The stocks of asset management companies (AMCs) listed on the exchanges have been a mixed bag in CY21. The returns of AMCs are influenced by how markets value different fund houses vis-à-vis their business performance. But picking a share of a listed AMC is not the same as picking its mutual fund schemes.
Who benefits from key metrics?
It’s not necessarily important for a fund house to be large in size if you are keen to invest in its mutual fund schemes. For its shareholders though, that’s great news.
Typically, a large market share comes on the back of good performance. But new scheme launches can bolster assets, too. But many of the new funds may not be necessary for retail investors. Aggressive sales techniques, too, may not be in the unitholder’s best interests.
HDFC AMC has seen its market share slip, which has impacted the company’s stock price. Data from AMFI shows that HDFC AMC, on an average, managed Rs 4.15 trillion worth of investor assets in the March quarter, accounting for 12.9 percent of the MF industry’s assets. This is the lowest share HDFC AMC has had in the last two financial years (2020-2021 and 2019-2020). Equity markets have not been favourable; HDFC AMC share has given returns of little over 2 percent so far in CY21.
“HDFC AMC has been trying to improve the performance of its equity schemes, but it may take some time,” says Prayesh Jain, an analyst at YES Securities.
But things appear to be turning around. HDFC AMC’s diversified equity schemes have started delivering over the last six months. For example, HDFC Top 100 is ranked third in the large-cap category, with returns of 22 percent. HDFC Growth Opportunities is ranked second in the large and mid-cap segment, with returns of 29.53 percent. HDFC Flexicap is also ranked second in its category with returns of 29.41 percent in the last six months.
HDFC Balanced Advantage Fund, with assets of Rs 42,736 crore, has become the top-performing fund in its category over three and five-year timeframes, with annual returns of 12-14 percent.
The AMC roped in Gopal Agrawal in July last year as a senior fund manager to enhance its offering. Agrawal was heading macro strategy at DSP MF.Branding influence
Brand power is another important factor that has an influence on the stock price of an AMC.
In 2019, there was an ownership change at the Reliance MF, as Nippon Life took full ownership of the AMC.
Analysts say the Nippon brand has helped the fund house recover its market share in debt schemes, and hold onto its market share in equity funds.
The fund house had decided in May last year that except for its credit risk and hybrid bond funds, none of its debt schemes will make any fresh investments in bonds rated below AA.
Apart from clean-up of its portfolios, the performance of its equity funds also improved. Shareholders were happy and rewarded the fund house.Tightening regulations: hits and misses
Over the years, SEBI has continuously worked to bring down the costs of investing in a mutual fund. Higher management fees mean more income for the fund house. This is good news for shareholders. But lower fees mean it’s cheaper to invest in a mutual fund. Fund houses’ incomes drop and that’s bad news for shareholders.
Earlier, credit risk funds were able to charge higher expenses. But more recently, the category has lost significant investor interest due to rating downgrades and credit defaults.
Some regulations, however, are welcome for shareholders as well. In March 2011, the Pension Fund Regulatory and Development Authority (PFRDA) proposed higher fees for pension funds. This helps fund houses that manage pension funds. The minimum fee is now pegged at 0.03 percent of assets managed and the maximum fee has been kept at 0.09 percent. It was 0.01 percent earlier.
This move has contributed to the returns of UTI AMC, which is one of the pension fund managers.Valuations
Analysts say that besides the market share loss due to weak performance of its equity schemes, high valuations is another reason behind the underperformance of HDFC AMC’s stock.
The firm has been trading at 42 times the per share earnings estimated for the financial year 2022-2023.
In the case of Nippon India, the stock has been playing catch-up with HDFC AMC. “There was a wide valuation gap between Nippon India AMC and HDFC AMC, which has been narrowing since the beginning of CY21,” Jain says. The stock has gained 22 percent in CY21.
Similarly analysts point out that UTI AMC, which was listed in October last year, was being valued at a significant discount to its listed peers.
This has also contributed to the strong returns of the stock. The AMC’s stock has gained 40 percent thus far in CY21.