Changes in ownership in asset management companies

At a time when Indian individuals are increasingly investing in mutual funds to build long-term corpus and assets under management (AUM) of the industry are growing rapidly, there are ownership changes happening in India mutual fund industry. With DSP Group — headed by Hemendra Kothari — buying out BlackRock’s 40% stake in joint venture, there has been over 25 ownership changes in India’s mutual fund companies in the past 10 years. These range from foreign companies selling stake to local companies, to foreigners buying stakes in home-grown ones.

BlackRock saga

BlackRock is the world’s largest asset managers and the joint venture with DSP group, a homegrown company, had become the ninth largest mutual fund company in the country. BlackRock had agreed to sell its 40 per cent interest in DSP BlackRock, which in total, manages assets of over Rs 1.1 lakh crore. Both the companies did not disclose the details of the deal. In fact, initially BlackRock was in talks with DSP for more than a year and were interested to buy the 60% stake of DSP group. However, it later junked the idea and instead, sold its stake in the joint-venture. After the deal, DSP BlackRock Mutual Fund will be renamed DSP Mutual Fund, while the holding company will be known as DSP Investment Managers.

Recent AMC Exits

Source: AMFI, media reports

In 1996, DSP Group had tied up with Merrill Lynch Investment Managers to establish its retail asset management business in India as DSP Merrill Lynch Asset Management. In 2008, BlackRock had bought out Merrill Lynch’s 40% stake in DSP group’s joint venture to establish retail asset management business in India. The business subsequently went on to become DSP BlackRock Investment Managers in 2008. The US-based BlackRock is the biggest asset manager in the world and managed around $6.32 trillion in assets worldwide. While investors would panic on the change in ownership at DSP BlackRock, Morningstar, a global mutual fund advisory company says, DSP has a good legacy and they will do well even without BlackRock. Just like L&T AMC has done very well after the exit of Fidelity.

Past exits by foreign players

In the last 15 years, foreign heavyweights in mutual fund like Merrill Lynch, Goldman Sachs, Nomura, JP Morgan, Deutsche Bank had exited the Indian asset management market because of higher costs, stringent rules and fickle investor’s interest. Moreover, the Indian mutual fund industry is very lopsided as the top 10 fund houses control over 80% of the ₹23-lakh crore AUM. But now with increasing investor’s interest, mutual funds companies are seeing higher traction and foreign companies are willing to play a significant role. The Indian mutual fund industry has seen rapid growth in the past five years, from Rs 7 lakh crore of AUM as on March 31, 2013, to Rs 23.25 lakh crore as on April 2018, according to data from Association of Mutual Funds in India (AMFI).

In the past, foreign companies sold stake in Indian mutual fund business (like Fidelity, Goldman Sachs) and Indian companies like Reliance and SBI have partnered with foreign companies and even foreign companies have sold their stake to their Indian partners. With India is going through a savings phase where even the younger generation is saving and investing for the long-run, the current activity in the industry clearly indicates changes that are likely to happen in the future.

Category-Wise AUM Holdings

Source: AMFI, media reports

In the future, more sophisticated products would be sold in India which will have higher risk and high possibility of outperformance and that is when expertise of foreign companies will be needed the most. Moreover, the penetration of MFs in India still has a long way to go, with total AUM to GDP ratio standing at around 10%, significantly below the global average of around 55%.

In 2003, Dundee Mutual Fund, a Canadian investment management firm that started operations in India in 1999, shut down its operation in India. Similarly, Newton Investments UK, Foreign & Colonial, Cazenove UK are other global companies that went out of India. On the other hand a few others like Morgan Stanley, JP Morgan, ING and Deutsche stayed on some time and sold their stake to domestic mutual fund companies.

Also, foreign companies such as Goldman Sachs, Pinebridge, Daiwa and Merrill Lynch could hardly do any business in India and Fidelity, which had established a successful retail business in India, sold to L&T Mutual Fund after Sebi barred it from transacting in Indian shares via their Singapore investment desk. These companies could not bear the loss as mutual fund requires lot of patience and has high gestation period. It may take 6-8 years for a well-managed fund house to break even and a  larger share of debt assets may take even longer. Most foreign asset managers are not willing to wait for that long to see profit. Several foreign investment managers wound up their India operations for want of bulk domestic assets.

While foreign companies spend a lot of money (in dollars) to set up business in India, their get disappointed fast to see meagre returns.  Most foreign mutual funds that exited are subsidiaries of mammoth global and investment banks or wealth management pools. The local team does not have much power and in case of losses, the management simply shuts their India operations. That is indeed short-sightedness on the part of shareholders and the top management. Foreign players must have a long-term view of India and partner with strong local company in joint venture.

Fidelity’s exit

While there were many exits of foreign partners in the Indian mutual fund industry, Fidelity Mutual Fund’s exit was the most high profile one. Fidelity Mutual Fund, which was one of the prominent retail-focused mutual fund, shut shop in 2012. The reason to exit India was because retail investors did not embrace equities wholeheartedly and hence the company was not willing to spend huge amounts of money.

Fidelity Mutual Fund was investor’s darling as of the Rs 8,800 crore of assets under management before exit, Rs 6,000 crore was in equities — quite a rare feat in the industry. Only the top 10-15 players could boast of this amount in equities and the funds performance was remarkable. But increasing equity assets had come at a price. In FY08, it had accumulated losses of Rs 181 crore, which went up to Rs 307 crore in FY11, the highest in the industry. In fact, between FY10 and FY11, its losses rose 26 per cent. This made the India business untenable forcing the promoters to quit India.

That apart, the fund house got caught in a myriad of problems. Right from trouble with the distributors as the company selected few to distribute the products. But the distribution community was quite upset which spiked the company’s distribution efforts. The stopping of entry load on mutual funds by Securities and Exchange Board of India finally hit the company. 

Successful ones stay strong

Two AMCs – Franklin Templeton and Mirae Assets – have consolidated their position in India by making locally-planned strategies. At present, Franklin Templeton manages over Rs 1 lakh crore and Mirae Asset Mutual Fund, with Rs 19,000 crore book, is another success story. Franklin Mutual Fund has made changes to 24 of their existing schemes and merging its two schemes. The changes, effective from June 4 was done because of re-categorisation and merger of schemes are in line with Sebi’s new rules on categorisation of mutual funds.

It was tough going in the beginning for Franklin Templeton. The markets regulator (SEBI) had a rule that any new fund—Templeton India Growth Fund in this case—needed to raise Rs 50 crore to keep the asset management business functional. If the company failed to raise that kind of money, it would have to shut shop. It sailed past the litmus test and has established a strong footing in India. In July 2002, Franklin Templeton had acquired Kothari Pioneer, a fund house based in Chennai. This helped the company to increase footprint and get the best fund managers.

Ownership changes really does not affect the long-term performance of any AMC provided the fundaments are put in place and there is synergy in any deal.