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| Shobhana Subramanian: AMCs: Time for a shakeup | | Of the 36 or so AMCs in the market, about half are expected to post losses for 2008-09 |
| Shobhana Subramanian / New Delhi Aug 28, 2009, 00:44 IST |
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It’s time mutual funds took more initiative; they have in the past depended too much on corporate money
In July mutual funds saw the amount of money that they manage hit a new high — the assets under management (AUM), according to rating agency CRISIL, hit a new peak crossing the Rs 7,00,000 crore mark for the first time ever. That should have been reason to celebrate but, ironically, funds have probably never felt gloomier. But first a closer look at the numbers. Most of the money is flowing into debt funds or schemes. Nothing really new about that because all along, money in debt funds has far outweighed that in equity schemes and only for a very short period has the ratio been less skewed than the current 2:5 in favour of debt. The reason mutual funds are inundated is because banks have too much money and apparently don’t know what to do with it except to part it in liquid schemes. As for equities, while there have been reasonably good inflows — July saw over Rs 4,000 crore — much of the appreciation has come from rising stock prices.
Even that should have been reason enough for Asset Management Companies (AMCs) to cheer but the reason they aren’t is because they themselves aren’t making money or making very little. Of the 36 or so AMCs in the market, about half are expected to post losses for 2008-09. Even if one excludes funds that have been around for less than five years and so are not really expected to be profitable yet, the number would be significant. And by a rough reckoning, there could be at least three or four that have been around for 10 years—a fair length of time to be able to get one’s act together—and are still struggling. According to McKinsey, industry profitability, measured as basis points (bps) of average AUM, dropped from approximately 22 bps to approximately 14 bps last year. Obviously, most funds haven’t been able to build corpuses that are large enough for them to be able to defray the expenses which can be high in an industry that has traditionally been driven by distributor commissions. To be able to cover expenses and come up with a surplus, a fund should have a minimum corpus of around Rs 10,000 crore, say industry players, but barely half the funds can boast that kind of size. Now with the regulator doing away with entry loads, distributors, who pocketed the load as a commission, could shy away from selling mutual fund products altogether unless compensated for their loss. So AMCs will probably choose to make it up to distributors through higher ‘out of pocket’ commissions and higher trail commissions.
That could leave AMCs even more stressed, at least for the next couple of years, especially if distributors want almost as much as they were getting earlier. McKinsey estimates that, under a certain commission structure, profitability could drop to as low as 1 bp in the current year improving gradually to 13 bps in 2011-12. Or it could range between 7 bps and 12 bps over the same period in a somewhat more affordable commission structure. Of course, if some AMCs are able to cope better than others in the new regime, they may not lose much. By logic though, the smaller players are likely to be worse hit and so it won’t be surprising to see a shakeout in the industry. Consolidation might not be such a bad thing provided investors have enough of a choice. But entry barriers shouldn’t be too high, something that could happen, because new entrants will need to spend a lot more to establish themselves as incumbents become stronger. But even incumbents will need to rejig their business models to become more profitable.
It’s true mutual fund players have been at a distinct disadvantage vis-à-vis the insurance companies which have been indulging agents, with ridiculously high commissions, at the cost of the investor. And getting away with it. But it’s time mutual funds also took more initiative; they have in the past depended too much on corporate money. They could, for instance, rope in independent financial agents, who have the reach, beyond the metros, to form IFA platforms. AMCs in Australia and parts of Europe have had great success with this model and seen disproportionately high flows from these platforms. The Internet is another good option to focus on. Most important, they need to be careful about how they manage money. Bad investment decisions could cost them not just their profits but also their reputations.
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