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HDFC AMC seeks growth at reasonable price with AIF entry

The company told analysts in a recent call that it has filed an application with Sebi to start a Category III AIF.

Mumbai / February 23, 2022 / 08:27 AM IST
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HDFC Asset Management Company is making strides towards entering the alternative investment fund space at a time when the segment is increasingly garnering interest from investors looking for more sophisticated investment solutions.

The company told analysts in a recent investor call that it has filed an application with the Securities and Exchange Board of India to start a Category III alternative investment fund in India and plans to launch a Category II fund in 2022-23.

Category II comprises private equity funds and debt funds with no special treatment from the government while Category III funds are generally long-only and long-short funds akin to hedge funds in the US.

“Over a period of time, we have the ambition to build our presence on the alternative side as well. So, that’s very much on track,” Chief Executive Officer Navneet Munot told analysts in the call held in January.

Category III AIFs have raised net cumulative commitments of Rs 63,700 crore as of December 31, which is 36 percent higher than a year-ago reflecting the surge in interest among investors. Similarly, Category II AIFs have raised cumulative commitments worth Rs 4.95 lakh crore as of December, which is 40 percent higher than a year ago.


HDFC AMC, however, is a late entrant in the space that is already quite competitive but has long growth potential. Mutual funds such as Axis AMC, Edelweiss AMC, Nippon India Life AMC, Motilal Oswal AMC, Sundaram AMC, Kotak AMC and ICICI Prudential AMC are competing against true blue AIFs like Avendus, ASK and Alchemy Capital for a share of the pie.

Avendus Group’s alternative asset management business will give HDFC AMC hope of making a strong impact given that Avendus was able to become one of the largest Category III AIFs with a $1 billion plus corpus in a year since its launch in 2017.

Why now?

The mutual fund industry in India has become hypercompetitive with the entry of fintech firms. While the industry makes 70 basis points as the yield on its equity assets, the yield on new inflows into equity schemes has nearly halved to 30-40 basis points, according to HDFC AMC.

The rise of passive investing as well as the push from new mutual funds on such products has led to a race among incumbents to offer more passive products to investors in order to protect market share. Passive products, however, have an even lower fee of 10-30 basis points compared to active schemes.

“We would also like to believe that getting share at any price is not a sustainable strategy and hoping that we will see rationalization at industry level sooner than later,” Munot had said. HDFC AMC’s passive product profile has been limited because of its belief in the superiority of active investment strategies.

Additionally, there is a rising penchant among investors for thematic funds, which is driven by recent strong performance in certain sectors like IT. “The highest selling product on the fintech platforms has been Tech funds, which HDFC AMC does not possess,” YES Securities said.

“Our miss, though by design, on sectoral and thematic space was because we strongly believe that market was not ready and more often than not risk is something that does not get enough due,” Munot said. While sectoral funds have the same fee structure, their popularity till recently was low because of higher risks due to the concentration of the portfolio.

HDFC AMC’s limited offerings in passive investing products and low presence in thematic funds or sectoral funds have led to a loss of market share to peers in the past two years. HDFC AMC’s market share based on quarterly average AUM has fallen to 11.7 percent at the end of the December quarter from 13.1 percent a year ago.

“Management aims to improve market share by building scale, quality, and profitability of the business with the help of varied lined up product launches in the alternate space, thematic funds which will further increase the investable universe,” said brokerage firm Centrum Broking in a note.

AIFs more lucrative

Since recouping market share through a bombardment of passive and thematic funds would result in dilution of profitability given the lower fees, the AMC is likely to see alternate funds as an option to increase both equity AUM and profitability.

Much of the recent rise in AIF inflows is thanks to the Securities and Exchange Board of India’s decision in 2018 to cap total expense ratios of mutual funds. Total expense ratios for active equity schemes were capped in a graded manner of AUM that led distributors to push AIF schemes to potential investors because they could get higher commissions.

AIFs currently are not subjected to capping of fees, and the fee structure, in general, is considered complex. A common structure is the 2-by-20 where an investor pays 2 percent annual management fee and 20 percent share of the profits. Other structures include only profit sharing. Naturally, such products are attractive for asset management companies as it results in higher yields.

Who are buying category III funds?

The sharp growth in Category III funds, which are currently dominated by long-only funds, is being driven by rising C-Suite executives and millionaire households. Dollar millionaire households in India rose by 11 percent to 458,000 from last year and is expected to increase by 30 percent to around 600,000 in the next five years, according to Hurun India.

Most C-Suite employees avoid investing in portfolio management schemes as the shares, although picked by the portfolio manager, are held under the client’s name, and not that of the PMS. This exposes them to the risk of owning stocks where they may be aware of insider information, which may lead to regulatory issues, industry experts told Moneycontrol.

Category III funds, therefore, are better suited for such investors given that they only own the unit of the fund and not individual stocks. And unlike, equity mutual funds that invest only in listed companies, category III funds have the flexibility to explore investments with asymmetric gains in the unlisted space.

While HDFC AMC will look to offer a bouquet of products on the AIF side, its own mantra of long-term wealth creation suggests that the category III segment is where it will find its home.

What could HDFC AMC do?

Despite its late entry into the AIF space, experts see HDFC AMC making a quick impact given its sheer size and brand name.

“AIF is a distribution game and HDFC AMC has a solid distribution network. They could make category III products popular because they could take it to places,” said Sankalp Manoj Pal, who looks after business development at PMS-AIF World.

Pal believes HDFC AMC’s entry will further drive interest in category III products as it can leverage the branch network of its sister HDFC Bank to distribute these products in tier-II and tier-III cities.

“We want to balance between two extremes, and not keen to do business at any price. At the same time, we do want to not be away from all the action,” Munot said.
Chiranjivi Chakraborty
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