BackThe curious case of mid-size MFs
These firms can't cut corners and scale as aggressively as their smaller cousins
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When you invest in a mutual fund (MF) scheme, what do you look at? Performance? Or, perhaps some innovation, something you feel this scheme does that others don’t? Or, as many investors who can’t tell one scheme from another: a good and large brand, someone who you can trust, and has a legacy? As I take a look at the pecking order of the asset management companies (AMCs) ranked in terms of their corpus (January to March 2014, average assets under management), I find it difficult to see much differentiation in terms of what fund houses outside the largest, say, 15 to 17, can bring to the table that the top ones wouldn’t. In fact, even some of the smallest fund houses seem to have carved a niche for themselves. What are the mid-sized fund houses still doing in the business and what do they aim to accomplish? Let me explain.
After years of turbulence since the market crash of 2008, and the extreme stock market volatility and far-reaching regulatory changes, things appear to be stabilizing in the 9.05 trillion Indian MF industry. Equity markets are looking cheerful again and fund houses are seeing value and launching new schemes to tap that value at current market prices. With added incentives to go beyond the top 15 (B15) cities, fund houses are busy trying to expand their market share slowly and gradually.
One of the unintended after effects of the change in the MF landscape has been the segregation of firms into large, medium and small. Earlier, all fund houses seemed to be on the same path of making money—launching multiple schemes, opening new branches...(making profits down the line was a reasonable certainty come what may). But now it will be tougher for firms to break even and make profits. Till 2007, rising equity markets and a favourable fee structure allowed new fund offers (NFOs) to charge as much as 6% as initial issue expenses and then amortizing it over five years. NFOs have slowed down considerably ever since markets regulator Securities and Exchange Board of India (Sebi) banned amortization of NFO expenses in January 2008, and entry loads in August 2009. Turning profitable is now a game of patience.
A fund house incurs costs such as staff expense (one of the biggest expenses), rent, infrastructure, technology, marketing, so on and so forth. Assuming that the maximum expense ratio a scheme charges is 2.50% and the AMC fees (the income that fund house earns) is 0.75% of it, a mid-size AMC can incur expenses anything upwards of 20 crore a year. For a fund house to make more income (through the 0.75% AMC fees in this example), it should have an overall corpus of at least 3,000 crore. This is a very conservative example; costs of many fund houses are more than this.
Earlier, it was easy to add corpus; between October 2005 till December 2007, fund houses added about 14,000 crore on an average, with the top five gainers adding about 37,000 crore of assets. But times have changed. Between January 2010 and December 2013, fund houses collected 4,000 on average; and many fund houses, in fact, lost money.
Tougher regulatory norms, volatile markets and weak investor sentiment has ensured that fund houses now have to wait longer to collect as much money. Net worth and seed capital requirements will only put more pressure on them. The path to breaking even and making profits has become longer. Till that happens, a fund house has to merely survive.
As a result, business models have changed considerably in the MF industry. Fund houses with deeper pockets can survive, though. How do other fund houses compete? The small fund house goes for massive cost cuts and downsizes its business aggressively. It closes about half of the branches—that wouldn’t be too difficult to do as there wouldn’t be many branches to begin with. It retrenches a section of its staff and gets nimble. The smarter ones would do all this and position themselves to cater to either a niche set of clients or play on their strengths and offer niche products. Fund houses such as Mirae Asset Global Investments (India) Ltd, Quantum Asset Management Co. Ltd, Motilal Oswal Asset Management Co. Ltd and Edelweiss Asset Management Co. Ltd are among the smaller ones that have identified their specialized areas.
It’s the mid-size ones that appear to be stuck. These firms can’t cut corners and scale as aggressively as their smaller cousins. And they can’t easily make their way to the top 10. Most of them have multiple schemes that appear to be clones of their more popular larger peers.
Ultimately, performance is required irrespective of the size of the fund house. But if mid-size AMCs can’t differentiate themselves from others, they won’t be able to offer any uniqueness to the investor, especially since many investors give more importance to brand than to performance, and thereby stick with large firms. As long as these firms make profits, their sponsors aren’t likely to ask tough questions. Loss-making firms, however, will be questioned by their sponsors, sooner or later, about why they should still exist.
The writing on the wall is: to survive, a fund house has to either be big to stand out or be niche and be counted. The middle guy looks the most vulnerable.
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