These Two Money Managers Created Maximum Wealth For Investors In 2019

India’s largest and third-largest asset managers have created most wealth for investors so far this year.

Shares of HDFC Asset Management Company Ltd. and Reliance Nippon Asset Management Ltd.’s have gained over 75 percent so far in 2019—being the top two gainers on the on the Nifty 500 index.

HDFC AMC continued its rally from 2018, however, for Reliance Nippon the rally was after a 47 percent decline in value.

The decline in value for Reliance Nippon was related to negative news flow and financial problems around its promoter group—Reliance ADAG Group—and its inter-corporate deposits worth Rs 400 crore extended to various Anil Ambani group companies.

However, things changed after its co-promoter Nippon Life Insurance said it will increase its stake in the firm to 75 percent from 42.88 percent. The company also announced Reliance Capital will exit the remaining part of the stake through offer-for-sale to other financial investors, leading to repayment of the inter-corporate deposits.

Steady flows into systematic investment plans, pass through impact of reduced total expense ratio and strong financial performance over the last three quarters also aided the rally in share prices of both the asset managers.

Steady SIP Flows

For the last three consecutive months, net inflows into mutual funds have been steady even as the benchmark indexes fell. The contribution through systematic investment plans rose to its highest level in July. That reflects continued investor trust on the Indian mutual fund industry, NS Venkatesh, chief executive officer at AMFI, told BloombergQuint.

SIP flows have been over Rs 8,000 crore per month for the tenth consecutive month now.

Pass-Through Of Lower TER

Securities and Exchange Board of India cleared the proposal to cap the maximum total expense ratio—the fee that mutual funds collect from investors every year to manage their money. A lower TER means lower revenue for asset managers.

However, both the listed asset management companies were able to pass through nearly 80-90 percent impact of this reduced total expense ratio to distributors. Of its overall 25-basis-point impact, HDFC AMC was able to pass through 22 basis points to dealers by reducing their commissions. Reliance Nippon passed on 10-11 basis points of the 12-13 basis-point impact.

That coupled with the market regulator’s rule of banning upfront commissions aided financials of asset managers. Upfront commission is an expense for an AMC as it’s paid to distributors.

Strong Financials

Strong flows into mutual funds, banning of upfront commissions and pass-through impact of reduced TERs aided the financial performance of both the listed AMCs. Despite a lower TER, HDFC AMC’s revenue grew on the back of greater inflows, while its total expenses reduced due to banning of upfront commissions.

This resulted in a strong operating and net profit growth for HDFC AMC in the last three quarters.

Reliance Nippon revenue declined due to a lower TER and dip in flows, but a sharp drop in expenses on the back of lower commission expenses aided its operating and net profit growth.

Concerns

Volatility in equity markets has been a major concern for asset managers. The benchmark NSE Nifty 50 has largely remained flat so far in 2019. But in the last eight months, it not only rose to a record in June, but also slumped to a low in August.

This volatility could lead to negative investor sentiment, impacting flows.

Along with this, for HDFC AMC, expensive valuations are why only over two-thirds of the analysts tracking the company have a ‘Buy’ rating. The 12-month return potential on the stock suggests a potential downside of 23 percent.

On the other hand, RNAM has zero ‘Sell’ rating, with nearly 78 percent of the analysts tracking the company suggesting ‘Buy’.

For Reliance Nippon, the outflows in all three categories—equity, debt and liquid—has led to a significant drop in its market share in the mutual fund industry. However, with Nippon Life taking over the company, Nomura and CLSA expect the fall in market share to be arrested.

Losses on debt side where it has corporate clients and on the equity side where it has high net worth individual clients led to outflows.