CONCLAVE 2013

Whats Inside
ETF Conclave Summary..............................................................................................................................................2 Opening Remarks........................................................................................................................................................3 Ms. Chitra Ramkrishna - Managing Director and CEO of NSE Keynote Speech..........................................................................................................................................................4 Ms. Deborah Fuhr - Partner and Co-Founder of ETFGI Panel Discussion.........................................................................................................................................................6 Panelists: Ms. Deborah Fuhr - Partner and Co-Founder, ETFGI Ms. Hansi Mehrotra - Managing Director, India, Hubbis Mr. Rajnish Rastogi - Co-Head of Investments, Motilal Oswal AMC Mr. Manu S Dua - India Head, Listed Derivatives & OTC Clearing - Citigroup Moderator: Mr. Anubhav Srivastava - Head Institutions and Products, Motilal Oswal AMC Market Outlook.............................................................................................................................................................8 Mr. Raamdeo Agrawal - Chairman, Motilal Oswal AMC

ETF Conclave Summary

The Motilal Oswal MOSt Shares ETF Conclave 2013 was held on Wednesday, 19th June at Motilal Oswal Tower, Prabhadevi, Mumbai. The conclave a premier industry event is envisaged by Motilal Oswal AMC as an annual event in furthering its efforts in the area of investor education. The effort of this conclave has been to disseminate information on ETFs' to Institutions, Investors, and Intermediaries as well as open up discussions across Manufacturers, Distributors, Market makers and strategists on global trends in ETFs. The Motilal Oswal MOSt Shares ETF Conclave 2013 had the following five segments: an introduction by Mr. Aashish Somaiyaa, followed by opening remarks by Ms. Chitra Ramakrishna post which was the keynote address by Ms. Deborah Fuhr on the global trends in the use of ETFs. The keynote address set the tone for the panel discussion moderated by Mr. Anubhav Srivastava discussing in depth ETF Strategies, how Indian investors can benefit from the use of ETFs and how global investors have been using ETFs. The conclave concluded with a brief market outlook by our Chairman, Mr. Raamdeo Agrawal.

Mr. Aashish Somaiyaa

CEO, Motilal Oswal AMC Mr. Aashish Somaiyaa brings with him rich and varied experience - with more than 13 years in sales and distribution, channel management, product development and institutional sales from ICICI Prudential AMC and a brief stint at project management with Bharti AXA Investment Managers. His last assignment was with ICICI Prudential AMC, as Senior VP & Head - Retail Business where he was responsible for sales, distribution and product development of Mutual Fund, PMS and Real Estate offerings through retail distribution, banking and private wealth management channels across India and UAE. Mr. Somaiyaa holds a Bachelor of Engineering in Polymer Science and a Masters in Management Studies in Finance from NMIMS, Mumbai.

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Opening Remarks
High Growth Potential
Ms. Chitra Ramkrishna, in her opening remark, stated that the National Stock Exchange (NSE) is a strong believer in Exchange Traded Fund (ETF) as an appropriate product for Indian markets and that NSE's passion with respect to ETFs has only grown over the last half a decade. She believes that the product has huge potential to grow in India as the proportion of household savings in the financial markets is small and in Equities even smaller. ETF is a broad based universal product which can interest retail masses with its passive management and low cost structure. She highlighted that around 70-80% of the growth in ETF assets have come over the last three years. And although ETFs in India are dominated by Gold ETFs, Non-Gold ETFs have grown at a rate of 20% YoY. It is also important to know that the number of folios in ETFs, although low in value, is also growing at an attractive rate. Ms. Chitra points out that most of the geometric growth in the ETF industry in different regions is attributable to Institutional participation along with participation from liquidity providers and arbitrageurs. And to this extent, several constraints, in recent times, have been reduced by way of STT changes, SEBI policy changes to augment participation of such investor categories. Institutional participation also has an overflowing effect on retail investors and efforts over the next few years will be critical to galvanize momentum into the product. It is only a matter of time before Insurance Companies and Pension Funds enter the ETF space, pending formulation of regulations. She states that there is a need to add more asset classes and enhance product offerings within the existing asset classes with special emphasis on mass penetration and awareness through educational programs. According to her, there is a need to look at a different class of distributors in order to spread awareness and conventional distributors shall follow as liquidity and corpus grows. She concluded by saying that NSE will continue to work closely with manufacturers of ETFs for the purpose of product development, product design and mass penetration and wished Motilal Oswal all the success in its endeavor to popularize the product.

