Why AMC stocks are at a low ebb 

Kumar Shankar Roy | Updated on: Jun 14, 2022

Slower growth, dip in yield, investor shift to passive funds play spoilsport

With net assets under management (AUM) expanding 12.6 per cent to ₹37.22-lakh crore and the number of mutual fund MF folios at an all-time high of 13.33 crore , India’s mutual fund industry seems to be on a high . Yet, why are the stocks of all the listed asset management companies down over 40 per cent from their 52-week highs, faring much worse than the nearly 13 per cent lost by the Sensex?

Slower-than-industry growth for the leading players, declining yields and a growing shift towards passively-managed funds where AMCs earn lower fees, appear to be the reasons.

Slow growth, market share loss

Earlier, as the MF industry went through consolidation, the top AMCs used to expand faster than their smaller rivals. But that has changed in the last three 3 years from FY19 to FY22 with the four listed AMCs seeing their AUMs grow slower than the industry average. The year FY19 is when the dust had settled at AMCs across India after regulator SEBI brought in new category norms and a reshuffling of portfolios followed.

While the overall MF industry grew by an annualised 16 per cent between FY19 and FY22, HDFC MF (8 per cent), Nippon MF (7 per cent), ABSL MF (6 per cent) and UTI MF (12 per cent) under-performed the industry in terms of AUM growth. In comparison, unlisted AMCs such as SBI , Kotak Mahindra, Axis and IDFC grew MF assets at 20-40 per cent. Consequently, listed AMCs ceded market share, too. For instance, HDFC AMC’s Q4 market share in closing assets came down 80 bps quarter-on-quarter (q-o-q) to 10.8 per cent.

“Active equity market share came down 10 bps q-o-q to 11.3 per cent, and debt market share fell by 100 bps q-o-q to 13.8 per cent. The quarter saw unique investor count grow at ~2 per cent q-o-q..., below the 10 per cent growth for the industry,” said JP Morgan analysts who have a ‘neutral’ rating on the stock.

Declining yields

AMCs derive revenues from the management fee they charge investors. This makes the yield, which is revenue to assets under management, a key metric to track. Yields of the four listed AMC stocks have been under pressure or stagnant lately. Factors such as SEBI bringing in far lower total expense ratio limits for larger fund sizes, and higher proportion of passive products in the portfolio mix have played a role in the yield compression.

HDFC AMC Q4 yield was flat at 50 bps. In case of Nippon Life, fall in yields was mainly due to a reduction in TERs (total expense ratio) of a few funds due to an increase in size, higher trail commission and increase in competition, an ICICIDirect research report said. For UTI AMC , JM Financial analysts said, that the management continued the guidance of pressure on top-line yields driven by existing equity AUM getting replaced by lower-yielding new flows and an increase in proportion of ETF , index fund assets.

Earnings in slow lane

With slower asset growth and pressure on yields, the earnings growth juggernaut for AMC stocks has slowed too. In the case of the some of the listed AMC stocks, the high profit growth witnessed in FY18 to FY20, seems to be a thing of the past. HDFC AMC clocked 30 per cent profit growth in successive years, but that slowed to single-digits in FY21 and FY22. In the case of UTI AMC , the profit growth trends have been uneven. The AMC saw profit dip marginally in FY19 and take a 20 per cent cut in FY20. Thereafter, the AMC reported 80 per cent growth in FY21 before that pace slowed to 8 per cent in FY22.

A combination of the above factors, and investors’ tilt towards passive funds , have taken a toll on AMC valuations. At over ₹5.3- lakh crore asset size in FY22, passive funds now accounts for roughly 14 per cent of the industry pie. While a large part of the passive fund inflows earlier was thanks to the Employees’ Provident Fund ( EPF ) flows, cost-conscious investors have also been joining the bandwagon of late. This means lower income for AMCs overall. Typically, passively-managed funds charge a fraction of TER of active-managed funds. SBI MF is the dominant player in passives, followed by Edelweiss MF , UTI MF , Nippon India MF and ICICI Pru MF . HDFC MF and ABSL MF are fringe players in the passive space.

Of course, both assets and the yields of AMCs are also highly sensitive to movements in stock and bond prices. With both stock and bond markets now in corrective mode, delivering growth in assets and yields may prove an uphill task.

Published on June 11, 2022
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