CAMS - Indirect Bet on Financialization?

Stock Opportunities
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Computer Age Management Services Limited selected as record keeping agency under NPS:

Computer Age Management Services Limited has received a communication, from the Pension Fund Regulatory and Development Authority, New Delhi, stating that the company has been considered eligible for selection and further grant of registration as a Central Record Keeping Agency under the National Pension Scheme (NPS) under the Pension Fund Regulatory and Development Authority (Central Recordkeeping Agency) Regulations, 2015.

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hello there,

here is the book summary of the book An Eye for Detail, a book on CAMS (mentioned in one of the above posts too) -

CAMS started off as a first generation promoter driven software company making ERP software for SMEs. It had started expanding in in other countries too but it did not find much success there. Since being a software product would have entailed a lot of investment in development and marketing, CAMS pivoted as a BPO handling clerical functions of secretarial documentation of listed companies such as Ashok Leyland and Sterling software, which were headquartered in Chennai.

With a lot of investor activity in shares of Reliance, the internal registrar RCS (Reliance Consultancy Services) started outsourcing a lot of share transfer and allotment functions to outside organizations in various cities calling them Investor Resource centers (IRC). CAMS was the IRC appointed for Chennai, and its started handling the documentation of the sizable reliance investors, first in Chennai, followed by Bangalore.

Along with managing Reliance documentation (for this the company relied on a significant temp staff as this was based only on corporate action like rights / bonus), CAMS diversified into handling IPO allotments. From 1993 to 1995, almost 1500 IPOs hit Indian markets, and CAMS, having some experience already, started expanding its centers all across India to cater to investors applying in newer IPOs (this branch network continues to be a source of advantage of CAMS even now). Initially, it appointed other IRCs of Reliance as its collection centers so it could be asset light.
CAMS competed with Citibank and SBI.

As the IPOs waned on account of many unscrupulous offerings and declining markets, CAMS started focusing on RTA services for mutual funds, in which private participation was allowed from July 1993. CAMS bagged Alliance Capital as its first client in 1995, an American institution setting up shop in India. Alliance chose CAMS on account of its familiarity with the Indian eco system and its technology back end. After getting the Alliance account, CAMS became a market leader with more foreign funds approaching CAMS for RTA serves, with Karvy Computershare as a competitor.
In late 1990s, many banks were opening in house RTAs since there was significant interaction between the services provided by the bank and the RTA (with respect to book – keeping and funds collection. HDFC Bank, which already had a large banking operation and mutual fund operations by 1999 was also contemplating opening an RTA. However, since it was already working with CAMS and was impressed with its infrastructure, it decided to invest in CAMS, buying a 10% stake.

Over the years, CAMS has focused on automating as many processes as possible, starting with calculation of broker commission for MFs, greatly reducing the manual intervention. Not only has CAMS developed an in house software platform, it has also developed a software for MF distributors called FinNet, which helps them keep track of the investments made by their clients across funds, calculates their commission and also eases KYC functions. Further, CAMS is also trying to move to a B2C operation with apps made for investors to check and transact with their MF holdings. CAMS and Karvy together worked on CAS reposrt which gives a 360 degree view on the MF investment.

This was a nice short read. I am still reading up on its business and will add my observations, if different from posts above.

Hope its helps.

Umang

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As CAMS has major clients like HDFC MF, ICICI MF , SBI MF rather than betting on any particular it looks sensible to play through CAMS as it benefits if an investor chooses any 3 funds.

Strong operations , high ROE of about 30%. Profit compounding at 18% , I believe this is the best way to play Asset Management theme.

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From my very limited investing experience so far, and I may be completely wrong, but what I have learnt is to never invest in something as a proxy to other. Invest in CAMS only if you like its business model, pricing power, moat etc. and invest in AMC only if you like that particular AMC. Do not invest in a bank because you like its AMC and do not invest in a AMC registrar if you like the AMC business. Invest in a registrar if you like the registrar business.
Disc: Invested in HDFC AMC. Not a buy/sell recommendation but only thoughts on investing strategy. Evaluated CAMS but have skipped so far as not sure about its pricing power with AMCs. Open to new thoughts on this.

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The point is one needs to do both! Often we get to know about the proxy companies while studying the business model of the original company. In my case, I look for proxy companies if I am not comfortable with the OEM companies, i.e. which one will grow ahead of others (e.g. I invest in Auto Ancillaries).

