Investing begins at home

Fund houses generally have to cast their net far and wide in search for fundamentally-sound stocks. But not so much in recent months, as they have found a few closer home. Ever since AMC stock prices started losing altitude over the last year, it has got some of their fellow peers excited. Excited because it gives them an opportunity to invest in sound businesses at bargain prices.

Case in point being PPFAS Mutual Fund and SBI Mutual Fund dramatically increasing their stake in UTI Mutual Fund and HDFC Mutual Fund between December and March, respectively. (For context, AMCs, or asset management companies, and mutual fund houses mean the same thing).

While PPFAS Mutual Fund boosted its holding in UTI AMC almost fourfold, from 0.66 per cent in December 2022 to 2.52 per cent in March 2023, SBI Mutual Fund upped its stake in HDFC AMC by more than six times, from 0.46 per cent in December 2022 to 2.97 per cent in March 2023.

Such a large jump in ownership over a short period is not a very common pattern in the mutual fund business.

All fall down
In total, there are four fund houses listed on the stock exchange - UTI AMC, HDFC AMC, Aditya Birla Sun Life AMC and Nippon Life India AMC - and their stock prices fell down in unison over the last year, slumping by 10-29 per cent, as you can see in the 'AMC stocks: A sea of red' table.

Reasons for underperformance
It's true the broader stock market remained subdued last year, but the slide of AMC stocks was rather steep. Blame it on last year's interest rate hike triggering a sharp debt fund withdrawal.
Rumours of SEBI, the markets regulator, planning to modify the expense ratios are also a dampener for fund houses, a fact highlighted by a renowned fund analyst, who said: "Despite AMC's strong structural business, there are headwinds in the form of constant regulatory changes."

Down but not out
And strong businesses they are, which is why, despite the fall in stock prices, other fund houses view the sharp drawdown as a buying opportunity. "(AMC) stock prices have had a significant correction and are currently looking reasonable," said a fund manager, requesting anonymity.

Moreover, the fundamentals of these AMCs have barely altered. They continue to attract inflows, have a reasonable dividend payout policy and healthy ROCEs (Return on Capital Employed), the fund manager added.

Although the AMC business remains robust despite the recent months' hammering in the stock market, their profitability ratios have been a mixed bag the last we checked, as can be seen in the 'AMC stocks: Return on Capital Employed' and 'Return on Equity' tables.

Healthy dividend distribution
In addition, the fact that AMCs are offering a higher percentage of dividends suggests they are not cash-hungry corporations. Sundeep Sikka, the chairman of Nippon Life India AMC, stated in the business's 2022 annual report that "our declared dividend policy is to share 60 to 90 per cent of our income, subject to board approval". UTI AMC, incidentally, had shared 63.75 per cent of its net profit as dividends to its shareholders.

The last word
Performance wise, AMC stocks are available at basement prices. But someone's misfortune is another person's opportunity, a theme that's playing out as rival fund houses grab this opportunity to buy fundamentally-strong businesses at a bargain.

Suggested read: The three positive investment trends of 2022-23