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High costs and losses force Fidelity to exit

Despite collecting a good amount in equities, the fund house did not have enough assets to support its expenses

Joydeep Ghosh  |  Mumbai 

The Indian mutual fund industry has seen several exits in the last decade. But Fidelity’s exit has been the most high profile. Rightly so, since the asset management company has a parentage that manages over $200 billion internationally.

It’s not that Fidelity did too badly in India. Of the Rs 8,800 crore of assets under management, Rs 6,000 crore is in equities — quite a rare feat in the industry. Only the top 10-15 players can boast of this amount in equities. Similarly, its equity schemes have also not done badly. Many of them are among the top performers.

But increasing equity assets has come at a price. According to market experts, the accumulated losses at Rs 307 crore in 2010-11 — the highest in the industry — made the business untenable. In this financial year, the losses have most likely gone up further, said industry sources.

Company Entry Exit  Buyer#
ANZ Grindlays (Australia) 2000 2002 Standard Chartered
Pioneer (USA)* 1993 2002 Franklin Templeton
Newton (UK) 1996 2002 Sundaram
Zurich (Switzerland) 1994 2003 HDFC Mutual Fund
TD Waterhouse (UK) 2001 2004 Tata Mutual Fund
Alliance Capital (USA) 1994 2004 Birla SunLife
Standard Chartered (UK) 2002 2008 IDFC Mutual Fund
ABN AMRO (Netherlands) 2004 2008 Fortis
Merrill Lynch (US) 1996 2008 BlackRock
Lotus Mutual fund 2006 2008 Religare
DBS (Singapore) 2005 2009 L&T
Aegon (Netherlands)** 2008 2011 Religare
Fidelity (USA) 2005 2012 L&T
* Pioneer has re-entered India.  ** Aegon gave up its licence as Religare went solo
# In some cases, the partner bought the stake of the seller

The high-cost structure did not help either. In 2010-11, the company had earned income of Rs 75 crore whereas its staff cost was Rs 68 crore. In comparison, staff cost at the country’s largest fund house by assets, HDFC Mutual Fund, was Rs 85 crore against income of Rs 680 crore.

But fund houses found themselves in a myriad of problems in the initial years itself. First, it ran into trouble with the distributors. Though all distributors are registered with the industry body — Association of Mutual Funds in India (Amfi) and there is no limit on the number of fund houses a distributor can affiliate itself with — Fidelity decided to select a few distributors to sell their products. “Perhaps, they feared mis-selling. But the distribution community was quite upset,” said the chief executive officer of a leading mutual fund distributing firm.

Similarly, it wanted to have a ‘Chinese wall’ between marketing and fund managers. So, distributors were not allowed to meet fund managers — a common practice among other fund houses. “However, things changed in the later years as the fund house used to hold regular meetings with distributors,” added the CEO.

Meanwhile, losses kept mounting for the fund house. In FY08, it had accumulated losses of Rs 181 crore, which went up to Rs 307 crore in FY11. In fact, between FY10 and FY11, its losses rose 26 per cent.

Market experts say after the new guidelines on entry load, the business cycles of mutual funds have changed substantially. “Given the earnings on equities is around one per cent and Fidelity has a reasonable amount in equities, it would still have been really difficult for the company to break even.”

In terms of numbers, even if costs were to be kept under control for some time, the fund house would require to have at least Rs 12,000-15,000 crore in equities — double the amount it has now — consistently for the next five years to wipe out the losses — a really tough task in a situation where investors have not been too keen on equity mutual funds.

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First Published: Wed, March 28 2012. 00:33 IST