Post Fidelity: Will L&T MF succeed?

Fund houses love to celebrate milestones. India’s 13th largest fund house, L&T Investment Management Ltd, is about to celebrate one such soon. On 24 November, it will celebrate its first anniversary of acquiring Fidelity group’s Indian mutual fund (MF) business, FIL Fund Management Ltd (FIL), one of the most talked about MF acquisitions in the country in recent years. Faced with many concerns at the time of how FIL schemes would be managed under L&T’s stewardship, the top brass at L&T Investment Management have worked hard in the past one year to soothe nerves of investors and set its house in order.

The fund house, which itself is a result of quite a few such small and big mergers, is finally set to sail ahead and become a formidable firm in the 8.08 trillion Indian MF industry. The question we’re asking is: Is it really poised to threaten the top firms and be counted?

Setting the house in order

As the takeover got underway, the task was cut out for the top brass at L&T Finance Holdings Ltd (the fund house’s sponsor company) as well as the MF’s new management. With combined assets of over 12,000 crore to manage, turning around its own performance and maintaining the performance standards of FIL was tough. FIL’s track record was much better than that of L&T Investment Management (see table). Also, FIL’s equity fund managers weren’t crossing over to L&T, so there was a vacuum on the fund management side. Large distributors, especially private sector and foreign banks who had been aggressively selling FIL schemes till then, stopped selling FIL schemes.

When Lahiri got hold of FIL portfolios after the transition phase, he made few changes. Mid-cap holdings (such as those in Gujarat Fluorochemicals Ltd) got changed; he sold some of the companies and reduced exposure in others. He cut exposures to large-cap companies and also to pharmaceuticals companies, increased weightage to two-wheeler auto companies and cut exposures to large banks replacing them with small-sized banks such as ING Vysya Bank Ltd. Overall, he also increased the weightage of mid- and small-cap companies in L&T Equity Fund (LEF; formerly Fidelity Equity Fund) and reduced the overall number of stocks from about 65 (LEF typically held a large number of stocks) to about 55-60 at present.

Lahiri is pinning his hopes, though, on L&T Midcap Fund where he has made sweeping changes to the portfolio; till date, about 68% of its June 2012 holdings have been replaced.

L&T Investment Management decided to lean the equity schemes towards FIL’s scheme of things. On the debt fund management side, the fund house gravitated more towards the erstwhile L&T. Ashu Suyash, chief executive officer, L&T Investment Management, says, that it was about where the performance was good and where the fund house saw scale “and where the product idea gave a sense of continuity”.

Infact, its top team also appears to be tilted towards former Fidelity employees. Apart from Suyash and Shriram Ramanathan, who heads the MF’s fixed-income schemes, other key functions such as operations and customer service, legal and compliance, sales and distribution, finance, compliance and risk management and product development are headed by erstwhile Fidelity employees. Post of national head, institutional sales and the investor relations officer has been retained by erstwhile L&T people. Kailash Kulkarni, chief business officer, who’s next in the pecking order after Suyash, comes from the erstwhile L&T Investment Management.

Suyash has a different take on this. “That was never a conscious decision; it was about the people and their own experience in the business. It’s not fair to say that it’s entirely Fidelity or anything like that. The erstwhile L&T people are doing well. Y.M. Deosthalee (chairman and MD, L&T Finance Holdings Ltd) also mentioned about looking at talent augmenting his talent pool. As L&T, the company is committed to provide the best experience to its customers. It has to line its people base accordingly. This is beyond the AMC (asset management company) business. It’s about how to take this business forward in financial services. L&T is a very serious entity in this segment,” explains Suyash.

Focus on performance and inflows

On the performance front, L&T Investment Management has a long way to go. As on 16 October 2013, only L&T Indo Asia, L&T India Special Situations and L&T Prudence funds have turned a decent performance in the past one year among equity oriented funds; they’ve beaten category averages and also done better than many of their peers.

Lahiri admits that though FIL’s equity fund managers were handling the schemes during the eight month transition period, “their focus at the time was more to manage liquidity, naturally; volatile markets and possible outflows were a concern”.

“It’s been a short while since the merger happened. We need to give some time”, says Suyash. She says that over time, she would like to see the fund house’s schemes beat “at least 60% of their peer schemes”.

Suyash is also keen to ensure that those distributors who had stopped FIL schemes post-merger should start selling the MF’s schemes again. Backed by some decent performance, for instance, Citibank N.A. has started to selectively focus on some of L&T MF’s schemes. Standard Chartered Plc has also made L&T schemes available on its platform. These were among the distributors that had earlier gone slow with regards to FIL schemes after the acquisition.

