With debt and equity assets under management (AUMs) falling since March, asset managers will see a dip in fees
Debt funds have been in a spot of bother for the last two years
The turmoil in the mutual fund (MF) industry is denting the prospects of asset management companies (AMCs). Compared to their highs in mid-February, shares of Nippon Life Asset Management Co. Ltd and HDFC Asset Management Co. Ltd are down 26% and 46%, respectively.
With debt and equity assets under management (AUMs) falling since March, asset managers will see a dip in fees. This will squeeze profitability in the coming quarters.
Debt funds have been in a spot of bother for the last two years. With some debt-laden firms defaulting every now and then, investors’ confidence in debt funds have been shaken. After Franklin Templeton Asset Management (India) Pvt. Ltd shut down as many as six debt schemes last week, the trouble has only magnified.
While debt AUMs overall are up so far in April, there have been increased redemptions since the Franklin episode, largely in the credit risk category, followed by low-duration and ultra-short-duration funds.
“Since August 2018 (IL&FS default), AUM of debt mutual funds has stagnated and is down 14%, more so for liquid funds, where AUM is down by 45%," said analysts at Morgan Stanley in a note after the Franklin episode.
Given the problems, analysts are not ruling out an increase in redemptions from debt MFs in coming quarters. “These events do bode ill for debt funds as a product and are likely to keep retail investor sentiment subdued in the medium term. The recent unwinding of six large debt-market schemes by one of the top-10 AMCs is likely to see a fresh round of redemptions from credit funds," said JM Financial Institutional Equities.
In addition, the turmoil in the equity market is piling pressure on AMCs. AUMs plunged 23% month-on-month in March. Equity AUMs have risen by about 8% so far this month, thanks to the bounce-back in the markets.
Note that fees charged on equity funds are 100-150 basis points higher than in debt funds. This will add to the erosion in management fees.
Besides, the increase in volatility could impact flows into equity funds. Of course, flows from systematic investment plans (SIPs) are holding up well, up to ₹8,641 crore a month. However, the shutdown could also impinge on new SIP registrations in coming months.
Besides, the fixed cost nature of the business can impact operating metrics when AUMs shrink. “Under the new full-trail commissions regime, most costs for AMCs are fixed/quasi-fixed in nature—and while this does aid profitability (profit after tax as a percent of AUMs) in good times, it may lead to ‘operating de-leverage’ in weak equity market conditions," added JM Financial.
Despite the fall, AMC stocks still trade at price-earnings valuations of 30-57 times. Well, these investments may still be subject to market risks