HDFC Mutual Fund has been on the lookout for an acquisition for quite some time.So, when the news broke out that HDFC Mutual Fund was to acquire Zurich India, it came as no surprise.
Almost all major mutual funds were vying with each other to snap up Zurich India, but it was HDFC which emerged successful in the end. HDFC will be paying 4-4.5 per cent of the value of total assets to acquire Zurich.
If one were to compare it with the 6.80 per cent Franklin Templeton paid to acquire Pioneer ITI, the deal is definitely a steal for HDFC. With this acquisition HDFC Mutual becomes the second private sector mutual fund to cross the coveted Rs 10,000 crore mark in total assets under management.
Prudential ICICI, which manages around Rs 10,187 crore worth of assets was the first private sector mutual fund to cross Rs 10,000 crore mark. The Smart Investor spoke to Milind Barve, managing director, HDFC Mutual Fund, on the acquisition, future plans for the merged entity, and the outlook for the industry.
Apart from gaining critical mass, what other attractions led you to bid for Zurich India Mutual Fund ?
To begin with, Zurich has a higher composition of equity in its product mix. Out of the total corpus of Rs 3321 crore, equity makes up about around 14 per cent. Since we have higher composition of debt in our product portfolio, the product mix fits well together. Another reason is that Zurich India offers a basket of funds with a good track record.
But most importantly, we believe that there is a close alignment in both our investment styles. We follow a simple and conservative investment strategy. Most of our investment decisions are driven by common sense rather than some fashionable terms such as momentum, value, growth etc. I think Zurich also follows a similar investment strategy
Since a mutual fund is allowed to have one ELSS scheme, you'll have to merge both the tax-savings funds. But are you looking to merge any other schemes?
Apart from the tax savings funds, we don't intend to merge any other schemes. Our track record in most of our funds has been good and so is the case with Zurich. So, I don't see any reason why we should upset their performance by merging funds.
Investors invest in a fund expecting it to generate a particular return using its stated investment philosophy. So, it is important to continue the existing investment strategies to ensure consistent returns.
What is the process you used for valuing the business and how is the acquisition being funded?
After getting all the required regulatory approvals, the deal is likely to be completed in the next six weeks. So the acquisition price will be a percentage of the total value of assets as on that day when all the formalities are completed.
In fact, we are taking an average of the value of total assets on the last five days to avoid any aberration. I think this process of valuing of the business is fair to both parties. The price range being worked out is close to 4-4.5 per cent of total assets.
The acquisition is being funded by a combination of additional equity/preference capital being brought in by HDFC and Standard Life and surplus cash with HDFC AMC.
On the operational front, when is the integration likely to be complete?
Once the deal is completed in the next six weeks, integration of operations should be complete in a couple of weeks. We have some similarities on the operational front as well. For instance, both of us use the same fund accounting package and operate through the same registrar, CAMS. Since Zurich and HDFC use similar back-office operations platform, the integration should be smooth.
Since both Zurich India and HDFC don't have sector funds, are you looking to launch some sector funds or is it a conscious decision not to launch one?
I think sector funds have been launched and sold to investors who didn't have a great deal of understanding of the product. As a result, many investors burnt their fingers. So we don't believe in launching products that are not understood well by investors just to complete the product portfolio. We'd rather introduce products for which there is a need, and those that are understood well by investors.
Most funds have a marginal contribution from equities. Why hasn't equity products caught the fancy of the investor? With fall in interest rates, are we likely to see more inflows into equities?
If you look at the investment pattern in the Indian Economy there is a strong bias towards debt. If you add the total investments in fixed income instruments, it would amount to over Rs. 25 lakh crore while the BSE market cap is only Rs. 5.50 lakh crore.
The mutual fund industry product mix merely mirrors this investment pattern of the economy. Indian investors still place a lot of importance on capital preservation and its going some time for the investment pattern to change.
I hope equity market see more inflows this year as the valuation have been depressed for some time. But as seen in the past, investors are likely to turn equity markets only when they see a sustained rally.
Most mutual funds get their business from coporates and high-networth individuals. Why haven't mutual funds been able to crack the retail segment?
As far as HDFC mutual fund is concerned, we have been adding about 1,00,000 customers per year on an average in the past three years. In this segment income funds are still competing with assured return schemes such as the Relief bonds and post office savings schemes, so retail investors are still hesitant to move away from these schemes.
But where there is a higher awareness of financial markets, investors are starting to look at mutual funds more favourably. Our share of retail customers in our assets is almost 50 per cent, which is higher than the industry thumbrule of 35-40 per cent.
At the same time, we diligently pursue the institutional investor by launching new plans such as the Premium and Premium Plus Plans in three of our biggest debt schemes.