In its zeal to increase its corpus though, the fund house appears to have done bonus stripping; a practice that’s typically frowned upon but is a regular practice across the Indian MF industry, as per industry officials.

In bonus stripping, investors enter a fund, sell existing units at a loss soon after the bonus is declared and set the loss against gains made elsewhere to save taxes. The bonus units are typically held and then sold after a year.

To plug the gap, the Securities and Exchange Board of India (Sebi) tightened the norms and insisted that investors either enter three months (here’s where fund houses privately announce an upcoming bonus to select investors) before the bonus declaration date or stay till nine months after the bonus is declared.

L&T Investment Management declared bonuses for two of its debt schemes—L&T Triple Ace Bond Fund (LTA) in September 2013 and L&T Floating Rate Fund (LFR) in August 2013. LTA’s corpus shot up from 426 crore in May 2013 to 2,577 crore in June 2013; it fell from 2,486 crore in August 2013 to 1,739 crore in September 2013; this perhaps indicates bonus stripping. Investors got in three months before the bonus was announced and some exited soon after.

LFR’s corpus rose similarly; from 11 crore in March 2013 to 973 crore in April 2013 and from 664 crore in July 2013 to 300 crore in August 2013.

Though the numbers seem to indicate bonus stripping, the fund house denies it. “Our assets did not go up because of bonus; that growth was a small part of the overall growth of our assets”, says Kulkarni.

Putting pieces together

At present, the fund house is India’s 13th largest. “They are no different than other mid-sized fund houses in India. Acquisition gave them profile and some assets, but it did not turn up the scale dramatically. What value they aim to bring to the table is not yet clear,” says the head of wealth management at one of the large foreign banks on condition of anonymity.

Part of this problem is that L&T Investment Management has evolved through several mergers in its lifetime. In 2006, Singapore’s DBS bought a stake in Chola Asset Management Co. Ltd; it was rechristened as DBS Chola Asset Management Co. Ltd. In 2009, L&T Finance Ltd acquired DBS Chola Asset Management and rechristened it to L&T Investment Management Ltd. Last year, it acquired FIL.

Suyash is aware that track record will take time. But she is also closely monitoring customer service; something she believes will be the MF’s hallmark apart from performance. The MF’s back office and call centre is managed by Computer Age Management Services Ltd (Cams; one of the largest registrar and transfer agents, or R&T, in the Indian MF industry).

Although a single R&T caters to several fund houses, customer experience with each of them could be different depending on how the MF uses the R&T’s technology and facilities to its own advantage. They come at a price, of course.

Some industry officials say that practices adopted by L&T Investment Management are “among the best”. From having a separate phone number that customers can call to, monitoring quality of interactions when a customer calls and training call centre employees itself (things like how to talk, how to end a call), monitoring how many calls get abandoned in case there’s no answer and deciding the type and tone of language it uses in its letters that the MF sends to customer in response to their complaints, Suyash keeps an eagle’s eye on all.

Processes can be seen on the fund management side as well. Ramanathan says the fund house rates companies’ debt scrips internally and replies on its internal ratings. “Even if an outside rating agency would rate a scrip as, say, P1+, which is the highest credit rating for short-term debt scrips, we would break that down and give a further internal rating spread over four-five levels,” he says adding that the MF’s internal ratings are typically more conservative than external ratings.

Are the efforts bearing fruit? “I think L&T is very serious about the fund house given the amount of money they’ve poured into the business. It’s a continuous dialogue with the fund house and they keep us apprised,” says the head of wealth management a foreign bank.

Most distributors who we spoke to, though, are watching L&T Investment Management closely but haven’t warmed up to it in a big way yet. “They are still in a transition stage. Their schemes don’t have the kind of recall like Fidelity’s,” says the head of research at another foreign bank on condition of anonymity. None of the distributors wanted to be named because they have commercial relations with all fund houses.

Mint Money take

Last year, we advised our readers to stop their systematic investment plans with the erstwhile Fidelity schemes on the back of L&T Investment Management’s track record before that because of change in management and, so, the uncertainty.

After a year of acquiring Fidelity India last year, the firm is now settling. With Lahiri—who comes with a good track record—at the helm of its equity funds, we think that the performance will come eventually. But it faces tough competition not just from larger peers but also from some key mid-sized firms.

The next three years are crucial for the fund house’s long-term future. The funds are yet to find their way into Mint50.