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.

Business Magazines and Business Journalism

Like pigs sniffing truffles from afar, I chase down any book on stockmarket or a magazine that claims to know the "secret". Sadly, then, I chronicle the rise and fall of stockmarket magazines in India. Of course, you always had magazines like "Business Today", "Business India" (can you believe it is still there?) and "Business World" with occasional banter about the markets but magazines and tabloids on stockmarkets were always springing up from nowhere and capsizing in bad times. "Fortune India", "Intelligent Investor" (now known as "Outlook Money"), "Shree Profit", "MoneyTimes", "Kompella's Portfolio Advice", and one magazine brought out by RR Capital, New Delhi-"Investment Portfolio Watch" or something like that - the list goes on...There are few which survived like "Dalal Street Journal" and "Capital Market" but amongst those which came with fanfare there are few which are edging up sales - "MoneyLife", "Money Today", "Wealth Insight", "Mutual Fund Insight" and "Investor India" (mainly captive to Bajaj Capital). Outlook group started "Outlook Profit" a few years back but now they have closed down with December issue in the same month that saw the release of Vinod Mehta's autobiography "Lucknow Boy"- I keep wondering what led a group with deep pockets like Outlook merge "Outlook Profit" with "Outlook Business". I guess what undid "Profit" was reliance on mostly research reports - in the guise of covering company profiles and market views - sourcing reports by CLSA/Motilal/MS/GS etc. Sourabh Mukherjea was probably the only writer I used to follow in "Outlook Profit" - the rest is ho-hum and below-par or external research content. It was hardly original even if its is informative. Another magazine I suspect is Valueresearch's "MF Insight" - it reeks of paid advertorials - between the mutual funds recommended and the ones advertised. Except for Sanjiv Pandya and Paronjoy Thakurta, there's nothing worth reading really that makes a difference to Advisors. I always treat any report from Research desks released to public with suspicion - if somebody is leaking such reports to public, it means they want to find suckers on the moon. If your research is really that good, you should share with your clients and make them money - or else, it tantamounts to front-running. Amongst the newspapers - my best and foremost is always "BusinessLine"- Investment World - I have not missed an issue since 1994 and it has the best legacy of objective views on the stockmarkets. The fact that IW is edited by my friend is no excuse for not picking a bone with it - it is still a trustworthy source of opinion and analysis on the stock markets.iA leaf out of Businessline's "Investment World" is more than all the future babble that permeates the business & money magazines. There is ET, BS , Mint, DNA Money, and FE but more drivel than insights except the occasional columnist pieces - a'la Ruchir Joshi or Madan Sabnavis or Sanjay Prakash. Almost no magazine covers stock markets with independent thinking and unbiased opinions - except maybe "Capital Market" and to some extent "MoneyLife". Equity Master - the group that runs Quantum Fund is good - but they are trying hard to garner assets and clients in a world dominated by distributors. They send good newsletters but appear like teaser ads for baiting your subscription money for multi-bagger stocks. Instead, rediff.com gives you better insights on markets and asides.The best way to read any of these magazines is to use their data and process through your own prisms of analysis, interpretation, reasoning and conclusions. It is easy for anybody to do that if you see what I mean - ask your searching questions and have "contrary" thinking approach. But I subscribe to all these mags and papers and journals - they keep us anchored to the tenets of filtering the "flat earth news" through your mind. They tell me that in hearing views and news about the markets - you can stand out and go against the grain and still make money. I welcome if anybody has to share any other sources of markets that is different and reliable.

On Wealth Management, RMs and Fees

This is my seventeenth year in Advisory profession. "Trust" is a critical element in any relationship between a Wealth Manager and a client and that is a function of three, no infact, four variables - Credibility (which comes from giving you advice thats not short-term but what counts for you), Reliability (in which the RM has to be there all times - in bear and bad times as well and more importantly service-oriented), Intimacy (the level at which you connect and like the RM). All these three build up the trust but what divides the trust is another factor - Self-Orientation. If the RM is selfish, or works for his goals at the detriment of your goals, you will have the same experience as what you outlined. Its when this trust gets depleted because of the interplay of these four variables (of which self-orientation is the most undesirable component) that the experience gets soured. If the charges are not disclosed upfront, it is more "self-orientation" and hence lower trust. According to me, a good Advisor is one who doesn't distinguish between advising his client and his father, in the sense of giving advice that works well and honestly for his circumstances. My last point, I want to drive home, is that in my experience of over 17 yrs, I find that the HNWI as a group, across the world, expect returns without risk - which they don't expect in their business or profession. The best way is to build market portfolios aligned with one's financial planning goals with least outgo as expense/charges. Do not believe anybody who says they can time the markets well. If the Sensex this year is down 25%, no way any Mutual Fund can return even 5% (I am generalising). Failing to recognise this sets them up to fail or get disappointed in more ways that makes the experience itself self-fulfilling. You often get what you expect. And in the process, they move advisors - Advisor swapping also erodes the wealth - because the timeline from now till retirement or investment horizon, if it is so long, would make enough money provided we are patient and make those tactical and strategic changes periodically. Everytime we think there is money to be made from a new advisor, than what the market is offering, we eventually lose out - in fees, in charges, in commissions, in brokerage, and then taxes. There is no statistical evidence for persistence of performance - in life or markets - why then make our portfolios gyrate with advisors? But I hope I have made some points that make sense. This is my individual take - and I am passionate about this profession and have been sincere and diligent about these points before any moon and six pence is promised.