Ms. Chitra Ramkrishna Managing Director and CEO of NSE

She is a Chartered Accountant by profession. She has been with NSE since its inception in 1991 and was part of the core five-member team selected by the government to create a screen based pan-Indian stock exchange.

Time has come for a true kink in the curve in the growth of this industry
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Keynote Speech
Global trends in the use of ETFs
Ms. Deborah Fuhr commenced her keynote address by highlighting how awareness about ETFs have increased from the last time she was here in 2009 and that recent regulatory changes will help take ETFs to the next level. Ms. Fuhr touched briefly on the basics of ETFs From classical definitions in various geographies to how are they traded; duty of market makers and the real liquidity. She pointed out certain key benefits amongst many such as:
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Ms. Deborah Fuhr Partner and Co-Founder of ETFGI

Prior to this she was the Global Head of ETF Research and Implementation Strategy and Managing Director at BlackRock/BGI from Sept 2008 Oct 2011. She worked at Morgan Stanley in London from 1997 2008 as Managing Director and head of the Investment Strategy team. An MBA from the JL Kellogg Graduate School of Management, Northwestern University, and a Bachelor of Science degree from the University of Connecticut , Ms. Fuhr is on the Editorial Board of the Journal of Indexes (USA) and Journal of Indexes Europe, the Advisory Board for The Journal of Index Investing, investment panel of experts for Portfolio Adviser, FTSE ICB Advisory Committee, and the International Advisory Committee (IAC) for the Egyptian Stock Exchange, as well as the University Of Connecticut School Of Business International Advisory Board.

Low cost where the average annual TER globally is 0.31% Low minimum investment size, typically as low as one share Instant Diversification Real time entry

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ETF is a very democratic product, in that the very same fund is used by pension funds, sovereign wealth funds, asset managers, insurance companies, financial advisors and retail investors; which in Ms. Fuhr's seventeen years of rich experience is a claim that cannot be made by any other investment product. Ms. Fuhr took a moment here to talk about the history of ETFs the first equity ETF was listed in 1990 and the first fixed income ETF was listed in 2000, both in Canada. The first ever fixed income ETF in the Asia Pacific region was listed in India in the year 2003. She further goes on to state that the ETF growth story has been phenomenal over the last decade as Global ETF corpus has hit at an all time record of US$ 2.14 trn with close to 500 product offerings, ~10,000 listings and 211 service providers on 56 exchanges. The product has seen a CAGR of 29.6% over the last ten years, growing at a rate faster than that of many other investment products. As of May 2013, ETFs account for 6.4% of the global mutual fund industry assets. Flows into ETFs are at an all time high with net new assets of US$ 108 bn vs. US$ 81 bn this time last year. Of the total inflows, equity assets stole the show adding US$ 94 bn of new assets. Active ETFs are a relatively new space which saw ~US$ 5.2 bn of inflows. Ms. Fuhr pointed out that ETFs are a timely barometer of what's happening in the market, a statement underlined by outflows of ~US$ 24 bn experienced by commodity ETFs where investors were seen taking money out of gold and silver ETFs primarily due to high interest rates. Within Equities, a major chunk of the inflows went into North American Equity, ~US$ 62 bn followed by Asia Pacific at ~US$ 24bn. According to Ms. Fuhr, investors are seen to be investing more in ETFs comprising of high yield dividend stocks as opposed to high yield bonds. Of the many questions thrown in Ms. Fuhr's direction during her visit here, one particular question that stood out due to the frequency at which it was asked was, How do foreign investors use ETFs that invest into India? She addressed this by saying that many investors don't have a foreign investor status for investing in different markets. However, an ETF possesses that foreign investor status enabling any retail investor to gain exposure to his/her preferred investment destination. Presently, there are roughly 36 foreign ETFs that provide access to Indian markets. These ETFs track

ETF is a very democratic product.

