Mutual fund firms face post-boom profit crunch
Friday, 01 August 2008

MUMBAI/HONG KONG (Reuters) - India's fund management industry, in boom mode for the better part of the decade, is facing a major slump in profitability as investment flows shrink, competition mounts and operating costs stay stubbornly high.

The downturn, triggered by a near one-third plunge in Indian stocks this year, will be particularly painful for smaller firms which have already been suffering losses and global fund houses who recently paid top dollar to enter what was viewed as a high growth market.

"There probably are firms thinking this was a bloody big mistake. We thought this was going to make us money. We had no idea this was going to be a drain on our resources'," said Shiv Taneja, managing director with Cerulli Associates in Singapore.

Some foreign fund houses have longtime roots in India. Prudential Plc's ICICI Prudential Asset Management venture with ICICI Bank is second in size only Reliance Capital Ltd's fund arm. Franklin Resources Inc, which set up its India office in 1996, is the country's No. 6 fund house.

But more recent arrivals include Pioneer Global, the fund arm of Italy's bank UniCredit, insurer American International Group Inc, U.S. investment bank JPMorgan and South Korea's Mirae Asset.

Mesmerised by a five-year bull run in which stocks rose 500 percent, Indian investors poured into equity funds. The industry grew more than four-fold over the period to manage 5.5 trillion Indian rupees ($129.8 billion) by the end of 2007.

Assets have shrunk about 5 percent since then. But fund executives said the underlying situation is much worse than that suggests because of the drop in assets invested in stocks.

Equity funds, which typically carry fees of about 1 percent, are the industry's most profitable products. Many bond and cash funds, by comparison, charge from 5 to 25 basis points.

Industry data showed equity assets have shrunk by nearly a third on back of the stock market decline.

More ominously for future growth, equity fund inflows fell to their lowest in June since August, 2006 and new stock funds have collected just 18.3 billion rupees so far in fiscal 2009, compared to 63.35 billion rupees in the year-earlier period.


Naveen Tahilyani, a partner with consultancy McKinsey & Company, estimated the profitability of large and medium-sized players in India was about 23 basis points (bps) of assets under management last year.

Factoring in the shift to lower-margin products, he said profitability for the industry could drop to below 15 bps this year. This means a firm managing $100 million in assets would earn a profit of just $150,000 on that money.

By comparison, the industry's operating profit as a percentage of average assets was 12 bps in the UK and 18 bps in the United States, McKinsey said in a report early this year.

"It is going to be tough, for sure ... if people have spent a lot of money in building their business and they were looking for a payback this year, they are not going to get it," said Sanjay Prakash, who recently stepped down as CEO of HSBC's India fund unit to take another role with the bank.

India's fund industry has also found operating margins squeezed by spiralling real estate and staff costs.

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