crores (313 Billion USD) Assets Under Management, up by a whopping 2.7x times the amount in Sep 2013: 7,45,969 Crores (114 Billion USD). This translates to a CAGR of 29% over four years!

Not apparent in the above chart is that in 2017, for the first time, small retail investor AUM (the dark blue section) grew faster than the other segments at 45% year-on-year. (HNI’s have been classified as investors with over 5 Lakhs (0.5 Million INR) invested in mutual funds)

The Calm Investor | MF Growth India

However, Corporates continue to be the largest customer-segment for Mutual Funds

The Calm Investor | 2017 India MF AUM Distribution

Corporates investing in Debt funds and small Retail investors in Equity Funds are the biggest segment-product category combinations. But compared to the same distribution in 2013, we see a marked difference in investor preferences.

The Calm Investor | 2013 AUM DIstribution

Look at the numbers that stand out in the 2013 table versus 2017. Note the shift away from debt-oriented funds and into other asset classes like equity, balanced funds and ETFs. Also note the increase in small retail investor’s share, as a percentage of overall AUM from 20% to 23% implying it has grown faster than other segments.

Finally, a table showing 2017 AUM as a multiple of 2013 AUM shows an interesting shift away from Gold to other equity-laden asset classes.

The Calm Investor | Where India Invests

Investment in Gold ETFs has halved over the four year period (which is a massive shift away from the metal considering overall AUM almost tripled) while it has grown 40x in regular ETFs.

The Credit Suisse Global Wealth Report estimates that only 16% of wealth per adult in India is owned in financial assets, the rest of it being in physical assets like real estate and gold. That same number is 52% in China.

As the share of financial assets owned by Indians moves up to be in line with global averages, the runway for growth for managing financial assets is immense. This growth is unlikely to be straight line as market corrections are ironically likely to slow investments into MFs.

It is still early days, but the increasing preference for Equity ETFs (growing 40x from 2013 to 2017) will add an interesting wrinkle as expense ratios and fees get squeezed with a move towards passive investing, but that might still be some time away. Exciting times for the Indian Mutual Fund Industry.

Further Reading

Can Indians shift away from physical assets? livemint

NIFTY 10 year average earnings growth at a new low, markets do not care capitalmind

Great Indian valuation party continues. But… stableinvestor

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