Jio Financial Services and BlackRock have signed an agreement to form a 50:50 joint venture to offer investment solutions. This news made people wonder if there is a Jio moment likely to happen yet again, this time in the Indian asset management industry. The arguments in favour are strong, and the arguments against this happening are strong too. But the fact remains that if BlackRock, the largest ETF issuer, has decided to make a comeback in India after its earlier exit post the split with DSP Group, it shows the seriousness of Jio BlackRock. Can this disrupt the asset management industry? Is the move intended to disrupt the industry or take advantage of the rising tide, which will carry all boats along with it. The latter, I believe.
First things first—why does BlackRock matter? Well, BlackRock is large. Its $2.5 trillion US franchise still dwarfs everyone except for Vanguard Group in the ETF industry. But while passive funds are growing across the world, this year, BlackRock attracted $39 billion across its 408 ETFs so far, which, as per a Bloomberg story, works out to 15% of the industry's $263 billion year-to-date inflows, on track to be BlackRock's lowest share since 1999. The story leads with how a stellar year for JPMorgan Asset Management is proving to be an unusually tepid one for the world's largest asset manager BlackRock, shaking up the leaderboard in the $7.6-trillion U.S. exchange-traded fund industry. JPMorgan is one of the several asset managers challenging the duopoly of Vanguard and BlackRock on inflows because investors have been increasingly seeking actively managed strategies as the Federal Reserve undertook its most aggressive tightening campaign in decades. Hence, even for BlackRock, making a foray into India is important.
India is different. According to many, the country is still at a stage where many nations would have been a multiple years ago. It still has a tiny fraction of its populace investing in equities. The there are more Dream11 players than mutual fund folios or demat accounts lays bare the fact India is heavily underexposed to equity investing. And that is where the muscle of Jio comes in. I will get there in a moment. Let's understand the industry currently.
As of March 31, 2023, there are 44 registered mutual funds in India, offering different schemes to satisfy the dynamic needs of diverse investors, up from 34 mutual funds 10 years back in 2013. To put this into context, the U.S. has over 1,400 mutual fund houses and the U.K. has 143 authorised fund managers. India has seen a clutch of new fund houses coming in recent times, but that notwithstanding, we are still at the nascent stage of mutual fund and equity adoption. Due to the JAM trinity and the ease of payments, India has moved up the curve on click and buy fairly early. And that only helps the spread of digitally enabled mutual fund options.
The other aspect is performance of active funds, which leads people to adopt passive options. As per the SPIVA India scorecard, in 2022, performance among Indian active managers varied across categories. A majority of Indian equity large-cap funds failed to beat their benchmark, with 88% of actively managed schemes underperforming the S&P BSE 100. Underperformance rates remained high over three- and five-year periods, at 96.7% and 93.8%, respectively. Keep in mind, SEBI's tight rules around composition of large-cap funds also leads to difficulty in outperformance. As a result, large-cap options are already popular on the passive side. Does this help Jio BlackRock? Surely does. As per the release, Jio BlackRock will deliver tech-enabled access to affordable investment solutions. This approach may also help as Jio has the distribution muscle—both offline and online. Reliance Jio's digital reach and the offline presence through various retail touchpoints is a powerful tool if used correctly. And since BlackRock brings the trust and the experience, at the onset, Jio BlackRock will have both push and pull factors. But is that disruptive of existing fund houses or does it stand to help them grab incremental market share post launch? I believe it may be the latter.
Let's not restrict the ambitions of Jio BlackRock or any other AMC to just retail mutual funds. The demand for alternative investment products, such as private equity and venture capital, is expected to grow in India in the coming years as these products offer higher returns than traditional asset classes such as equities and debt. Hence, the combine will probably look to build out tech-enabled passive solutions in the current mutual fund landscape, while looking at other options. Both parties will initially invest $150 million (Rs 1,230 crore) each in the JV, but the tech-enabled passive model plays into the hands of anyone who starts a largely passive business as costs are lower. It also helps that the combine will not need the third-party distribution muscle for the passive business as much due to the distribution that Jio brings to the table anyways.
So, while this move is being thought of as the Jio moment for the asset management industry, even if it turns out to be the same, it will be for incremental business in passive funds. I doubt that this is meant to be a 'disruptor' as Jio was in telecom years ago. Asset management is so much a people-driven business that in the active space, fund managers and smart CEOs will thrive, and will be able to prosper concurrently. Also, the existing players are a capable lot, having thrived in this space for over two decades. Their competition won't be just Jio BlackRock but everyone else in the space. Vanguard was a pioneer in offering low-cost funds in the U.S., which made them more accessible to investors of all income levels and changed the face of the asset management industry. India has already tasted that fruit. Is the Jio moment really a turning point in passive fund investing? We shall know that only in hindsight.
Niraj Shah is Executive Editor at BQ Prime.
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