There are different business dynamics in the original and the proxy company. For example, a soap company can have pricing power, brand value and steady margin trajectory, whereas its proxy Surfactant company often suffers from less bargaining power, RM volatility and so fluctuating margin trajectory. So, growth in one case is secular and in other case is a bit lumpy although the growth runaway is similar in both cases.

Yes, but you need to be aware that CAMS being the RTA of almost all the AMCs will essentially mirror the average industry growth trajectory. However, in case of CAMS a decent operating leverage is there to be unlocked, and so the bottom-line growth will be greater than the top-line growth.

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Agree on your thought. My point is one needs to do what one needs to do. No need to do either or both. Just do what you understand and like the business. Do not go after proxy just because they are proxy to something. Go after them if you like their business otherwise. This is purely based on my personal experience and I maybe wrong in my assessment. Thanks

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Any thoughts about Promoter integrity or any past records?

How about entry barrier in this business as this company has 3 major clients any shifting will cause major problem.
Any other negativity?

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CAMS’’ profit after tax rises 22 pc to Rs 56.42 cr in Dec quarter

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what is the impact of ETF’s on CAMS revenue? Going forward majority will invest in ETF’s

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Can you elaborate on future ETF investing?

What I think is that, many people are yet to move from regular MF to direct MF, they may not want to move because they could be getting good advice from their distributors, and then they move to index funds if they believe or know or experience later that it is getting tough for their direct funds to beat the indices and the indices returns are superior with low expense ratios.

And index investing comes with its own advantages and risks, and index funds are the best to invest as ETFs have their own disadvantages.

There are a lot of stages in this shift in my opinion, the jump if happens will be gradual and may take many years. I don’t have the numbers to prove any of this though.

Disclosure - I have a tracking position.

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At least in developed countries active mutual funds are dead. Most of the passive investing funds flow into ETF’s. There are 2 trends we can learn from developed countries:

  1. Eventually debt funds will disappear
  2. ETF’s/Index funds will be the standard for the passive investors. why? Because many mutual funds are struggling to beat the index so let’s say ETF’s will split 50% of the AUM from active mutual funds then hows that going to impact CAMS revenue?
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Please do not make developed countries’ comparison to India, we all know where we are regarding the matter.

Crores of people are yet to come to the financial markets, not that they should come but the educated private sector class with no ancestral assets will take part in equity, considering at least one goal - retirement. But as the risk appetite, the return expectation, the time they have are not the same, they will take different routes - active route, passive route or direct equity. The numbers will tell how the story is unfolding each passing year.

Debt funds have a place in the PF of 30% tax bracket people, as they are tax efficient with the benefit of indexation. Maybe the investors will not be adventurous with any other funds other than liquid funds in the future for reasons like Franklin fiasco. Some type of funds may see a decline in AUM but not the entire category will not disapper. In fact, complex debt instruments could be introduced in India which may increase the AUM of debt funds, I don’t know.

No serious investor who expects to cash out one day will invest in ETFs as not all ETFs have good liquidity and trading activity. The premium and the discount to NAV makes a lot of different. If one has accumulated good number of units but which are less than the minimum mentioned size by the fund house, we have the only option of selling the units in the market. So if one has accumulated many units for a specific goal, he has to sell at the price the buyer says. Index funds don’t have these limitations.

So the theme of passive investing may have started gaining traction but I think there is no immediate threat to CAMS from ETFs.

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While we can’t compare India to developed countries what matters at the end is are active mutual funds able to beat Index funds or not. If they can’t then people invest in Index funds or ETF’s. Money flows where the returns are. why would anyone invest in active MF’s if Index funds can beat them.

Second, Interest rates in majority of countries are 0-2 % (In Europe, It is -ve). India is one of the rare country which still has 5% interest rate but if you check out the long term trend of interest rates have been downward. Eventually one day even we will reach 0-2% range which makes bonds unattractive.

Of course i am not talking about 1-2 years but 5-10 years down the line how does it look like is the question. I don’t invest for short term. I look for companies which can grow business at least for next 20 years

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Even index funds have to be invested with the fund houses, so there will be business.

And I have already mentioned the inherent risks that come with ETFs and I think the people who want to go the passive route will be aware of these risks and will opt for index funds rather than ETFs because there could be a potential threat to the goal for which they are investing and the fund houses may take some action regarding pushing index funds since their interests are also aligned with index funds. Also, I don’t think many people will open a Demat account just to invest in ETFs, only brokerage houses will have the data about the activity happening in the accounts where only ETF purchases take place, which will not be released, of course.

iShares of BlackRock offers 372 ETFs it seems, when do you think we will have at least 100 ETFs in India?

