HDFC's Morgan Stanley MF buyout is a bet on stocks

HDFC betting on rising interest in stocks?

But while consolidation is one way to look at it, HDFC’s choice in buying Morgan Stanley’s fund business is interesting.

Consider this: only about 21 percent of the industry's Rs 8.09 lakh crore in assets under management (AuM) is in equity funds. Morgan Stanley’s two equity funds manage a total of about Rs 1,450 crore, or about 44 percent of its Rs 3,290-crore AuM.

That investors have been averse to equity funds since the 2008 crash when a large number of schemes fell even more than the market is well-known. That a large number of mutual funds have recalibrated their strategy and have started focusing on wooing corporates’ cash for their debt and liquid funds is also well-known.

But what attracted HDFC to Morgan Stanley is the fund’s equity portfolio, Milind Barve, the fund house chairman told CNBC-TV18 in an interview.

So is this deal just an expression of HDFC’s confidence that stocks will, before long, be back in favour for investors and it is only trying to be better-positioned to cash in on another wave of high performance of and investor interest in stocks?

“We have a positive outlook on the stock market on a medium-term basis. So we thought this would be a good time to acquire such a product,” Barve said.

“About Rs 10,000 crore redemptions have taken place in the industry. The industry is at an all-time high AuM but most of the growth has happened in liquid funds,” Barve pointed out. “We could buy [an equity-focused mutual-fund portfolio] at a reasonable price only when the environment for equity has been bad.”

This coming from a fund house whose ace chief investment officer Prashant Jain has long been an advocate of the Buffett-esque virtue of buying at the height of pessimism shouldn’t surprise industry watchers.

Way for HDFC MF ahead

Admitting that some of Morgan Stanley’s funds have an overlap with HDFC’s liquid funds portfolio, Barve said the fund company would evaluate later whether to merge any part of its newly-acquired eight-scheme portfolio with its existing schemes or if they would continue to function standalone.

“As we go into the next few months through the regulatory approval process, our objective will be to see how we position these new funds in a manner that doesn't overlap our existing funds. We now have an opportunity to create a distinctive positioning, which are differentiated from our existing funds when we go to the new set of Morgan Stanley investors.”

HDFC MF has only bought the right to buy the schemes and the staff, physical infrastructure, etc would not be part of the acquisition, Barve added.

HDFC is the largest player in the Rs 8 lakh crore mutual fund industry. Morgan Stanley MF, with a total of eight schemes, stood in the mid 20s in the 44-player industry.