Fidelity, one of the world’ largest mutual funds, is selling its business in India and moving out of the country. By itself, this news is not a surprise. Looking at the list of mutual funds operating in India, I can’t help notice that practically every one of them has had some sort of a major upheaval in its ownership structure, the exceptions being the few that are too young. Mergers, acquisitions, major stake sales and other restructuring are the norm rather than the exception. Exits out of India are also hardly uncommon. Offhand, I can recall Alliance, Threadneedle, Zurich, Sun F&C, AIG, Shinsei, Aegon, Lotus, Merril Lynch, Newton, ABN Amro, Fortis, Wellington, and Cazenove; there may be a few more too. All these global outfits were running mutual funds in India but decided to quit at some point. Logically, one would expect that investors should be equanimous about such business events, but that’s not the case. It’s hard to take a detached view when one’s money is on the line. Fidelity’s exit has produced cries of worry and protest from investors who have been tracking the news. At Value Research, we have received a flurry of emails from investors, worried about what this means for their investments in Fidelity’s funds.
Fidelity is exiting India by selling off its operations to L&T Mutual Fund. L&T Mutual Fund itself is a very young name in the Indian fund industry, having been setup through L&T Finance’s acquisition of DBS Cholamandalam Mutual Fund just two years back.
Mergers, acquisitions and other restructuring of asset management companies will continue. It would be good for a fund investor to understand what exactly this means for their money. There are two types of concerns that investors have regarding an AMC’s exit. One is the somewhat naiive worry that arises out of hearing that an AMC is quitting India because it’s making too many losses. Some investors assume that it’s possible that their own money is somehow involved in these losses. Such worries crop up whenever any news of any AMC’s business problems comes up. The answer is straightforward—investors’ money has nothing to with the AMC’s business. The country’s mutual fund regulations take complete care of the fact the AMC’s finances and business is completely isolated from investors’ funds. They are held in a separate account.
The AMC manages the money and gets a fee for doing so out of the funds. This fee is deducted out of investors’ funds but its quantum is strictly regulated. Its usage too is strictly regulated. For example, not only is there complete isolation between the AMC’s money and investors’ money in a mutual fund, there’s complete isolation between different mutual funds run by the same AMC. Whether it makes profits or losses out of that fee is the AMC’s own problem, not the investor’s. It’s entirely possible for an AMC to invest a lot of money in its business, manage the funds well so that investors make money and yet not be able to make a profit itself. In fact, this is exactly what went wrong with Fidelity. It has a number of funds that investors have done well by but has never made a profit itself. In fact, in seven years of operations, Fidelity has accumulated over Rs 300 crore of losses.
Having said that, these are just the legal basics of how the fund management business is organised. There’s a second source of investors’ concerns that are much more real. These pertain to the possible change of the quality of fund management once the funds shift to a different company. People have invested in Fidelity’s funds because of their investment track record. And that track record is the result of investments done by Fidelity’s investment managers, following processes that may be characteristic to the AMC. Will that change? Will L&T be as good? These are legitimate concerns that L&T Mutual Fund has to address. One big positive for Fidelity investors is that Fidelity’s fund management team will stay on for a while. L&T has said that till it’s own equity fund management team builds up to manage the newly acquired funds, Fidelity’s managers will keep managing the funds. There’s no schedule stated for this although I’m sure that there must be one internally. While this is true even when just the fund manager changes within the same A MC, it’s all the more crucial when the AMC itself changes.
Which means that eventually, the fund’s investment management will change. In any kind of a management change, there’s always room for caution. After the change happens, investors have to watch out for a decline in the fund’s performance.
However, this does not mean that there’s any reason for panic. At this point in time, investors should continue with their investments. If they have any SIPs going in Fidelity, there’s no reason to discontinue those either. Disruptions can mean paying L&T Finance has paid about Rs 600 crore to acquire Fidelity’s business. This investment makes sense only if it can build upon the performance and existing investor base of these funds to grow its business. The current revenue stream from the Rs 8,000 crore of assets that L&T gets as part of the deal is certainly not enough to justify the price tag. For L&T, this is a high stakes investment. It leapfrogs the company from the also-ran status that it inherited from DBS Chola to a potentially serious player in the industry. While L&T is a big business, it’s a brand only in business circles. It has no consumer product and is not known to a large mass of people. The only way it can leverage the money it’s spending is to ensure that investors have a profitable experience from keeping the faith and continuing with their Fidelity investments under the new L&T name.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
