There was a time when public sector banks and financial institutions sponsored asset management companies (AMCs) sprawled over the Indian mutual fund landscape. The advent of foreign players meant tough competition to these AMCs, which were run like their parents. While most old AMCs continued to go slow, a few of them scouted around for foreign partners. IDBI Mutual Fund was among those few.
IDBI Mutual kicked off at a time when Unit Trust of India had a dominant market share. So daring to be different, this AMC introduced the safety net facility in its first closed-end fund—IDBI I-NIT '95 (now IDBI-PRINCIPAL Equity Fund) in 1995. After a handful of launches in the next two years, IDBI Mutual went into hibernation to emerge in July 2000 when it joined hands with Principal Financial Group, US. The 50:50 joint venture proved to be a turning point for the AMC, which was lagging behind in the booming industry. Christened as IDBI-PRINCIPAL Asset Management, it completed its basic product offerings of an equity, bond, cash and balanced fund. Though plain-vanilla funds, these were positioned as asset allocation plans aimed at offering investment solutions at every life stage of investors in line with Principal's global business of pension funds. Principal also brought in its managers and the AMC got a new vibrancy. There has also been an improvement in service standards and a wider geographical coverage of its investor services centres.
But going by the assets growth, it seems that the AMC isn't chasing numbers. In the last two years, total assets under management have hovered in the range of Rs 1,200 crore and Rs 1,700 crore and in December 2002, its assets crossed the Rs 2,000 mark. Its flagship equity scheme is the index fund—IDBI-PRINCIPAL Index, which also happens to be the second largest index fund after UTI Master Index Fund. Incidentally, according to the fund's half-yearly results in September 2002, a single investor owned 75 per cent of IDBI-PRINCIPAL Index Fund's assets.
Sponsored by one of the biggest financial institution, IDBI, the mutual fund came into existence in the year 1994. After liberalisation, most financial institutions were diversifying into newer areas such as mutual funds, banking, investment banking and broking.
After a slow start and realising the importance of a foreign partner, IDBI started scouting for a foreign institution and that is how Principal Financial Group came into the picture. Principal Financial Group, is one of the biggest pension fund managers in US, managing over $120 billion assets primarily for retirement plans and institutional clients. The partnership made sense to Principal, which was interested in a presence in India. Principal plans to be a big player in the Indian pension fund market as and when it opens up. Before the new partner came in, the AMC was managing Rs 440 crore in four schemes, which has increased to Rs 2,166 crore and 16 schemes in December 2002.
IDBI-PRINCIPAL's equity funds have stayed the course, being neither category toppers nor bottom-of-the-pile. Its bouquet of funds can be classified as old and new (after Principal). While the old funds, have gone through the full market cycle, the new funds, having started in 2000, have largely witnessed falling markets.
Its old bouquet of funds—IDBI-PRINCIPAL Equity and Tax Saving Fund (see Fund Focus on page 34) had an uninspiring record till 2000, having missed the rally of 1999. In the subsequent market decline, these funds lost as much as their category peers. Its new bouquet of equity funds—IDBI-PRINCIPAL Growth and Balanced funds—were also average performers during 2001.
However, a high stake in energy stocks has turned the fortunes of all its equity funds in recent times. Its equity funds had invested in oil PSUs much before they caught market fancy. When these stocks blossomed on account of disinvestment in early 2002, the schemes were amply rewarded. To a large measure, this accounted for the funds' strong showing in 2002.
IDBI-PRINCIPAL has been actively managing its fixed income funds in the bullish markets of the last two years and has been able to deliver above average returns. Its Monthly Income Plan, launched in May 2002, has been a decent performer. While the fund has been taking a marginal equity exposure in old economy and PSU stocks, it has been making a consistent monthly dividend payout too.
The Principal partnership has indeed been fruitful for the AMC with regard to its investment management process too. It has been able to leverage Principal Financial Group's expertise in credit analysis and risk management practices. Besides, the AMC itself claims that the investment management process has improved tremendously due to enhanced technology and processes, specifically customer service and office processing.
Products and Innovations
Though late in the day, IDBI-PRINCIPAL converted all its closed-end products into open-ended funds in 2000. In March 2000, the AMC opened investor service centres across 12 major cities, in addition to the services offered by the registrar Karvy. After Principal's entry, the AMC's Future Goal Series (comprising equity, balanced, income and cash funds) was introduced. Using a model portfolio questionnaire, the AMC can suggest the ideal asset allocation to an individual depending upon his appetite for risk, age and financial goals.
Around the same time, in a bid to increase visibility, IDBI-PRINCIPAL decided to use the vast distribution network of post offices to sell its products. Though this channel hasn't delivered results in a big way, the fund house claims to have a presence in 200 post offices. In 2001, it decided to use the services of NSE brokers to sell products, especially in small towns. On the product side the recent innovation has been the launch of an income fund dedicated to trusts. Principal's partnership has also improved the level of investor service. According to the AMC, there has been considerable reduction in investor complaints since April 2000.
What Lies Ahead
Recently, IDBI has decided to reduce its stake in the AMC as it does not consider asset management as its core area. Principal is expected to raise its stake to 75 per cent, while IDBI will continue to hold 25 per cent. For it, this is an opportunity to expand operations in India, especially at a time when the industry is going through a consolidation. With Principal Financial Group having strengths in the area of pension management, the investment approach is likely to be tilted towards stability of returns. Once the pension market opens up, investors can expect more activity from this AMC.