Morgan Stanley AMC's takeover by HDFC AMC reminds me of the famous quote by T.Rowe Price: "Change is the investor's only certainty." Here's a fund house which came to India way back in 1994 which collected for their maiden NFO (it was sold as an IPO) Morgan Stanley Growth Fund more money in that year than what Sri Lankan Government budget counted. Of course, it took several years of bad decision-making, lazy fund management and investor apathy before Morgan Stanley resurrected it's dented image in Mutual Funds by re-launching several new schemes and new fund management that's almost the talk of the town in atleast fixed-income investing. In all these years since 1994, Morgan Stanley's assets have touched a little short of Rs.3300 crores which includes it's legacy fund - the infamous Morgan Stanley Growth Fund which has a size of Rs.1300 crores apprx. Just when the fortunes of the fund house are about to look up, HDFC AMC has picked it up for a whopping Rs.170 crores almost paying half of whatever PAT it earned this year about Rs.328 crore - which is the highest in the industry. The nearest competitor to HDFC - Reliance AMC is sitting on a profit of around Rs.194 crores. Considering that, one wonders why HDFC bid in a hurry to stay at the top of the race. It could have easily pulled in some of the star fund managers like Ritesh Jain to garner a handsome lead in debt assets.
What is curious is why Morgan Stanley exited the business after getting just 5 per cent for its equity assets. This year, Morgan Stanley is the second MNC after Fidelity to exit the fund management business and it could once again point to the disruptions in the business models thrown up by regulatory winds of change. The Indian Mutual Fund industry despite having a total fund base of Rs.8.9 trillion or more (that's about Rs.9 lakh crores or roughly 9 per cent of India's GDP) is becoming a joke of sorts with no sense of direction. Of the 44 AMCs, less than 17 are making profits and most of them are to the tune of Rs.50 crores or less and if you count the profit of all the AMCs this year including the likes of HDFC, Reliance, UTI and so on, it roughly comes to a total profit of Rs.750 crores. That is 0.08 per cent of the total AUM - no wonder, the industry is sinking despite projecting a brave face. Scratch the surface of the AUM and you will find most of the funds are in fixed-income or mostly liquid and ultra-short-term. If you start counting the treasury surpluses of the top corporations in Mumbai, Kolkata, Bengaluru, Delhi and Chennai, you can comfortably knock off almost 35 per cent of the total AUM - which may have already moved under the direct code - the new manna from heaven that SEBI has offered investors without realising how under-penetrated the MF industry is despite the industry struggling to re-invent itself well with the advent of new technologies and platforms. The MF Industry is offering the best of choices to the investors to minimise costs but struggling to attract the right kind of investors to meet the long-term financial planning goals.
Look at Templeton Bluechip Fund which completed 20 years early this month. Since its inception in 1994, the fund has given a return of 53 times on its original investment but there are only 9000 folios which are staying invested since the fund was launched - of which more than 50 per cent are supposed to be inactive! Take HDFC Children's Gift Fund - it returned over 22 per cent compounded return since inception and could have been the perfect vehicle for planning for kid's education, it's corpus is still at Rs.320 crores. Take another plan aimed at Pension - Templeton India Pension Builder Plan. Even though it returned a handsome 18 per cent plus return, not many investors nor advisors even know it exists in the fact sheet. On the contrary, hefty commissions and mighty incentives offered on Insurance Plans have made Unit-linked Insurance Plans much more lucrative to sell than the plans as mentioned above - despite having significantly lower expense ratios. More people are still sold insurance products but few come forward to buy mutual funds despite a stark need for sound investing in a country which boasts of 22 per cent plus savings rates.
While the regulator has been blamed enough for the ills of the industry, one cannot blame them forever if the industry is not self-introspecting. I still fail to understand why the Industry's apex body is a self-regulator where a group of biggies decide what the rest of the industry should follow. I still do not understand whether there is uniformity in the alignment of interests - of the twin goals of growth and profitability of the AUMs across the board. I still do not understand whether the mandatory spending requirement of minimum percentage on Investor Education is going towards the intended purpose. I still do not know whether funds are investing in talent in research, sales and product innovation in the requisite manner. I do not know whether the ecosystem of advisor-distributor-manufacturer is developing harmoniously and whether there's something amiss there. I do not know whether new entrants to MF Industry feel welcomed or threatened by the oligopolistic nature. I do not know whether Morgan Stanley will be the last to exit the MF Industry in India - at a time when other key markets like China and Brazil are seeing expansion in MF activity.
As far as HDFC is concerned, it's a revival of the "Economic Moat" concept as it rakes in the Morgan Stanley assets to increase it's monopoly on the leading market share. It always had sticky asset managers on the equity front even if they are perennially optimistic about the market irrespective of the cycle performance. Now this will add to its dominant position by being able to hike its investment in technology (hiking its custody fees), reward its long-standing managers with higher carry (they will now get another scheme which will carry assets upwards of Rs.1000 crores) and increase its economies of scale in debt funds. Being an unequal merger (HDFC paid less to Morgan Stanley than what L&T Finance paid Fidelity on a comparable metric of % on equity assets), the benefits are more for HDFC than MS. And that's how realising early in Asset Management helps that some assets are more unequal than others. As for Morgan Stanley, and the guys like Fidelity, exit could have been less painful at a different time. Which again proves a costly rule in Private Equity - it is easier to sell a business than run it.
Views are personal.
