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An Old Hand with Potential

SBI Mutual, the second-oldest AMC, has many strengths which could make it a major player in the fund industry. Read ahead to know what are these strengths and how can it become the key player

SBI Mutual Fund (SBIMF), an old hand at fund management, has all the reasons to have been a major player in the Indian mutual fund industry. It is backed by the country's largest bank. It is the second-oldest player after the Unit Trust of India, having been in the business for 16 years.

However, SBIMF is the eighth-largest player in terms of its assets under management today. The performance of its equity funds has been disappointing. It has not been able to cash in on its strengths of being the second player in the market or having a strong parentage. It has not been able to change with rapidly-changing market opportunities.

Nevertheless, one has to concede that it is the only PSU bank-sponsored AMC, which is still a force to rec-kon with. There have been some positive changes too—it has managed to transform itself from being an AMC that only had closed-end products on offer into a fund house that can easily boast of variety now. In its formative years, the AMC was best recognised as a closed-end fund house that offered tax-planning and monthly income plans virtually every season of the year. The launch of Magnum Multiplier Plus, its first closed-end equity scheme (now Magnum Equity) in November 1990 marked its foray into the equity funds arena. The scheme was a big success as its units commanded a hefty premium in the secondary market. In 1993, its closed-end diversified equity fund, Magnum Multiplier Plus 93, caught a lot of investor attention, managing to mobilise Rs 1,000 crore during its initial offer. However, it was only in 1994 that SBIMF launched its first open-end scheme, Magnum Global. Since then, the AMC has been attempting to expand its product portfolio from time to time.

Performance
SBIMF's equity funds have been on a roller-coaster ride since their inception—with more downs than ups. Most of its equity schemes have performed exceedingly well in some years while turning in returns close to the category or way under it in most years. Thus Magnum Multiplier Plus series had a ballistic start in 1990 and 1993, as their launch preceded the bull run in stock markets.

The next spurt came along with the bull market in 1999 when nearly all its equity funds were propelled to the top of the performance charts. This performance was achieved with the help of a huge exposure to the IT sector, and within this to a number of mid- and small-cap stocks. The subsequent years have been harsh on these equity funds and they have been languishing at the bottom of the performance charts. Neither have these funds had substantial participation in the mid-cap rally of 2002 and 2003, nor have they benefited from the rally in PSU bank stocks.

While the AMC's equity funds struggled, one fund-Magnum Contra—has managed to do well. This fund, which invests in undervalued and out-of-favour stocks, has been an exceptionally good performer. In both 2001 and 2002, it has found a place in the first quartile of its peer group. The AMC's sector funds, on the other hand, have had a mixed record. Magnum FMCG was comfortably beaten in both 2000 and 2001, but has turned around in 2002 and the current year. The pharma offering, Magnum Pharma, has performed in line with the category. Magnum IT, on the other hand, after a solid start, has slowed down in subsequent years to grace the bottom of the category.

As for its fixed income bouquet, they too have benefited from falling interest rates like all other funds. Magnum Income, its medium-term income fund with aggressive interest rate risk management, has performed in line with the category. On the other hand, its medium-term gilt fund (dividend and growth options)—which is among the largest in the category—has marginally underperformed its category. Again, Magnum MIP has been an average performer. Launched in March 2001, the fund initially stayed away from equities as well as government securities. While equities entered the portfolio in 2002, the fund has aggressively courted gilts this year.

Product & Services
SBIMF's product launch on the equity side has coincided with a rally in the markets. In July 1999, when stock markets were on a high, the AMC introduced its Magnum Umbrella Series, comprising technology, FMCG, pharma and value fund.

While SBI Mutual Fund has been quick in launching equity funds, the same has not been true for some of its debt offerings. Magnum InstaCash Short-term Plan, and Magnum Children Benefit Plan were rather late entrants in their respective categories. Nonetheless, the fund house has also been responsive to market demand and introduced an MIP and index fund in recent years.

SBIMF is planning to launch a scheme to tap NRI investors, particularly those who participated in the Resurgent India Bonds. SBI Mutual Fund has thus filed an offer document for Magnum NRI Investment Fund with the Securities & Exchange Board of India. This fund will offer three investment options. Two of these options will have a debt flavour and will be oriented towards short and long-term investors. Magnum NRI Investment fund will also offer a Flexi Asset Plan. This will be an asset allocation fund and will be based on certain triggers in the stock market. The investment universe of this fund will be limited to the stocks comprising the BSE 100.

Over time, the AMC has expanded its distribution network. From 16 investor service centers in 1998, it has 22 centres today. Besides that, starting July 2001, the fund house has started selling fixed income funds as well as tax-planning funds through post offices. However, the fund has not capitalised on the biggest ace up its sleeve—the distribution network of its parent, the State Bank of India. This is unlike its private sector peers, which extensively rely on the distribution muscle of their parent organisation.

However, SBIMF's parent has come to its aide in other ways. In October 1991, the fund launched Magnum Triple, an eight-year close-end equity scheme. As the name suggests, this scheme was meant to triple investors' money. As with other assured return schemes it could not live up to its promise and closed its tenure with a significant shortfall. The shortfall was met by SBI and investors were paid out the assured return.

The Road Ahead
Leaving aside a good performance record in equities, SBIMF has all things in place—a full product basket, sizeable asset base and a mass reach. What could really help the AMC grow will be the entry of a private partner. To this end, its parent has expressed willingness to sell its stake and is reported to be scouting around for a buyer—a move that may benefit this AMC and its investors considering PSU bank-sponsored fund houses haven't had a great run so far.