SPDR S&P 500 ETF SPY was launched in 1993, it is the biggest ETF by AUM of 338 billion and also widely traded by institutions, hedge funds and individual investors. We had our first ETF in 2001 it seems, the Nifty BeEs which has the AUM of around 3000 crores. A mere launch is not enough, we need more number of ETFs along with high liquidity.

So I don’t think there is any immediate threat from ETFs.

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Index funds have low expense ratio which means low share for CAMS. Let’s assume eventually debt funds disappear and most of the money flows into equity that means AUM of Index funds will increase but the share will decrease. One more thing to keep in mind is direct investment and competition in MF means market share will be divided. I have a feeling that revenues of CAMS will be saturated down the line unless they get into other businesses

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How could we assume that the whole category of debt funds will disappear, one or two types of funds could disappear but what will make the whole category disappear, provide a reason.

Top 5 fund houses have more than 55% market share and 4 fund houses are served by CAMS, and 3 of those 5 fund houses are banks, so there will be sales. The reasons why the fund houses don’t move to the other RTAs were explained in the thread, please go through them.

CAMS also generates revenue from by providing services to AIFs, insurance companies, banks and NBFCs.

Its fortunes are aligned with the growth in MF industry which may not have a linear growth trajectory owning to number of reasons, and so this is a long-term story.

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When interest rates reach 0-2% where are debt funds are going to invest? They are no more attractive with such returns for investors even if they exists.

Second, Zerodha wants to get into MF business(May be many more) even if they can take away 10-20% of market share from the current players and if some of them decides to go with karvy then the market share of CAMS drops.

so threats for CAMS:

  1. Direct investment
  2. Index fund investment
  3. New players in the MF industry who may go to Karvy means reduction in market share

Yes, if they can grow their other businesses then it is good. I kind of like their dividend policy but would buy only when it gets cheaper

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As the economy matures interest rates are bound to go down, the question is not if but when. Even fund managers could get this call wrong while buying bonds.

Direct funds are still bought from the fund houses, so the fund houses will not make as much profit as before, because the TER is less in direct funds, but as of now regular funds have big share than direct funds. This gets reflected in NFOs too.

As far as the question of index investing is concerned, I cannot answer this better than this, obviously.

Regarding new entrants, not just Zerodha, here are some other applicants.

The above data can be interpreted in 2 ways - the market share being taking away from the existing fund houses or that the market is becoming bigger and the market share could remain the same if not become bigger.

We cannot predict how much of market share will be lost before someone has even begun and before they choose someone to be their RTA. All these are probabilistic in nature, and can only be analyzed when they happen.

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  1. How come direct investing is a threat to CAMS. They are RTAs not distributors. RTA’s workload will in-fact increase due to direct investing, as they earlier were serving mainly distributors, and will now be serving individual investors who are far greater in number. So, they may in-fact renegotiate to hike their fees for direct portals.
  2. I am not sure how index fund investment will take away their profit. RTAs like CAMS manage the back end support systems for AMCs whose work load will remain the same be the purchase happens in active fund or index fund.
    And don’t think that trend towards index fund will reduce profits for AMCs also, as index fund eliminates the need for much maintenance, so fund management related expense will reduce in line too, keeping AMC profits similar per transaction. So, CAMS will in no way suffer.
  3. This is a real threat. However, now CAMS gets customers from Karvy, and so don’t see this happening in future unless CAMS does something wrong.
    Also, RTA business has some network effect. Understand that people invest across multiple AMCs and so customers & distributors will always prefer visiting the same RTA offices to manage all their investments. Also more AMCs with CAMS means more streamlined standardized operation. Don’t see why a new AMC will go to Karvy unless there is enough pricing related incentive.

Lastly, ETFs are also owned by AMCs. So, I feel that RTAs may also get to offer some technology back-end services for ETF investments. I am not so sure about it. Hope someone asks this question during the next concalls.

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https://www.kfintech.com/ also claims to be the largest registrar and transfer agency and a market leader in the financial sector providing investor servicing , services offered are similar to CAMS + someothers as well . As per there website they seem to have more numbers in terms clients serviced , customers etc .
Its still a private limited company and might be the direct competitor to CAMs .