Keynote Speech
benchmarks ranging from MSCI, S&P to custom benchmarks provided by Wisdom Tree. These benchmarks could either be market capitalization weighted or be enhanced benchmarks for e.g. fundamentally weighted (smart beta) which essentially try and generate better performance vis--vis the traditionally constructed indices. Ms. Fuhr highlights that certain investors are seen to be moving some money out of emerging markets which has impacted the corpus of foreign domiciled India dedicated ETFs. However, many investors still maintain their India exposure and the asset size under this particular class is over US$ 5 bn as of May, 2013. Ms. Fuhr states that one must keep in mind certain factors while selecting an ETF a) Type of exposure, time horizon, b) benchmark, c) structure, d) costs, e) performance, f) liquidity, listings, size, g) regulation and tax. According to her, what drove the growth of the ETFs initially was the acceptance of ETFs by Institutional investors as a trading product. ETFs graduated from being a market access product providing exposure to difficult to reach markets to an investment product as investors expanded the asset classes, geographies they invest in. Many investors now hold ETFs for longer than they did earlier which is a sign of their growing confidence in ETFs. The results of a recent study by Greenwich Associates show that while institutional investors continue to find several ways to use ETFs to satisfy investment strategy needs, investors' need for passive exposures as part of core/satellite portfolio models has emerged as a key driver of ETF demand among institutions. In fact, institutions participating in the study cited passive exposure in the core as the most common ETF application. A majority of insurance companies (72%) and institutional funds (67%) using ETFs employ these products as a passive component of their core portfolios. Some of these institutions likely to keep ETFs in their core holdings as part of a longer-term strategy, while others may find it useful to employ ETFs for tactical shifts within their core exposures. The use of ETFs for several other purposes is becoming significant as well. For example, 43% of study participants say they employ ETFs for portfolio completion, indicating that many institutions now see ETFs as a way to ensure complete portfolio diversification by minimizing benchmark risk while maintaining alpha objectives. One in five institutions using ETFs is also employing the funds as part of hedging strategies. ETFs remain effective tools for tactical portfolio functions 70% of institutional ETF users employ ETFs for tactical portfolio adjustments. Ms. Fuhr concluded by saying that she is positive on ETFs and has been ever since she started talking about it in 1997. Based on a recent study by BCG, passive ETFs, both equity and fixed income, are slated to grow at a rate of 15-20% p.a. over the next five years and the asset size of ETFs globally is expected to double over the next four years, currently at US$ 2.14 trn. The future for ETFs is most definitely bright and with the advent of regulatory and tax changes, ETFs will witness investments by various categories of investors which will help propel it to the next level.

Ms. Deborah Fuhr Partner and Co-Founder of ETFGI

Asset size of ETFs globally is expected to double over the next four years

Panel Discussion
Making MOSt of ETFs
The panel discussion kicked off with a question to Ms. Mehrotra on What is the importance of Asset Allocation for Private Clients/ Wealth Management Clients; Why would an Investor or Advisor Consider ETF as an investment Avenue? Ms. Mehrotra responded by saying that there are two parts to asset allocation i.e. Strategic & Tactical. Most investors realize that a bulk of the value add or alpha comes from 'Strategic Asset Allocation' which is essentially selecting a range of asset classes and assigning them certain weights. She was of the view that ETFs are most useful when it comes to 'Tactical Asset Allocation' and that a lot of the Institutional Investors were using ETFs for this purpose, something Financial Advisors can look at too. Mr. Srivastava directed his next question towards Mr. Dua How can or how should Institutions use ETFs? Mr. Dua responded by saying that they at Citi are great believers in ETFs as a way forward not only on the Institutional front but also on the Retail and Private Banking front. On the institutional front, they try to use ETFs in an innovative way especially when they are designing new products for e.g. Quant trading strategies. Mr. Dua believes that most of the strategies that were earlier bundled with Portfolio Managing Schemes or Collective Investment Schemes are now being bundled with ETFs in an easier manner. And that's where the beauty of the product lies. It is simple, easy to understand, exchange traded, available to all category of investors and various strategies whether beta neutral or low volatility can be built around it. He believes ETFs on the institutional front help bridge a big gap which earlier was difficult to fill. Also, he thinks that ETFs are a great product for Asset Allocation as they come with a certain degree of dynamism. Mr. Srivastava in his follow up question to Mr. Dua asked about the validity of ETFs as a trading product for Institutions. Mr. Dua responded by saying that for any product to be a trading product it needs to have a certain mass of liquidity. Referring us back to Ms. Chitra's comments about the need for arbitrageurs and liquidity providers and the steps taken by the Government to reduce STT and paving way for different class of investors such as Pension Funds and Insurance companies to invest in ETFs, Mr. Dua believes that once this critical mass is achieved and with the presence of an already vibrant futures market, participation from the trading community will pick up which will further enhance liquidity. Mr. Srivastava's next question was for Ms. Deborah Fuhr Concept of liquidity in ETFs sparking debate amongst investors, could you help throw some light on this? She responded by saying that liquidity in US for example is a lot different from liquidity in Europe in that all trades in the US have to be reported and about 28-30% of all actively traded securities are ETFs. The challenge with liquidity is mostly with trades in Europe. As per regulations, ETF trades in Europe don't have to be reported on exchanges. And so in reality, only a third of the ETF trades are reported and the other two thirds take place over-the-counter. This is what makes the investors believe that ETFs don't trade at all. Therefore, in essence the liquidity of the ETF is the liquidity of the underlying security held.

