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Morgan Stanley’s surprise exit from the Indian mutual fund (MF) business has put a spotlight on the several loss-making entities in the sector, struggling to stay afloat.
Quite a few are on the block but unable to find buyers. These are mostly smaller fund houses, with modest assets under management (AUM) and distribution set-up. Some are global entities, which want to exit from all non-core markets and focus on their home turf.
Morgan Stanley Mutual Fund India’s AUM as on September 30 was Rs 3,290 crore, less than 0.5 per cent of the sector’s total assets of about Rs 800,000 crore. Still, it found an influential buyer because a little over 40 per cent of the AUM was equity. Historically, MFs with predominantly equity assets have always fetched higher valuations because these are mostly retail investors’ money, which stay with funds for a longer time. This was seen in the case of Fidelity Mutual Fund India’s sale, where at least five rivals were in the race because of its steady equity assets
Sector officials said fund houses put on sale have mostly debt AUMs, essentially institutional money. Prospective buyers are unwilling to buy these because they are not certain whether the money would stay. "Why should anybody buy them? Given the scale they have, they are not worth acquiring," said Dhirendra Kumar, chief executive officer of New Delhi-based fund tracking firm Value Research.
The MF sector’s slide started in 2009, after the Securities and Exchange Board of India banned entry load, an upfront fee funds charged investors to pay distributors. Since then, many distributors have been indifferent to selling MFs, said officials. The continued bear market added to the woes.
Officials said smaller fund houses were hit harder because these could not compete with larger peers’ deep pockets for pushing products. In the past four years, the share of the top 10 funds in the sector’s total assets rose to almost 80 per cent.
"The situation is dismal. We are directionless, as business is refusing to pick up," says the CEO of one those fund houses, wanting to sell its business.
According to Kumar, "If (these) fund houses find this business not their cup of tea, they should ideally shut shop." But, sector officials said, closing of operations is a tedious process. "Along with various regulatory approvals and legal activities, one needs to write to each investor, explaining why such a move is beneficial to them. Promoters eschew such moves, as it shakes faith among investors and other stakeholders about the capabilities of the promoters' group," explains the former CEO of a fund house which got sold off a few years earlier.
Currently, there are a little over 40 entities in the MF sector. Hardly a third are profitable. Says Deepak Chatterjee, former managing director of the sixth largest fund house, SBI MF, “I would not be surprised if there is further consolidation.”
