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Shyamal Banerjee/Mint
Shyamal Banerjee/Mint

What to do if your fund house is acquired?

To sell or retain units will depend on the performance of the acquiring fund house

Consolidation continues in the 9.45 trillion Indian mutual fund (MF) industry. After the exit of FIL Fund Management Pvt. Ltd in 2012 and then by Morgan Stanley Investment Ltd in December 2013, comes news of another exit. Last week, Birla Sun Life Asset Management Co. Ltd announced that it acquired ING Investment Management (India) Ltd, one of India’s smallest fund houses with assets of just about 750 crore. If you are an investor with ING Investment Management, should you exit and move out now?

The specifics

Birla Sun Life AMC has said that it will acquire ING’s schemes, but not the fund house or its executives, yet. The fund house refused to divulge the amount it spent on acquiring ING, but sources in the MF industry say Birla AMC paid about 1.5% of ING’s equity assets (its MF and portfolio management services, or PMS, divisions). ING Investment India has about 280 crore in equity assets under its MF division and about 350 crore in PMS. This puts the deal value at about 9.45 crore.

Birla Sun Life AMC will get about 80,000 investors belonging to the ING fund house. This makes it one of the lowest deal values in the history of the Indian MF industry. In addition to the usual mix of equity and debt schemes, ING has many fund of funds schemes and a few international schemes as well.

Since the capital markets regulator, Securities and Exchange Board of India (Sebi), abolished entry loads in 2009, fund houses have struggled to get inflows.

Volatile equity markets have made matters worse for the industry as many retail investors burnt their fingers during the 2008-09 period due to the global credit crisis.

In 2012, Fidelity International Ltd sold its Indian MF business to L&T Investment Management Co. Ltd. Then late last year, Morgan Stanley Investment Management exited its Indian MF business by selling it off to HDFC AMC.

Does this series of exits indicate that there’s something wrong with the way foreign fund houses are doing business in India?

“Not really," said Abizer Diwanji, national leader, financial services, EY. “Foreign fund houses appear to have exited their onshore businesses but retained their offshore businesses. JP Morgan has one of the largest India-dedicated funds run out of Hong Kong," he added. In an onshore business, the investment business is managed from within India and the funds invest in Indian stock markets. An offshore business is one where the investments business is managed abroad but the funds invest money in Indian stock markets.

Diwanji said that to maintain a successful onshore business, fund houses need large volumes of assets under management to be able to justify high costs. “Otherwise, the AMC business is loss making," he added.

The recent Sebi ruling to increase the minimum net worth criteria for fund houses to 50 crore, up from 10 crore earlier, will also lead to more consolidations. Sponsor companies, whose fund houses’ net worth is less than 50 crore presently, might exit the MF business.

Small wonder then that ING Investment Management’s (India) accumulated losses over the years is 300 crore; the highest among all fund houses in India.

Gautam Mehra, executive director, and leader, asset management, PwC India, said that many foreign fund houses “haven’t been able to make a headway despite being around for quite some time".

Fund industry sources say that in the current scenario, a potential acquirer in the Indian MF industry can pay the same amount of money to acquire new assets and customers at one shot as it would pay to distributors at the launch of a new equity scheme to acquire new customers in some cases. “The assets acquired through a takeover would bring investors on Day 1, while money paid to distributors would get the investors over a three-year period. And there is no certainty of investors continuing with the fund house," said an mutual fund industry executive who did not want to be named.

What should you do?

If you are an investor of ING Investment Management Co. Ltd, your decision should hinge on the pedigree of the acquiring fund house—Birla Sun Life, in this case—and what it plans to do with your scheme.

A. Balasubramanian, chief executive officer, Birla Sun Life AMC, said, “Most of ING’s schemes match ours. So we will merge most of them to avoid any duplicity." Also, ING’s PMS division, which runs schemes using quantitative methods, would be a “good fit into the Birla Sun Life’s schemes of things", he added.

Others agree. “Birla Sun Life AMC has a good research and fund management team. If ING investors have stayed invested with ING, it makes sense for them to stick around. This acquisition is a positive move for investors," said Suresh Sadagopan, a Mumbai-based financial planner.

Gajendra Kothari, chief executive officer, Etica Wealth Management Pvt. Ltd, said, “If the acquiring fund house is good, investors of the acquired fund house should stay invested and give the new fund house about 2-3 years. If it doesn’t deliver, investors should then quit. When L&T Investment Management acquired Fidelity in 2012, Fidelity had assured that their own fund managers would stay on board for a year till the transition was happening. So, we had stayed invested. Unfortunately, L&T hasn’t been able to give a significant performance. So, we later advised our investors to exit L&T Investment Management."

Kothari said if existing ING investors have already invested in Birla Sun Life’s schemes, it may make sense to exit as there’s no point in investing in Birla twice. We suggest: if you are an ING investor, stay invested for now and move over to Birla Sun Life. But if you are under-diversified as well as already invested in Birla Sun Life, it might make sense to take your money out and go elsewhere.

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