Assets Under Management AUM

Why AMC shares are at rock bottom

With net assets under management (AUM) up 12.6% to ₹37.22 crore and the number of mutual fund folios at an all-time high of 13.33 crore, the mutual fund industry in India seems to be at its highest. Yet why are shares of all listed asset management companies down more than 40% from their 52-week highs, much worse than the nearly 13% lost by the Sensex?

Slower-than-industry growth for major players, declining returns and a growing shift towards passively managed funds where AMCs charge lower fees, seem to be the reasons.

Slow growth, loss of market share

Previously, as the MF industry went through consolidation, major AMCs grew faster than their smaller rivals. But that has changed over the past 3 years from FY19 to FY22, with all four listed AMCs seeing their AUMs grow more slowly than the industry average. FY19 was the year the dust settled at AMCs across India after regulator SEBI introduced new category standards and a reshuffling of portfolios followed.

While the MF industry as a whole grew 16% YoY from FY2019 to FY22, HDFC MF (8%), Nippon MF (7%), ABSL MF (6%) and UTI MF (12%) underperformed the industry in terms of AUM growth. In comparison, unlisted AMCs such as SBI, Kotak Mahindra, Axis and IDFC have increased MF assets by 20-40%. As a result, listed portfolio management companies also lost market share. For example, HDFC AMC’s fourth quarter market share in closing assets declined 80 basis points quarter-on-quarter (qoq) to 10.8%.

“Active equity market share fell 10 basis points quarter-over-quarter to 11.3%, and debt market share fell 100 basis points quarter-over-quarter to 13.8%. During the quarter, the number of unique investors increased by about 2% year-on-year…, below the sector’s 10% growth,” said JP Morgan analysts who have a “neutral” rating. ” on the action.

Lower yields

Portfolio management companies derive their income from the management fees they charge investors. This makes yield, which is income from assets under management, a key metric to track. Yields on all four AMC-listed stocks have been under pressure or stagnant lately. Factors such as SEBI, which imposes much lower total expense ratio limits for larger funds, and a higher proportion of passive products in the portfolio composition played a role in compressing returns.

HDFC AMC’s fourth quarter performance was flat at 50 basis points. In the case of Nippon Life, the decline in returns was mainly due to a reduction in the TER (total expense ratio) of a few funds due to an increase in size, a higher trailing commission and a increased competition, according to a research report by ICICIDirect. For UTI AMC, analysts at JM Financial said management continued to guide the pressure on higher yields due to the replacement of existing stock AUMs with new low-yielding streams and an increase in the proportion of ETFs. , index fund assets.

Gains on the slow lane

With slower asset growth and pressure on yields, the earnings growth heavyweight for AMC shares has also slowed. In the case of some of the publicly traded AMC stocks, the strong earnings growth seen from FY2018 to FY20 appears to be a thing of the past. HDFC AMC has reported earnings growth of 30% in successive years, but this has slowed to single digits in FY21 and 22. In the case of UTI AMC, earnings growth trends have been unequal. AMC saw its earnings drop slightly in FY19 and suffer a 20% reduction in FY20. Subsequently, AMC experienced 80% growth in FY21 before that pace slowed to 8% in FY22.

A combination of the above factors and investors’ tilt towards passive funds weighed on AMC’s valuations. With over ₹5.3 million in assets in FY22, passive funds now make up around 14% of the industry pie. While much of the passive fund inflows previously came from flows from the Employees Provident Fund (EPF), cost-conscious investors have also joined the bandwagon lately. This means lower revenue for AMCs overall. Typically, passively managed funds charge a fraction of the TER of actively managed funds. SBI MF is the dominant player in liabilities, followed by Edelweiss MF, UTI MF, Nippon India MF and ICICI Pru MF. HDFC MF and ABSL MF are marginal players in the passive space.

Of course, AMC assets and returns are also highly sensitive to stock and bond price movements. With stock and bond markets now in corrective mode, growing assets and yields can be a daunting task.

Published on

June 11, 2022