Smaller AMCs bleed like never before

Every fund house claims that the current market turmoil is not a cause for undue concern as they are here for the long haul. After all, ups and downs are part of a regular market cycle, they point out. This may be true for the top asset management companies. But the rate at which some of the smaller mutual funds are bleeding cash, the landscape of the Indian mutual fund industry may change dramatically before long.

Thanks to the dependence of fund houses on institutional investors and declining interest among investors for equity schemes, several middle and small fund houses are losing big money everyday. An ET study of the results recently announced by AMCs shows that for every Reliance Mutual Fund and UTI AMC that have seen their profits rise, there is a Principal or Kotak whose earnings are only shrinking. And with the equity markets showing no sign of recovering, the situation for middle- and small-tier AMCs is only expected to worsen in the coming days. This may just hasten the much-anticipated consolidation process in the industry, many experts predict, pointing out to the recent takeover of Lotus AMC by Religare as an instance.

The worst hit are AMCs that have begun their operations recently. Take for instance, Mirae Asset Management. The AMC said it had lost over Rs 47 crore in the financial year ended March, an amount that would have only shot up in the past few months. (All the numbers we quote are before taxes.) Its assets under management contracted by 57% in October, a trend seen at several other AMCs too as institutional investors moved their investments from MFs to bank fixed deposits. Mirae is now into cost-cutting mode; it had created a splash earlier when it took a bunch of scribes and distributors on a trip to South Korea last year.

Another recurring theme in the numbers is that of personnel costs. The three-year-old Fidelity AMC earned over Rs 80 crore as management fees, but spent close to Rs 50 crore of it on its personnel. It has accumulated close to Rs 160-crore losses, just in the past three years. Many others too have been accumulating losses year after year. In fact, AIG spent more on its personnel (Rs 16 crore) than what it earned through fees (Rs 12 crore). Abhay Aima, HDFC Bank country head of equity and private banking group, says in a relatively new industry AMCs have no option but to put up with high personnel costs.
A CEO of a fund house who requested that he not be quoted (fund managers usually fall over each other to be quoted when the discussion is about India’s long-term growth potential) said as AMCs build scale and their assets under management surge, personnel costs as a component of total expenses would fall.

But the situation is perhaps most alarming at middle-tier AMCs, who although are not running losses, are seeing their profits shrink. Principal’s profits fell from Rs 15 crore to Rs 10 crore till March 2008, largely due to a mysterious sounding entry— admin and other operating expenses. Birla Sun Life’s profits contracted to a fifth (Rs 4 crore), thanks to the fund house more than doubling its personnel cost. JM MF, a reasonably old fund house, in fact, managed to triple its losses to Rs 17 crore in the space of a year.

MF officials say these days their fund houses have been losing anywhere between Rs 5 and Rs 15 crore every month because of the slump in the sale of equity products. So MFs without a powerful financial backing or people who were here only for the valuation game are likely to sell out in the coming days, they suggest.

UTI is the most profitable AMC in the country, mostly due to its retail heavy assets, HDFC comes next; Reliance doubled its profits for the year.

Source:http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/Analysis/Smaller_AMCs_bleed_like_never_before/articleshow/msid-3724886,curpg-2.cms