Friday 8 February 2008

Morgan Stanley Plans India Fund After 14-Year Hiatus

Morgan Stanley, trailing Franklin Templeton Investments and Reliance Capital Ltd. in India, will start its first fund on the subcontinent in 14 years to win clients in a nation where investments may quadruple by 2012.

The New York-based bank plans to start an equity fund that will go on sale from Feb. 11 until March 10, according to the sale document. The offering coincides with the worst start to the year for Indian equities, making it tougher for the U.S. bank to attract investors. The benchmark Sensitive Index, or Sensex, dropped 13 percent last month.

``We view the recent correction as an opportunity to build a portfolio,'' said Narayan Ramachandran, chief executive officer at Morgan Stanley Investment Management India Pvt, in an interview yesterday. ``Maybe we missed a step for three to four years, but still it's better late than never.''

Overseas money managers are vying with local funds to set up businesses in India to tap the wealth of a nation where invested assets will rise fourfold to $1 trillion by 2012 according to consulting firm Celent.

Less than 1 percent of Morgan Stanley's $606 billion of assets under management are held in India, where local firms led by Reliance Capital and UTI Asset Management Co. manage four times more than their overseas peers.

Domestic mutual funds, or joint ventures in which the local partner has a majority stake, manage 4.32 trillion rupees ($109 billion), while foreign fund assets are at 1.17 trillion rupees, according to data from the Association of Mutual Funds of India. Assets managed by all the 32 mutual funds rose 70 percent to 5.50 trillion rupees in 2007 from a year earlier, according to the trade body.

Crash Landing

Morgan Stanley, which in January 1994 became the first foreign money manager to start a business in India, has focused on investment banking and broking in the country after its asset management business had a rocky start.

The Morgan Stanley Growth Fund, the firm's only one in India, attracted more money than it could manage when it was launched in January 1994. Under securities regulations it had to invest all the funds within a few weeks of the fund closure, leaving little room for the money manager to choose at what price to buy.

The fund raised three times its target 3 billion rupees as investors queued up for two-and-a-half days to buy units at 10 rupees each. The units almost halved in May 1997 to 5.55 rupees in trading on the Bombay Stock Exchange.

Morgan ``crash landed on its take-off,'' said Dhirendra Kumar, chief executive officer at Value Research, a fund-tracking company in New Delhi. ``Over the past two years as the business started taking off, they realized the missed opportunity.''

Times Are A-Changin'

Morgan Stanley manages assets worth 43.8 billion rupees, lagging behind its peers. It has applied to the stock regulator to convert its close-ended fund, which matures next year, into an open-ended plan and take its units off exchanges.

Templeton Asset Management India Pvt.'s Franklin India Bluechip Fund, which was started in December 1993, has 282 billion rupees of assets, while Reliance Capital Asset Management Ltd.'s Reliance Growth Fund, unveiled in September 1995, manages assets worth 641 billion rupees.

The Growth Fund has returned about seven times since inception, matching gains in its benchmark, the BSE100 Index, while Reliance's Growth Fund has returned almost 40 times since it was set up and Franklin's Bluechip Fund about 17 times.

Indians increased investments in stocks and bonds to 5 percent of their financial assets in the year ended March 31, 2006, from 1.9 percent a year earlier, central bank data shows.

New Mindset

``The Indian mindset is changing,'' said A. Balasubramaniam, chief investment officer at Birla Sun Life Asset Management Co., which manages $8.1 billion in assets in Mumbai. ``Owning equity assets has become part of their investment strategy from earlier just putting the money into the bank.''

Investors based outside India bought a record $17.2 billion of equities in the nation last year, according to the stocks regulator. The Sensex climbed 65 percent in 2007 in dollar terms, making it Asia's best performer after China and Bangladesh.

The Morgan Stanley A.C.E. Fund, or Across Capitalizations Equity Fund, will invest in companies with varying market values and will benchmark its performance against the Bombay stock exchange's BSE 200 Index. Morgan also plans to start two bond funds soon.

``Lower assets under management compared to our competitors is a mathematical fact but the opportunity in India is a 30-year to 40-year one as the penetration is very, very low, Ramachandran said. ``We expect the mutual fund industry not to just double or triple but rise by a factor of ten.''