The increasing cost of acquiring assets due to a tight regulatory environment and six years without any profits have forced one of the biggest names in asset management to look for exit options in India.
Fidelity Investments is in talks to sell its domestic mutual fund business in the country. Fidelity managed assets of Rs 8,800 crore as of end-December 2011, according to data from the Association of Mutual Funds in India, making it the 15th largest company in India’s competitive asset management business.
Fidelity’s India fund management arm, launched in 2004, circulated a ‘request for proposal’ to companies interested in buying the asset last week, according to people familiar with the development.
When contacted, a Fidelity spokesperson said, “Fidelity Worldwide Investment is conducting a strategic review of its onshore asset management business in India; as with strategic reviews, all options are being covered. The review is underway and it is too preliminary to discuss any outcome.”
“India is probably the only country, where there is no entry load. In other countries, even management fee is higher. As a global organisation, Fidelity will look at the return on every dollar invested. If the return on their dollar is better elsewhere, they will do that,” said a local asset manager.
In FY11, Fidelity was the second largest loss-making fund house after Axis Mutual Fund. It booked a loss of Rs 62.39 crore in FY11 against a loss of Rs 27.56 crore in the previous financial year. Recently, Nippon Life had valued Reliance Mutual Fund at 6.6 per cent of its assets under management.
Analysts say despite the losses, Fidelity has a good chance of getting a similar or even better valuation of its assets, as 70 per cent of its corpus is in equity funds. The flagship, Fidelity Equity Fund, managed Rs 3,370 crore as of December 2011. The Special Situations Fund managed Rs 795 crore. Fidelity India Value Fund and Fidelity Growth Fund are other major equity schemes.
Though Fidelity has a decent bouquet of schemes in both debt and equity, it has not convincingly crossed the Rs 10,000-crore mark of assets under management, considered a ballpark breakeven point for the industry.
A sharp fall in the equity markets and recent regulatory changes, such as the removal of the entry load, or a commission charged by a mutual fund distributor for selling a product, have made the going difficult. Many fund houses also booked heavy losses following the mark-to-market rules on debt instruments in FY11.
The news has taken the industry by surprise, as only smaller names were seen susceptible to exits. "If Fidelity ends up selling its India business, it would be an indication of just how difficult it is to manage money in India," said the chief marketing officer (CMO) of a leading fund house.
The CMO of a mid-sized fund house said, "We cannot rule out the possibility of more consolidation in the industry, given the cost pressure and increasing competition over the past few years."
The company's average assets under management have fallen slightly from Rs 9,100 crore at the beginning of last year, data showed, with the country's benchmark stock market index posting a drop of nearly 25 per cent in 2011. Lured by the long-term prospects of Asia's third largest economy, overseas fund managers, such as the US-based T Rowe Price Group Inc and Nippon, have been buying into Indian money managers. While T Rowe bought 26 per cent in UTI MF last year, earlier this month, Nippon Life bought a similar stake in Reliance Mutual Fund.
Dhruva Chatterji, senior analyst at Morningstar India, said, "Fidelity was considered a very established player in India. If the story turns out to be true (that Fidelity is on the block), it would be a worrying signal for the industry."