HDFC AMC, Reliance Nippon tumble 8% after Sebi cuts total expense ratio

Shares of asset management companies tumbled on Wednesday, a day after the capital markets regulator Sebi announced major changes to the fee structure for the Rs 25-trillion mutual fund (MF) industry, a decision that will hit the profits of asset management companies (AMCs) but result in savings for investors.

The regulator has capped the total expense ratio (TER) for fund houses with equity assets up to Rs 500 billion at 1.05 per cent, down from as much as 1.75 per cent charged earlier. AMCs with lower assets under management (AUM) will be allowed to charge a higher TER, based on slabs. Sebi also said the industry would have to move to a full “trail model” for commissions. It also capped fees for exchange-traded funds (ETFs) at a maximum of 1 per cent. READ MORE

“The mutual fund industry has grown by leaps and bounds. However, the benefits of economy of scale have not been fully shared with investors,” said Ajay Tyagi, chairman, Sebi.

At 10:12 am, shares of Reliance Nippon Life Asset Management was trading 8 points lower at Rs 197 apiece on BSE. HDFC Asset Management Company was also down 8 per cent at Rs 1,417.80. 

Analysts say though the move was expected, the magnituide of the cut in TER came in as a surprise. Subramanian Iyer, an analyst tracking the sector at Morgan Stanley expects these changes to take effect from FY20. As regards HDFC AMC, Morgan Stanley has cut estimates for equity and overall gross revenue / AAAUM by around 20 basis points (bp) and around 11bp, respectively.

"Following this large front-loaded TER cut, the overhang of adverse regulation should subside for a long period. Further, both long-term growth prospects and investor perception could get a fillip from lower costs for investors and improved transparency, he says in a report.

Adding: "After some pass-through to distributors (which is the key variable), we cut our PBT / AAUM forecast by ~6bp, our EPS forecasts by 13-14 per cent and our price target by 14 per cent to Rs 1,765. The stock has been weak in anticipation of adverse regulation, and we expect some further near-term weakness."