Panelists Ms. Deborah Fuhr, Mr. Manu Dua, Mr. Rajnish Rastogi & Ms. Hansi Mehrotra Moderator Mr. Anubhav Srivastava

ETFs are most useful when it comes to Tactical Asset Allocation Ms. Mehrotra

Liquidity of the ETF is the liquidity of the underlying security held Ms. Fuhr

Panel Discussion
Mr. Srivastava then turned his attention to Mr. Rajnish Rastogi by asking How are ETFs managed? Is there any counter-party risk? Mr. Rastogi responded by saying that ETFs in India are just like mutual funds and all the underlying shares that an ETF invests in is held by an underlying Trust. Froman ownership perspective, there is no risk that the investor has on the AMC issuing these ETF units. As the AMC trades with the exchange, there is no counter-party risk the firm takes on. Also, when it comes to securities lending and borrowing, the AMC deals with the clearing corporation of the exchange where again there is no counter-party risk Mr. Srivastava summarized the discussion by concluding that different investors would use ETFs' differently. For Institutions the key factor was low cost and they would house the most customized portfolios. Private Banking and Wealth Management investors would either use a technology platform or have their advisors construct bespoke allocation using ETFs'. The retail client needs shrink wrapped goal oriented products or access products manufactured by institutions with ETF underlying..

Panelists Ms. Deborah Fuhr, Mr. Manu Dua, Mr. Rajnish Rastogi & Ms. Hansi Mehrotra Moderator Mr. Anubhav Srivastava

ETFs are a great product for Asset Allocation as they come with a certain degree of dynamism Mr. Dua

Market Outlook
Mr. Agrawal affirmed that the recent regulatory changes were encouraging for ETFs and that once institutional investments start rolling in ETF participation from retail investors and financial advisors will follow. He further went on to say that ETFs are a robust product and if one were to invest Rs. 100 in the Indian capital markets, half of it should be allocated towards well managed ETFs and the other half towards actively managed funds. He believes that 60-65% of the assets in the broad market indices are of very high quality which should encourage investments into ETFs tracking these indices. Going forward he expects a variety of ETFs to be launched and asserts that it is just a matter of time before people start looking at ETFs very seriously. As far as the market outlook is concerned, Mr. Agrawal believes that timing the market is not an ideal approach and that he never got it right and probably nobody else did too. He believes Current Account Deficit (CAD) is a big worry and can move the profitability of Indian Corporates, a fundamental change that will be brought about after a long time, impacting the earning profile of Indian companies. Export-oriented companies, with the devaluation of rupee, will be re-written in the market while importsubstitution oriented companies likely to suffer. All trade-able industrial products will become far more competitive in the days to come. Likely to see lower inflation and lower interest rates in the near future. FII buying is complex and something that is hard to figure out. He believes that Elections will be a complete game changer for the markets and that by September/ October this year, one will be able to figure which way the wind is blowing, whether UPA or NDA. Monsoon is another positive. He expects heavy weight reforms to take place soon and concluded by saying that markets will surprise on the upside and that investor money will most likely move back into Equities in the near future.

Mr. Raamdeo Agrawal Chairman, Motilal Oswal AMC

Mr. Agrawal is also the co-founder of Motilal Oswal Securities Ltd along with Mr. Motilal Oswal. Mr. Agrawal is an Associate of Institute of Chartered Accountant of India. He is a member of the National Committee on Capital Markets of the Confederation of Indian Industry. He has been authoring the annual Motilal Oswal Wealth Creation Study since its inception in 1996. He has also featured on 'Wizards of Dalal Street on CNBC TV 18'. In 1986, he wrote the book Corporate Numbers Game, along with co-author Mr. Ram K Piparia.

Timing the market is not an ideal approach

Asset Management

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