Where Goliath Wins over David | Value Research In the Indian fund industry, the big fund houses seem to be driving the smaller ones out of the market. Where will this leave investors?
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Where Goliath Wins over David

In the Indian fund industry, the big fund houses seem to be driving the smaller ones out of the market. Where will this leave investors?

If you're a voracious reader, you are sure to have come across the raging debate on income inequality across the world. Economists such as Thomas Piketty have been arguing that with rising GDP, the rich are getting richer and the poor, poorer. Well, a similar phenomenon is underway in the Indian mutual fund industry. The big fund houses are getting bigger, while the small ones are stagnating. The divide between the largest funds and the smallest ones is widening.

Any casual observer looking at the Indian fund industry would think that it is highly competitive. The list of fund houses is at 44 and growing. Consolidation is on, with some fund sponsors throwing in the towel and others keen to take their place. There's plenty of churn in the fund performance rankings too, with top schemes across categories constantly losing their place to newbies.

Always the same

But the players occupying the top five slots in the industry (based on assets under management) have barely changed in the last six years. In June 2009, when the equity market was in shambles, the top five players by assets were Reliance Mutual Fund, HDFC Mutual Fund, ICICI Prudential Mutual Fund, UTI Mutual Fund and Birla Sun Life Mutual Fund.

By June 2012, the markets were midway through a recovery phase. But this didn't bring about any change in the top five. They were again HDFC, Reliance, ICICI Prudential, Birla Sun Life, and UTI. They shuffled places between themselves but retained the top slots.

Now in June 2015, after a big bull market if you take stock of the top five, it is the same names that crop up again - HDFC, ICICI Prudential, Reliance, Birla Sun Life and UTI. Clearly, though the number of fund houses has gone up from 39 to 44 in this period, smaller and newer players haven't had any success at breaking into the big league.

Yawning gap

The top five funds seem to have attracted the lion's share of new money put in by investors too. This has led to high concentration of the industry's assets in the hands of the leading players. Six years ago, in June 2009 when industry assets were ₹6.7 lakh crore, the top five fund houses managed 56 per cent per cent of all this money. The top two alone managed 26 per cent.

Today, after all the ups and downs in both the equity and debt markets the industry manages ₹12.3 lakh crore. The top five fund houses still manage 56 per cent of these assets and the top two command more than 25 per cent market share. Contrast this with the bottom five fund houses, who together get to manage only ₹1200 crore. That is 0.0009 per cent of the industry's assets!

The yawning divide between the biggest fund houses and the smallest ones has actually widened in this six year period. Today, while the top five players manage over ₹1 lakh crore each, the smallest ones manage less than ₹250 crore on an average.

Survival of the fittest?

But why worry if the big players in the industry are getting bigger? Isn't this how all sectors are supposed to evolve and mature? Survival of the fittest and all that.

Yes, it wouldn't be a worry if the market shares of the biggest fund houses faithfully mirrored their performance. But the reality is that they don't. Can you honestly say that all the best equity, debt and hybrid schemes managed by HDFC, Reliance, ICICI Pru, Birla Sun Life and UTI are the top performers in their respective categories? Not really. Look through the Value Research rankings and you will see that each of these fund houses have a mix of both good performers and middling ones in their portfolio.

More importantly many of the tiny fund houses, the ones with minuscule market shares, do manage some top performing schemes. BNP Paribas and Mirae India, for instance, have quite a few five-star funds in the equity category in their portfolio, while Escorts and Baroda Pioneer manage some five-star funds in the debt category. Fund houses such as Quantum, Edelweiss and Motilal Oswal have really consistent equity performers in their portfolios. Despite this good show, these fund houses have not managed a meteoric increase in their market shares.

This is a pity. If the leading players in the industry are guaranteed top slots at all times and smaller rivals have no hope of breaking into the big league even if they do well, how can competition thrive in such an industry? After all, in any industry, it is healthy competition that drives down costs, fosters innovative products, keeps players on their toes and protects the interests of consumers in the long run. In the Indian fund industry, the Goliaths seem to be driving the Davids out of the market. Then, where will this leave investors?

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