Though the capital market regulator, Securities and Exchange Board of India (Sebi), has been nudging mutual funds (MFs) to consolidate their schemes, fund houses don’t seem to be rushing for it. Fund managers believe that though some of their schemes have tiny corpuses, they are used by large investors opportunistically.
Says Lalit Nambiar, senior fund manager, UTI Asset Management Co. Ltd: “In developed markets, sector funds capture a lot of mind share and fund allocation; especially from institutional investors and high networth individuals. This could be the way forward in India as well, though it will take maybe two-three years for that to happen.”
Fund managers say that there still exists a niche market for thematic and sector funds despite their small size. The Indian MF industry currently has nearly Rs 6.4 trillion across around 1,000 schemes. A closer look shows that there are at least 200 schemes with assets under management (AUM) of less than Rs 250 crore each.
The case for mergers
Typically, a small-sized scheme is a good candidate for mergers, especially if it is not much different in terms of its investment philosophy from its larger peer. Says A. Balasubramanian, chief executive officer, Birla Sun Life Asset Management Co. Ltd: “I check whether there is an overlap of objectives between two or more schemes in terms of portfolio construction and stock selection; if the fund manager is doing the same job or not. In this process, some investors lose out, but ultimately, long-term investors benefit.”
Adds Kalpen Parikh, deputy chief executive officer, IDFC Asset Management Co. Ltd: “Sebi is guiding in the right direction; it talks about clear-cut mandate for one scheme rather than having three-four schemes with the same mandate. So the trend (for rationalization) is rising.”
Once the board of trustees of an AMC zeroes in on the schemes that need to be merged, they approach the regulator for approval. After Sebi approves, the fund houses send letters to the investors of schemes that are to be merged providing them an exit option in case they disagree with the fund house’s decision. After the exit option period gets over, the smaller scheme get merged with the bigger one.
The case for tactical investment
However, fund houses largely avoid merging thematic and sectoral funds into other funds such as a diversified fund.
Take the case of ICICI Prudential Asset Management Co. Ltd. The fund house launched ICICI Prudential FMCG Fund and ICICI Prudential Technology Fund in years 1999 and 2000, respectively.
On average, the corpuses of these funds have been in the range of Rs 65 crore to Rs 95 crore for at least the last four years. “These funds are largely used as tactical positions by most investors. But we have an in-house person who looks at these two sectors,” says S. Naren, chief investment officer (equity), ICICI Prudential AMC.
A dedicated analyst in fund management can double up as a fund manager for a scheme that tracks the analyst’s sector.
For instance, in 2007 Goldman Sachs Bank BeES’—an exchange-traded fund that tracks the CNX Banking index—corpus size crossed Rs 7,000 crore at the start of the year and averaged at least Rs 5,000 crore, pitching it among India’s largest equity schemes in those few months. In 2010, its average AUM dropped to about Rs 64 crore; latest data available at Value Research, an MF tracker, shows its size at Rs 140 crore.
In 2006, foreign institutional investors were big investors in this scheme as many had reportedly reached a ceiling on the direct stock they could own and were looking for alternative means to get exposure to the sector.
Hence, investors chase performance and sector funds feed into that need.
Different voices: Not all agree though. Says Balasubramanian: “I don’t think many people use these funds for strategic purposes. In any case, consolidation is not mandatory, it is only advisable.” Within Birla AMC’s bouquet of funds, there is Birla MNC Fund, a Rs 250 crore (the fund house has total assets in excess of Rs 64,000 crore) scheme which the fund house claims is an unique theme.
This fund invests only in multinational companies. Balasubramanian says that there are some investors who prefer to invest in “well-managed multinational companies who have free cash flows or where the international parent is very strong”. For its unique theme, the fund house wants to retain this scheme and asserts that demand is there.
Clearly, merging schemes is not as simple as it sounds. But as long as duplication doesn’t happen and every scheme has a purpose, retaining small-sized schemes is fine.