Goldman Sachs in talks to buy Benchmark AMC

Goldman Sachs Asset Management (India) Pvt. Ltd, a new entrant in the Rs.6.75 trillion Indian mutual fund industry, is in advanced talks to acquire Benchmark Asset Management Co. Pvt. Ltd, which manages assets worth about Rs.3,000 crore.

A person with direct knowledge of the development said the deal may be clinched at a valuation of 4-4.5% (Rs.120-135 crore) of the assets under management of the 10-year-old asset management company (AMC) that is mainly focused on passive index investing.

There have been several acquisitions in the Indian mutual fund business, with valuations ranging from 1.6% to 13% of the assets under management. If the Goldman deal goes through, it will be the first instance of an index fund-heavy AMC being bought out by any fund house in India.

Goldman Sachs Mutual Fund entered the Indian asset management space in 2010.

There are 44 AMCs in the industry that has been grappling with sluggish sales and vanishing folios since a ban on entry load by the Securities and Exchange Board of India in August 2009.

Goldman Sachs’ move to grow through an acquisition is an anticipated consolidation in the mutual fund industry following the entry load ban that has hurt the profits of AMCs.

Goldman Sachs India head Brooks Entwistle declined to comment for this story.

A Benchmark official, too, did not offer any formal comment since the deal has not yet been closed.

Benchmark entered the industry in December 2001 with its maiden Nifty Benchmark Exchange Traded Scheme that currently has assets worth Rs.510.87 crore. In February 2007, Benchmark launched the country’s first gold exchange-traded funds (gold ETFs). ETFs typically track underlying indices and are traded on exchanges like stocks. Gold ETFs allow investors to hold paper instead of physical gold.

Till date, a majority of the schemes managed by Benchmark AMC are index-traded.

The Gold Benchmark Exchange Traded Scheme has assets worth Rs.1,506.29 crore, the highest among gold ETFs in India.

Following Benchmark, 10 other fund houses launched gold ETFs. The assets under such schemes are estimated at Rs.3,255.41 crore at the end of December 2010, according to Value Research, a Delhi-based mutual fund tracker.

Goldman’s move to acquire a fund house that predominantly manages gold ETFs may be inspired by the potential of gold fund industry in India.

Indians’ fancy for the yellow metal is yet to be capitalized fully by fund managers.

Recently, Reliance Capital Asset Management Ltd, the largest AMC in terms of assets under management, launched a fund-of-fund linked to Reliance Gold ETF, betting big on the prospects of gold ETFs in India.

According to a recent media presentation by Reliance AMC, India holds at least $800 billion (Rs.36 trillion) worth of gold, 11% of the world’s gold assets. Indians invest Rs.1.43 trillion in gold every year, but a minuscule portion of this is routed through gold ETFs.

ETFs do not earn as much commission as equity schemes for fund managers, and Goldman’s negotiation to pay a value of 4-4.5% of assets of Benchmark to acquire the latter’s assets might be a tad too high, fund managers said.

Typically, prices paid for such acquisitions are directly proportional to the assets under equity schemes.

Benchmark AMC has also tested the waters of quantitive asset management, with three equity schemes that are not exchange-traded—Benchmark Derivative Fund, Benchmark Equity and Derivatives Opportunities Fund, and Benchmark S&P CNX 500 Fund. Collectively, they manage less than Rs.200 crore of assets.

“Revenue in the ETF business is only 25-30% of what is earned from sales of equity schemes. Also, the income in ETF business fluctuates with the movement of assets under management. The valuation of 4% or more on assets of Benchmark AMC might be high,” said the chief executive of a rival fund house, on condition of anonymity.

Another concern, according to him, is that Goldman Sachs has always been into active asset management, and if it wants to manage ETF assets, it may need to retain the Benchmark team.

Earlier, in 2008, hedge fund Eton Park acquired a 5% stake in Reliance Mutual Fund for Rs.5,000 crore at a valuation of 12.9% of the latter’s assets under management then. In 2009, Japanese money manager Nomura Asset Management Co. Ltd picked up a 35% stake in LIC Mutual Fund Asset Management Co. Ltd for Rs.3,080 crore, or 2.4% of the valuation of the latter’s assets then. In 2009, L&T Investment Management Ltd paid Rs.450 crore to buy out DBS Cholamandalam Asset Management Ltd, 1.6% of the value of the latter’s assets.

Though there aren’t too many instances of acquisition of ETF managers globally, in 2009, US-based BlackRock Inc. paid $13.5 billion to buy Barclays Plc’s investment unit. Following the acquisition, BlackRock became the world’s largest money manager.

According to a June 2009 Bloomberg report, Barclays Global Investors’ (BGI) assets included $829 billion in stocks, $427 billion in bonds and $159 billion in cash as of 31 December 2008.

“More than 70% was tied to indexes, including iShares exchange-traded funds. The firm has more than 2,800 funds that track about 250 indexes worldwide,” the report said.

This means that BlackRock had paid about 1% of the value of total assets under BGI for the acquisition.

Source: http://www.livemint.com/2011/03/04013859/Goldman-Sachs-in-talks-to-buy.html?atype=tp

Mid-, small-caps dent diversified mutual funds in February

Diversified stock funds lagged the Sensex in February, as exposure to mid- and small-cap shares and sectors like capital goods hurt net asset values.

Diversified funds fell 4.66 percent on an average during the month, compared with a 2.75 percent fall in the benchmark, data from global fund tracker Lipper, a Thomson Reuters company, showed.

"There is no predictability at all, there are no sectoral moves... sometimes it (market) is getting impacted by global cues," said T P Raman, Managing Director at Sundaram Mutual Fund.

Equity diversified funds with significant exposure to mid- and small-cap firms bore the brunt as the BSE Mid-cap index declined 7.2 percent and the small-cap index dropped 7.8 percent in February.

Though money managers have reduced exposure to such stocks in recent months, these companies still accounted for more than 30 percent of assets as of January-end, Morningstar India data showed.

Exposure to capital goods -- a favourite with fund managers -- which accounted for nearly a quarter of assets, also affected net asset values as the sectoral index fell 8.3 percent during February.

"Funds with higher exposure to realty, healthcare, capital goods and auto sectors took a harder knock on their chin during the month," said Dhruva Raj Chatterji, senior research analyst at Morningstar India.

Among sectoral funds, schemes which bet on pharma stocks lost 6.9 percent in February, as the healthcare index posted a drop of 8.32 percent.

Diversified equity funds had 6.6 percent of their assets allocated to cash at end-January, their highest level since February 2010, data showed.

Fund managers have increased their allocation to cash, as a spate of corruption scandals, high inflation and rising crude oil prices dented sentiment and led to a fall in key indices.

"It appears that some of the funds which took larger cash calls during the correction may also have buffered themselves a bit amidst the turmoil," Chatterji said.

BOND, GOLD FUNDS

Indian fixed income funds investing in government debt saw net values rise 0.67 percent in February, as the yield on the actively traded benchmark bond fell eight basis points in the month.

India's gold exchange-traded funds (ETFs) gained 3.8 percent in February as the price of the yellow metal jumped on the back of political turmoil in Libya.

On the continuous charts in India, gold futures ended February at 20,923 rupees per 10 grams, up 5 percent for the month.

Source: http://economictimes.indiatimes.com/markets/analysis/mid-small-caps-dent-diversified-mutual-funds-in-february/articleshow/7618945.cms