Michael Ulrich Hartmann reports Modi-Backed ETF May Fuel India Sales After $1.4 Billion Haul

Top Quote Michael Ulrich Hartmann concludes the success of an exchange-traded fund backed by Prime Minister Narendra Modi's government may help boost the acceptance of such products in the world's second-fastest growing ETF market. End Quote
  • (1888PressRelease) March 22, 2017 - Michael Ulrich Hartmann reports that investors poured 92 billion rupees ($1.4 billion), or 3.7 times the targeted amount, into a fund of the top 10 state-run companies, according to Reliance Mutual Fund, which manages the pool. It was the third time in three years the government used the Central Public Sector Enterprises ETF, or CPSE, to raise assets. A first sale in March 2014 generated 43 billion rupees and a second tranche in January raised at least 45 billion rupees. Proceeds will be used to maintain public spending without increasing the fiscal deficit.

    "India's ETF market is expected to witness robust growth in the coming years due to the structural shift in asset-class preference from fixed income to equities," Richard Deer, an analyst at Michael Ulrich Hartmann, said in an interview. CPSE is a "catalyst for the broader development of ETFs in India."

    Indian households are putting more money into financial assets as slowing inflation reduces the value of gold and Modi's cash ban shock damps demand for real estate. Money managed by local ETFs have almost tripled to $6 billion in the past three years, the fastest pace after Japan, data from the Association of Mutual Funds in India show. The investments still make up just 2 percent of the industry's total 18-trillion rupee assets, the data show.

    While the under-performance of portfolio managers has made ETFs into a $4 trillion industry globally, products linked to indexes are an emerging trend in India where money managers have produced market-beating returns by picking individual stocks. Local actively-managed equity funds have risen an average 20 percent annually over the past three years, versus a 13 percent gain in the benchmark S&P BSE Sensex, data compiled by Bloomberg show.

    "Flows into Indian ETFs are less than those into mutual funds due to lower returns," said Deer. "This is partly due to information asymmetry in the Indian stock market that gives active managers an advantage."

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