Listed AMCs see a muted January-March quarter due to pressure on yields

Listed asset management companies (AMCs) have seen a subdued January-March quarter (fourth quarter, or Q4) due to pressure on yields.

UTI AMC saw its profit after tax drop 60 per cent year-on-year (YoY), while Aditya Birla Sun Life AMC saw its profits increase just 1 per cent. 

HDFC Securities in its report on UTI AMC stated that the fund reported a weak quarter, a hit on core operating profit notwithstanding.

“Moderating yields and elevated staff costs continue to drag core profitability (earnings before interest and tax margin at 36 per cent — a five-quarter low). While we draw comfort from management commentary around a buoyant flow environment and a strong growth outlook for the retirement solutions business, we remain wary of continued pressure on yields and staff costs in the medium term,” stated a note by HDFC Securities.

 UTI AMC reported operating income at Rs 301.2 crore for the quarter ended March, compared with Rs 289.2 crore a year ago.

Even during the October-December quarter, fund houses had seen stress on profitability. This was largely owing to pressure on yields attributable to lower total expense ratio (TER) in high assets under management (AUM) slabs.

Markets regulator Securities and Exchange Board of India has enacted several changes aimed at bringing down the cost of investing by lowering the so-called TER, and improving investor experience.

In a note on Nippon Life India AMC, HDFC Securities stated that, “the primary reasons for pressure on yields are: (1) lower yields in new flows as old assets are replaced and (2) low TERs in high AUM slabs. With the high-yielding old legacy book (pre-full trail-based model) still weighing heavy at 50 per cent of the mix, we expect pressure on equity yields to continue in the medium term as the old book is substituted by low-yielding new flows”.

Mutual funds (MFs) are permitted to charge certain operating expenses (opex) for managing a scheme, such as sales, marketing and administrative expenses, transaction costs, and investment management and registrar fees.

All such costs for running and managing an MF scheme are collectively referred to as TER, which is a percentage of the fund’s daily net assets. The maximum TER an MF can charge decreases as the size of the fund increases. While the smallest equity funds can charge a TER of as high as 2.25 per cent, the maximum TER drops to just 1.05 per cent in the case of equity funds that have an AUM greater than Rs 50,000 crore.

HDFC AMC — the largest among listed AMCs — reported an 8.7 per cent YoY increase in net profit to Rs 343.6 crore during the three months ended March (Q4 of 2021-22, or FY22).

“Net profit was marginally better than expected on account of lower opex. We note that the equity segment’s market-share loss, which has been a key investor concern in the last few quarters, narrowed in Q4FY22. This is likely due to improved performance across schemes/funds. Sustaining or regaining market share will be a key monitor going forward,” said Nirmal Bang in its note on HDFC AMC.