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Will Big Be Beautiful ?

It's a matter of time that Pioneer ITI will be called Franklin Templeton. But what does it mean for investors? You will be better off being the old fashioned way -- guided by your financial goals than market noise. And being alert will surely help.

It's a matter of time that Pioneer ITI will be called Franklin Templeton. A big event to make the headline of pink newspapers. No doubt, the merged entity will be a financial powerhouse. With an asset base of Rs. 8160 crore in wide ranging funds from nearly 9 lakh investors will make the merged entity a force to reckon with in the investment marketplace.

    Pioneer ITI  Franklin Templeton  Total
  Hybrid Funds 280.96 180.81 461.77
  Bond Funds 1754.40 2823.42 4577.82
  Cash Funds 867.00 780.29 1647.29
  Equity Funds 613.74 227.49 841.23
  Sector Funds 525.24 - 525.24
  Closed-end Funds 107.21 - 107.21
   4148.55 4012.01 8160.56

    But what does it mean for investors? The scale of the combined entity will justify investment in investor service standards to substantially enhance the customer experience in the funds. The added advantage will be the in-house back office infrastructure of Pioneer ITI. But this will take quite some time to happen in a manner that investor's realise and appreciate the difference.

For now, it only means anxiety caused by the noise around the deal and confusion for investors. Another disadvantage will be a distracted management. Merging their operations will mean series of strategic decisions, regulatory issues besides people issues. Following is a view on the shape of things and challenges ahead.

Equity Funds: Together they will offer a long menu of equity funds ­ 14 open-end funds of diverse flavour besides 5 closed-end tax savers of Pioneer ITI. Together, pure equity assets under management will be Rs. 1474 crore. This includes style based -- value and growth funds, capitalisation based – large mid and small cap funds, sector, index and tax saving funds. The only overlap is the Nifty tracker of both AMCs, which can be merged. Another regulatory glitch, but manageable one will be the two tax saving funds in one AMC. Regulations do not permit two open-end ELSS schemes from one AMC.

Hybrid Funds: The lineup is broad though not as much as the assets. In all 8 funds and Rs. 300 crore. Besides a balanced fund and MIP of both AMC, Pioneer ITI also brings – Pension Plan, a child plan, and two new funds – PE Ratio Fund and Asset Allocation Plans. But there could be issues to resolve. Franklin Templeton manages its dividend and growth plans of Balanced Fund and MIP differently, while those of Pioneer ITI are pooled together. Hence, the merger of MIP and balanced will be complex. It will be difficult to choose from dozen hybrid funds of an AMC.

Bond Funds: Together the family will be strong with bond funds as well, with Rs. 4878 crore in fixed income funds and a range of novelty. The floating rate funds, a money market fund and a cash fund exclusive for American Express customers. But this segment of fund will also confuse investors with identical funds. And managing fund overlaps here will be a challenge. Though the flagship bond funds of the two AMCs are aggressively managed and yielded identical returns in recent years. And if the two funds are merged, it will become the largest Indian Bond Fund, with Rs 3345 crore assets under management. The economies of scale and fund stability could also mean lower expenses and enhanced returns, which will perhaps be the only tangible gain to investors. Similarly, the range of gilt funds of both the AMCs will have to be merged and is an easy task as Pioneer ITI funds are new and small.

The combined entity will be a good bunch of smart fund managers with solid track record. But this acquisition also means that you have to keep track of changes in the fund's style, strategies and fund manager changes. If you invested in a fund buying the manager's argument, such a change gains more importance. A discomforting change should prompt you to evaluate your investment in the fund.

Moral of the Story:
Let's see if big will be beautiful too. For investors, the acquisition isn't more than noticeable news. It should not prompt you to act. You will be better off being the old fashioned way -- guided by your financial goals than market noise. And being alert will surely help.