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Entry load or not, most foreign funds got it wrong

High cost and similar performance from domestic players played spoilsport

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“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 (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 ban. But, that’s just one part of the story,” says Rajiv Deep Bajaj, CEO, Bajaj Capital, an MF distributor.
 

CAPITAL ACCOUNT
In Rs crore

Accumulated Profit / Loss

FY08 FY09 FY10 FY11
Loss
Fidelity Investment 181 217 244 307
ING Investment Management 117 191 227 249
Bharti AXA Investment 
Managers Pvt Ltd
16 61

-

137
Religare Asset Management  60 118 86 136
L&T Asset Management  20 58 85 124
AIG Global Asset Management  48 85 97 116
JP Morgan Asset Management India Pvt Ltd 47 71 89 111
Axis Asset Management  - - 51 96
JM Financial Asset Management  78 84 89 95
Mirae Asset Global Investment India Pvt Ltd 48 68 73 81
Profit
UTI Asset Management Ltd 382 449 553 639
Reliance Capital Asset Management Ltd 197 330 527 574
HDFC Asset Management Co Ltd 87 159 281 404
Birla Sunlife Asset Management Co Ltd 57 65 113 198
DSP BlackRock Investment Managers Pvt Ltd 57 98 149 196
Source: Value Research, Capitaline, Annual Report      Compiled by BS Research Burea

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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