Morgan Stanley's loss is HDFC's gain - An analysis of the MF deal

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.

"Breakout Nations" by Ruchir Sharma

"Breakout Nations: In Pursuit of the Next Economic Miracles" by Ruchir Sharma published by Penguin India. Price Rs.599.00. pp. 292.

Nonfiction interests me more than fiction. Naturally, I am delighted to introduce a book of nonfiction thats creating records in India and the world. "Breakout Nations" by Ruchir Sharma is a super-racy book giving the last word on Emerging Markets, Frontier Markets and all the nations that are trying to make it to the cut in between. Who is Ruchir Sharma? His title reads as Head of Emerging Market Equities, Morgan Stanley. But for readers of "The Economic Times", Ruchir is a well-known writer on subjects of Economics. Infact, I think Ruchir's speciality is the sweet spot between Social History, Geopolitics and Economic Affairs and most often, the vicissitudes of the capital markets are self-evident in the overlap between these affairs. And Ruchir is best equipped to write on these matters. I always thought (and now a bird in Mumbai confirms) that Ruchir Sharma is recruited by Morgan Stanley only because of his ability to write on complex subjects intertwined as above and not because he has some great degrees at Yale or Wharton or that he can decode the formulae in financial mathematics or excel sheets.


Ruchir Sharma is MS's answer to other guys who can write very well on capital markets who are held in regard by the Icons of High Street Finance. Peter Bernstein (he passed away in 1995), David Darst (again from Morgan Stanley who wrote a treatise on Asset Allocation), Barton Biggs (Morgan Stanley, yet again, who wrote on the who-and-how aspects of sharing the spoils of the World War-II). Then of course, we have Jim O Neil (Goldman Sachs - the original guy who coined BRIC with Roopa Purushottaman before Roopa was lured by our own Kishore Biyani - it happens only in India!). Ruchir Sharma is different because he uses a whole lot of qualitatative yardsticks in analysing data pertaining to who will get past the round two of the next group of nations to "break out" of the orbit of middle-income trap and make the leap into the developed markets. Ruchir Sharma makes many statisitical inferences, fine examples, anecdotes and similes, cruel objectivity, and laser-sharp observations on countries from China, India, Brazil, Russia, Indonesia, South Africa to Turkey, and other frontier nations in the continents of South/Latin America, Asia, Eastern Europe, Middle East and of course, Africa. Its breezy and page-turning even for the unitiated in matters of Economics and financial markets.

Ruchir has been writing for "Newseek" and "The Economic Times" for the past 20 years and has been kicking tyres in some part of the developing world for atleast a week of every month of those 20 years. He is most qualified, therefore, to talk with conviction interlaced with consummate ease on why and what aspects are appealing about these markets. He also writes on what aspects are not. Maybe, he has a say in the rejigging of the MSCI universe of stocks across the globe from South Korea to Turkey and from South Africa to Mexico. As someone who has the license to get under the skin of every country which wants to be the next or the new G-7 nation in some time, Ruchir does a fabulous job in giving a National Geographic -equivalent picture of every nation on the radar of the FII, Endowments of developed world and the Foreign Individual Investors. I am amazed at the insights the book gives in one read about China, Brazil, Indonesia and even about our own India. Rightly so, he gives India a 50: 50 chance to be counted as a breakout nation. Swaminathan Anklesaria Aiyer, my second-most favorite columnist from "Economic Times" has already written his repartee to Ruchir in the previous week's column in The Times. But Ruchir makes a few stunning, off-beat observations about India which should make policy-makers worry and middle-classes wary. He says, bulk of India's youth get carried away by either jobs in government or Maoist movements because of growing inequalities between the rich and the poor. And unlike in China, where the top Forbes Billionaires keep changing every few years and also their combined networth is capped at $10 Billion or so, in India, much to the chagrin of the poor and the oppressed, the same list of Billionaires is displayed year after year since the 1990s and the combined networth is in excess of $70 Billion while India boasts of probably the lowest per capital income amongst all developing nations and widening inequalities. There are other telling points, mostly objective about India and China.In fact, Ruchir's commentary on China can rattle the most die-hard bulls of that country. (Jim Rogers might re-look at the title of his book on China -"A Bull In a China Shop"). I think, Ruchir has pre-empted the "India Today" magazine's latest survey on the arrogant South India vs. the Persevering North India.

Ruchir makes some outstanding denouements  on the new headwinds of world trade that call for a lot of economic negotiations between the affluent and the emerging nations. Ruchir, by virtue, of his being in a chair to hobnob with the heads of state as well as head-honchos of corporations, is able to distill a range of reports, surveys (some of them outright exclusive) and put a fascinating menu of options for Intelligent Investors of any country. He doesn't take the burden of making hypothetical statements that needed to be proved. Instead, he gives an eclectic but largely concatenated dosage of interesting and disparate data points to drive home a point that is hard to disagree with. Maybe he is good at story-telling but this is a book that concerns four-fifths of humanity in the most convincing fashion. It has few flaws and some unprovable truths but largely, the content is open-ended to let these nations decide in a passing parade who will need what to cross the rubicon. Antoine Van Agtmael was the first guy who coined the phrase "Emerging Markets", then wrote a book "Emerging Markets Century". It was like a premature baby. Ten years back, Jim O Neil wrote BRIC report - this allowed the toddler nations to feast and grow with a 450 per cent jump in the FII allocation to these countries. Now, the teenagers are turning brash and feeling self-important and simultaneously, many toddlers are crying for attention thats legitimate. Ruchir Sharma's new book is a good wakeup call to all of them - an honest and objective, intelligent and readable report card.

Penguin publishers tell me this book is already hit the second print run within one month of launch. This is going to be the best-selling Nonfiction book for 2012. Well done Ruchir.