Buying the fund house

Summary: Seven fund houses are now listed and buyable as stocks, and Value Research argues that its decades of judging fund performance can also predict AMC business prospects, since good fund returns draw in money with a lag.

While Value Research advised savers on which mutual funds to invest in, the fund houses themselves were not open to investment. Anyone could have invested in the funds, but the fund houses themselves were privately held outfits.

The investment management business in India started in 1964 with US’64, a sort of mutual fund from the Unit Trust of India, which was legally a trust but functioned as a fund house. Then came the 1990s liberalisation, when other outfits could launch funds, initially just departments or divisions of government banks and insurance companies, then private companies with (optionally) foreign partners. All through the years, no one else could buy shares in these companies. That changed in 2017, when Reliance Nippon Life AMC (now Nippon Life India) became the first fund house to launch an IPO. Now there are seven, representing 62 per cent of Indian mutual funds’ asset base.

For stock investors, this raises a question which Value Research is better placed to answer than anyone else. For decades, our work has been to judge these fund houses by the most important criterion: how well they invest your money in their mutual funds. Now, we find that this experience can be put to a new use: judging the fund houses’ own stocks as investment prospects.

The normal way of reading the prospects of fund house shares is to tell the grand story of India’s savings boom and the ‘sahi hai’ campaign. Tens of thousands of crores in SIP inflows, crores of folios and the momentum of savers shifting to mutual funds. These are fine, but they don’t help you compare the seven listed AMCs or assess their future prospects as investments. However, we discovered that fund performance is a more useful indicator.

Good investment performance draws in money, but with some lag. A shareholder who keeps an eye on fund performance actually has advance notice of what will happen to the AMC business financially next year, and the underlying information is no secret; it’s public by law.

Moreover, as many investors have not realised, Indian fund management is an unusually healthy business. The regulator has forced down fees four times and each time the fund houses have ended up making more money, not less. Companies that grow richer as prices are pushed down are wonderful investments, and if it’s in an industry where they generally borrow nothing and own almost nothing, they are a rare breed indeed. Of course, it’s not all good news. The fund management industry also has an incredible track record of dead, sold-out and defunct names. Of the 84 sponsors that have run mutual funds in India, 30 no longer exist. It’s not always an easy business, and things can and do go bad for many fund houses.

So, as you will read in our cover story, Value Research already has the means to judge these companies, and they should inspire patience among investors. In a sustained falling market, the like of which we have not seen recently, all fund houses will decline, but we can distinguish between those with genuinely deteriorating funds and those who are just getting marked down with the rest of the market. As we discovered while researching this story, we can do this by looking at fund performance.

Of course, like all IPOs, these companies have been sold to the public during a euphoric market. Three of these were sold on the kind of excitement this magazine has always cautioned against, and they haven’t had a hard day yet.