Equity markets are subject to market risks, but that adage does not seem to apply to stocks of asset management companies (AMCs). While the broader market seems to be drifting downwards, AMC stocks have been hitting new 52-week highs in recent times.

Much of this optimism stems from the fact that there has been a continuous flow of funds into mutual fund schemes. A ban on upfront commissions to agents last October by the Securities and Exchange Board of India (Sebi), and changes in total expense ratio, were expected to impact the growth of assets under management. But that has not happened.

Total assets under management in June 2019 were higher by 9% since October, when the ban came into effect. Importantly, total net inflows into equity schemes have summed up to about 63,000 crore since October 2018. One reason is systematic investment plans, which are considered to be sticky.

The ban on commissions, however, has not dented the performance of AMCs, but instead, has helped improve their operating metrics.

Commissions paid to distributors formed a large expense in the profit and loss accounts. Additionally, AMCs have been successful in passing the cuts in total expense ratio to distributors to a large extent, which cushioned the impact at the net level.

(Graphic: Santosh Sharma/Mint)
(Graphic: Santosh Sharma/Mint)

This has played out in the first-quarter numbers. AMCs reported decent profit growth, despite muted revenue growth. HDFC Asset Management Co. Ltd’s revenues were up 7% in the June quarter, while net profit grew 42% over the year-ago period. Reliance Nippon Life Asset Management Ltd’s revenues were lower by 5.3%, while the net profit was up 13% over the year-ago quarter.

“1QFY20 was a transition quarter for mutual funds to lower fee norms and Reliance AMC (and the sector) have done well in managing it with limited earnings impact by lower distributors’ commissions and controlling discretionary costs," said a CLSA India (Pvt.) Ltd note to clients.

While all this is good, AMC stocks have turned pricey lately. A change in the ownership of Reliance Nippon AM has seen its stock run up about 19% in the past month, while HDFC AMC’s premier position has seen its stock rise by 11%.

Much of the optimism now depends on flows remaining steady. With the markets wobbly, lump-sum investments are likely to remain lumpy. Besides, growth in assets under management that seems to have stagnated in the last few months, should be closely watched.