Tepid flows, debt turmoil to hit bonus payouts to fund managers

Mutual fund (MF) employees may take home much lower bonus payments this year with the debt turmoil, tapering of equity flows, and regulatory changes all eating into fund houses’ earnings. 

Bonuses this year are expected to be in the range of 10-50 per cent of annual pay for good performers. Debt fund managers caught in the debt turmoil and equity fund managers who have significantly underperformed the benchmarks may end up getting no bonus at all.

Last year, it ranged from 40-60 per cent of annual pay, with payouts for top-performing fund managers close to 100 per cent. The generous payout was the result of record inflows in FY18, led by increased participation via systematic investment plans (SIPs) and robust returns in mid-cap schemes.

“The abrupt hit on debt inflows, tapering of equity flows in the second half, and the brakes on closed-ended product launches are expected to impact the earnings of fund houses. This, in turn, will impact bonuses paid this year,” said Swarup Mohanty, chief executive of Mirae Asset MF. 

Fund managers’ compensation is largely tied to the assets they manage and scheme performance. The variable pay component for the sales and business development teams, on the other hand, is typically proportionate to the growth in assets and investor folios. 

Debt fund managers have had a particularly tough year. MFs that took significant exposure to debt papers issued by IL&FS and its subsidiaries last year had to take a sharp haircut on their exposure, following the multi-notch downgrade of the parent. The markdowns impacted net asset values of the schemes, and returns. 

The tight liquidity environment also made it difficult for MFs to offload commercial papers of duration as low as one or two days. Some large fund houses even borrowed from banks to meet the incremental redemption requests last YEAR. Income and liquid schemes saw outflows while collections in fixed maturity plans remained muted.

Majority of the equity fund managers failed to beat the benchmarks. A study by Value Research shows that of 384 equity schemes, including direct plans, 62 per cent have underperformed their respective benchmarks in FY19. 

A separate study released by S&P Dow Jones Indices revealed that 92 per cent of large-cap equity funds and 26 per cent of mid- and small-cap equity funds had underperformed their respective indices over a one-year period ended December 2018. Experts said payouts for the sales and business development teams are likely to be impacted, with net sales for FY19 much lower than last fiscal despite higher targets.

Bonus is also linked to the growth clocked by individual fund houses. In percentage terms, SBI MF (30 per cent) and Kotak MF (20 per cent) grew the most among large MFs last year. Among mid-sized players, Mirae Asset MF (53 per cent) clocked the highest growth rate. Total industry assets stood at over Rs 23.8 trillion as of March 31, 2019 — growth of 11 per cent over the previous fiscal. Equity assets totalled Rs 8.92 trillion. 

SIP accounts for March stood at 26.2 million, compared to 21.1 million for the same period last year, according to the Association of Mutual Funds in India. 

Volatility in the secondary markets hit equity flows, with net inflows for FY19 seeing a 35 per cent drop to Rs 1.1 trillion, from Rs 1.7 trillion in FY18.

There may be more pain ahead for fund houses, with the cut in total expense ratios coming into effect from April 1. Last year, brokerage CLSA had observed that the cut in TERs could have a 25 per cent impact on the earnings of asset management companies.