Lower Expense Ratio To Hurt Asset Managers, Say Brokerages
Shares of Reliance Nippon Asset Management Company Ltd. and HDFC Asset Management Company Ltd.—the only two listed asset managers in India—fell the most since listing after the market regulator capped fees they can charge customers for various mutual fund schemes.
The board of Securities and Exchange Board of India has cleared the proposal to cap the maximum total expense ratio — the fee that mutual funds collect from investors every year to manage their money — for closed-ended equity schemes to 1.25 percent and other than equity schemes to 1 percent. The maximum TER for open-ended equity schemes will be 2.25 percent.
This was the second major review of expenses in six years amid a debate on whether Indian mutual funds charge too much. Morningstar in its October 2017 report said India’s average equity expense ratio at 2.22 percent is among the highest in the world. But the Foundation of Independent Financial Advisors, in a separate report, countered that at 1.88 percent, the ratio is the lowest among developing nations.
Yet, brokerages said SEBI’s decision to lower expenses paid by investors of equity mutual funds will hit profit of asset management companies.
TER has two components—expenses accounted in the books of mutual fund schemes and the investment management fee, which is the actual revenue for an asset management company.
What Brokerages Say
Morgan Stanley on HDFC AMC
- Maintains ‘Overweight’; Cuts target price to Rs 1,765 from Rs 2,050—a potential upside 15 percent.
- SEBI reduced total expense ratio quite sharply resulting into an earnings per share estimates cut of 13-14 percent.
- The stock has been weak in anticipation of adverse regulation.
- Expects further near-term weakness; overhang should subside after this cut.
Nomura on Reliance Nippon
- Downgrades to ‘Neutral’ from ‘Buy’; Cuts target price to Rs 210 from Rs 315—a potential downside 2 percent.
- AMCs will also have to absorb some part of lower total expense ratio.
- Operating leverage taken away to large extent.
- Ability to absorb such large total expense ratio cuts is limited for Reliance Nippon.
- A 35 percent absorption of lower total expense ratio would mean 10-15 percent cumulative reduction in profits for Reliance Nippon.
CLSA on AMCs
- Lowering of total expense ratio could lead to 15-25 basis point reduction in equity fees.
- Equity assets under management form 40 percent of total funds and could lead to 25 percent earnings impact on the sector.
- Companies to pass on majority of this to distributors.
- Banning of upfront commission to reduce investor churn and improve working capital cycle.
Citi on AMCs
- Mutual funds can cushion lower total expense ratio impact by passing it to distributors and by lower promotional expenses.
- Banning upfront commissions to improve quality of flows.
- Lower charges to make mutual funds more attractive for investors and boost penetration.
Shares of Reliance Nippon and HDFC AMC fell nearly 10 percent to Rs 191.70 and Rs 1,396.50 apiece, respectively.