Wednesday, February 8, 2012

Entry load or not, most foreign funds got it wrong

High cost and similar performance from domestic players played spoilsport

“When a fund house like Fidelity exits, it does not augur well for the Indian mutual fund industry,” says the chief executive officer of a leading fund house. But, he is quick to add, exits of large and well-known foreign fund houses from India are common.
He is right. Since 1993, when the MF sector was opened for private and foreign players, there have been exits by at least 10 high-profile foreign entities. Many were standalone ones. The trend started with the sale of Kothari Pioneer (Pioneer of the US), bought by Franklin Templeton, one of the few foreign successes. Pioneer has recently re-entered by buying a stake in Bank of Baroda’s MF arm. There are many others like ANZ Grindlays, Standard Chartered, Aegon, and DBS, which have completely exited.

According to experts, most foreign fund houses, especially standalone ones, have found the going difficult. “Most were unable to attain a critical mass – Rs 10,000 to Rs 15,000 crore – in assets, which hurt them badly. Even their cost structure is much higher. Yes, business models had to be tweaked after the entry load ban. But, that’s just one part of the story,” says Rajiv Deep Bajaj, CEO, Bajaj Capital, an MF distributor.
The entry load ban was implemented in August 2009, but it did not lead to huge losses for most fund houses. In fact, the top five continued to make money despite the tough regime. HDFC and Birla Sunlife doubled and trebled profits. On the other hand, already loss-making fund houses continued to perform badly. There were new players such as Axis, Mirae and L&T which entered during this tough phase and are still in the red.

Things weren't much different even without the entry load ban. While Fidelity’s asset quality, in terms of money in equities, is much better, there are others which have spent money without actually collecting it.

Cost issue In addition, costs are an issue. For instance, in 2010-11, Fidelity’s staff cost was as high as Rs 68 crore, whereas its income was Rs 75 crore and its assets Rs 8,880 crore. Similarly, ING’s income was Rs 74 crore, staff cost Rs 30 crore and assets Rs 1,559 crore. HDFC’s income was Rs 680 crore, staff cost, Rs 85 crore and assets Rs 88,737 crore, thereby making it more efficient.

The problem lies there: The cost-benefit matrix is not in the favour of many. “Fund houses which entered just before or have seen at least one good bull run should be doing much better. However, there could be a problem of managing costs and the inability of some to adjust to Indian conditions,” said Arindam Ghosh, CEO, Mirae Asset. The Sensex rose from 6,000 to 21,000 between January 2004 and January 2008, almost 3.5 times, a really good time for fund houses. He notes that besides the bull run, the other growth drivers no longer exist.

The fact is that the entire MF industry hasn’t suffered. Of 42 fund houses, 22 had accumulated losses of Rs 1,729 crore till March 2011. Eighteen others had piled accumulated profits of Rs 2,656 crore. Given that accumulated profits are post-dividend, the latter’s would be higher. Importantly, 14 of these are purely or predominantly Indian players, according to the classification of the Association of Mutual Funds in India.

The top three profit makers – UTI Mutual Fund, Reliance Capital Asset Management and HDFC Asset Management – have contributed a whopping 63 per cent to the profits of the industry. (UTI has been there for almost half a century, so its profits have been accumulated over the years).

Clearly, there is a disconnect somewhere. Mirae’s Ghosh says the top 10 players globally are standalone ones, that perform much better those with bank or corporate house affiliations. “In Asia, the trend is the reverse. It is a function of the stage an economy is in,” he says.

Other experts feel that there isn’t much difference between a foreign and Indian entity in terms of performance. “With performance being almost the same, reach is the key for success. This is where Indian fund houses, especially bank-sponsored ones, have scored,” said Rajiv Anand, CEO, Axis MF.

Most say the business environment is more high-cost now. As the CEO of a leading fund house said, “If one is earning Rs 1 and spending more than that in fees and brokerage costs, there is a problem. In such times, the promoter’s patience is put to test.” A test in which many foreign fund houses have been failing for almost two decades.


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