L&T's acquisition of Fidelity MF: Is it a Good Buy?

It came as a big surprise for the financial markets when the Indian operations of Fidelity mutual fund went on the block last month declaring that it was exiting the Indian markets. But the bigger surprise was yet to come. It came last week when L&T mutual fund with assets worth Rs 4,600 crore acquired the Rs 8,800 crore-Fidelity MF, subject to regulatory approvals. Expectations were that it would be HDFC mutual fund or any of the other bigger guys which would buy out Fidelity.

The Indian mutual fund market has been flat for the last five years and staying profitable in this industry is a big challenge. Industry experts feel that L&T has paid a huge price at Rs 550 crore or 6.25 percent of the assets under management (AUM) of Fidelity India because they have got these assets without the expertise of the fund managers. HDFC MFs biggest acquisition will always be Prashant Jain when the fund acquired Zurich mutual fund in 2003.

Typically in a mutual fund business the real assets for any active fund are their fund managers. Over the last two years the equity funds of Fidelity India were at their peak form due to the hard work put in by the likes of Sandeep Kothari and other members in his team who where managing the equity portfolio of Fidelity MF. The asset management team will remain a part of Fidelity’s international team and there is a huge chance that the Indian team will now be moved to Hong Kong as the Indian operations cease to exist. Kothari relocated to India from Hong Kong in 2006 to look after their three important schemes – Fidelity Equity, Fidelity Tax advantage and Fidelity India growth fund. L&T mutual fund will have a lot of work to do as far as handover of these funds are concerned as the fund managers will not be around for a long time.

It would have helped L&T to get in the fund managers along with the schemes. But the L&T finance is not worried. "The current portfolio managers will continue to manage these funds for such a period as the two companies agree as being necessary for smooth transition. After that they revert to Fidelity. Training programs will be available by Fidelity Research Directors to the L&T fund managers and analysts as a part of knowledge transfer for the period of transition", says N Sivaraman, whole time director, L&T Finance holdings.

The Indian markets have witnessed eighteen acquisitions over the last ten years at an average cost of around 2 percent of the Assets under management (AUMs) of the acquired fund house. Foreign funds which have sold their assets to Indian funds have normally done it for 6 percent of their AUM along with the fund managers. HDFC mutual fund acquired the assets of Zurich MF in 2003 at 5 percent of its AUM.

In 2004 Birla Mutual Fund (MF) acquired all the schemes belonging to Alliance mutual fund with assets worth Rs 2,000 crore. Birla MF had sizeable assets at Rs 9,000 crore and the acquisition helped the fund to move up its position in the AUM race. The fund managers were not a part of the deal. Alliance Mutual fund was known for its star fund manager Samir Arora who did not join Birla Mutual fund and moved base to Singapore. But Birla MF was already managing a fund size which was four times the size of Alliance and earlier had a fair share of star fund managers like Bharat Shah.

L&T mutual fund is generally distributed through independent financial advisors (IFAs) and is not strong as far as banking channels are concerned. On the other hand, Fidelity MF has relied exclusively on the foreign banks. L&T mutual fund feels that this allows for a strategic fit because it will now get access to the foreign and private sector banks that will help L&T MF grow its assets.

This on the face of it is a great idea but the mutual fund industry is sceptical. A CEO of a private mutual fund told Forbes India that the chance of foreign banks churning out the assets of Fidelity MF cannot be ruled out. “These banks have got in the funds for Fidelity and they can easily move the money out. L&T mutual fund will have to work really hard to retain these equity assets”.

SEBI has heavily come down on banks as they were known to churn funds to get more commission out of investors. But in case of a merger SEBI may not interfere if banks advise their clients to move out of L&T into some other funds. Again, there are no exit loads in case of mergers and many mutual fund advisors and even newspapers are advising Fidelity investors to stop their SIPs or not to invest into Fidelity funds and wait and watch the L&T fund managers perform.

The mutual fund industry feels that at Rs 550 crore or 6.25 percent of AUM, L&T mutual fund could actually have tied up with intermediaries and raised more equity assets than the Rs 6,300 crore equity assets that they will receive from Fidelity India. This is because L&T already is working with IFAs and national distributors which is brining in the assets to the mutual fund industry. According to a report by Mckinsey, IFAs accounted for bringing in 39 percent of the assets and national distributors like Bajaj Capital collected 26 percent of the overall retail assets in 2011. Banking channels are important but they have stopped growing due to regulatory hurdles.

L&T mutual funds have got the assets of one of the better equity funds in the country. Now it is for them to manage these assets to go on the next level. This may not be an easy task but the mutual fund feels confident that it will cross this hurdle.

The thoughts and opinions shared here are of the author.