Thursday, April 26, 2012

Fidelity MF sees Rs. 805 cr outflow ahead of sale completion

The acquisition valued Fidelity MF at 6.2% of its average assets under management (AUM) of Rs. 8,881 crore for the quarter ended December
Investors are pulling out from Fidelity’s Indian mutual fund (MF) schemes. In the March quarter, investors in the equity schemes of FIL Fund Management Pvt. Ltd withdrew at least Rs. 805 crore, while the Fidelity group was conducting a strategic review of its Indian MF business that ultimately led to the sale of the fund.

Fidelity MF announced the sale of its assets to L&T Finance Ltd for an undisclosed sum in the last week of March. A person with direct knowledge of the matter said the deal was clinched at around Rs. 550 crore. Fidelity and L&T Finance had declined to comment on this figure at the time.

The acquisition valued Fidelity MF at 6.2% of its average assets under management (AUM) of Rs. 8,881 crore for the quarter ended December.

According to data available with registrars and the capital market regulator, the average AUM of Fidelity MF’s five equity schemes grew by an average Rs. 73 crore to Rs. 5,698 crore in the March quarter from the December quarter .

The 50-stock Nifty index of the National Stock Exchange grew 14.52% between January and March, while the 30-share benchmark Sensex of BSE went up 12.61%. In line with this, the net asset values (NAVs) of the five schemes of Fidelity MF grew 13.16-20.32%.

Going by the returns these schemes offered to investors or their NAVs, a back-of-the-envelope calculation shows that the average assets of the five equity schemes should have grown by Rs. 877.99 crore and not Rs. 73 crore. This means, these schemes witnessed an outflow of Rs. 805 crore.

Most fund houses during the quarter saw a net inflow of money into equity schemes.

Fidelity had six equity schemes, but five have been considered for calculations as they contribute the bulk to the AUM. They are Fidelity Equity, Fidelity India Growth, Fidelity India Special Situations, Fidelity Tax Advantage and Fidelity India Value.

The figures are also available with the Association of Mutual Funds in India (Amfi), an industry lobby.
A Fidelity MF spokesperson rejected the contention that there had been an outflow to the extent calculated by Mint.

“We are not seeing much outflow and have not seen a net outflow of anywhere even close to Rs. 800 crore in the five equity schemes of Fidelity Mutual Fund during the January-March 2012 period. Therefore, it would be absolutely incorrect and wrong if any such story is carried,” the spokesperson said.

A senior Fidelity group official said, “In January, after informing Sebi (Securities and Exchange Board of India) about our business plan, we informed our investors, as per the rule, that they could redeem their investments in fixed-maturity plans, or FMPs, as they could not be rolled over. This news may have led to an exit of investors.”

The outflow from equity schemes flags the critical issue of protecting the assets of a fund house that is on the block. The price paid by L&T Finance to acquire the assets of Fidelity MF was based on the size of the equity schemes, but by the time the deal is consummated, the size of the schemes may shrink, distorting the valuation. The deal has not closed yet.

Outflows from Fidelity MF schemes are happening before the so-called free-exit period. Once Sebi approves an acquisition, investors in the selling fund house are given a month’s time to withdraw their investments.

L&T Investment Management Ltd, a subsidiary of L&T Finance, is in the process of securing Sebi approval for the acquisition. L&T MF currently manages average assets worth Rs. 3,897.6 crore.

Following the deal, L&T Finance had said that the combined entity will have a market share of 2% in terms of AUM. But if the erosion of assets continues, that may not happen.

An industry expert, who did not want to be named, pointed out that in case of a merger between two banks, the banking regulator typically imposes a moratorium and freezes operations of the bank that is being absorbed. This is to protect deposit liabilities and advances.

Fund house acquisitions are valued on the basis of the asset mix, network strength, long-term earnings prospects and profitability. There have been several acquisitions of Indian MFs at valuations ranging from 1.6% to 13% of AUM.

There are 44 fund houses with total average AUM of Rs. .64 trillion in the March quarter.

Fidelity MF had a team of seven people to manage its equity schemes.

“Fidelity MF investors had certain trust on its fund managers built over years. L&T doesn’t have much experience in mutual fund management and unless they create a trust among investors, it will be a challenge to retain the investors,” said the CEO of foreign MF who declined to be named.


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