Just to highlight a couple of points I’d covered in my VP presentation (VP Chintan Baithak Goa 2019 - Sector: Asset Management & Wealth Management) which I think are very relevant over the next 4-5 years -
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The space of investment management is going to see a lot of entrepreneurship over the next few years. You will have junta like me branching out on their own and setting up boutique asset management business and on the other hand you will have the tech focused guys trying to crack the retail investing platform segment. Disruption is coming for sure but it is wealth managers who will bear the brunt initially (refer slide 23-25 in the ppt)
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As tech platforms which enable direct plan investing for retail investors take off and start hitting respectable volumes, the power play will tilt more in favor of the AMC rather than the distributor, reason being investing will never be a winner takes all market either on the AMC side or on the distributor side. The inputs from HDFC AMC during the conf call indicate that retail users appear to be adopting the direct plan route more actively now
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AMC disruption occurs only after the general public realizes the futility of chasing alpha and paying higher fees. This will occur only after people try out exotic strategies and realize that they don’t work in the long run, for this first the PMS and AIF bucket need to really take off (which has started). PMS & AIF are growing at 1.5X the MF growth rate since 2012, look at the growth in PMS AUM of Motilal Oswal to get a sense of this. I know some PMS players who have grown AUM by 10X between 2013 and 2019 even when the performance is just slightly better than the index
What does this mean for the investment thesis on AMC’s -
Higher proportion of direct plans means higher profitability in the long run since expense ratios right now are well below the TER cap (and can be increased whenever it is needed, see slide no 19). Direct plans also means lower customer acquisition costs - instead of distributor acquiring customers for the AMC and getting paid a % of AUM, AMC now does adverts, invests in digital channels and can spread this cost over a larger number of customers. Think how operating leverage plays out for a consumer brand, as scale goes up the advert expense does not scale in proportion hence margins trend up
All initiatives that are being taken by an AMC are either focused on increasing growth without increasing costs proportionately or to enhance customer stickiness over time through digital tools. This is what a growth mindset looks like compared to what distributors are doing (preservation mindset, cost optimization mindset). This is classical inferential reasoning based on behavioral models - more often than not we will be right when we take this approach
With the inclusion of HDFC AMC in the MSCI India index this will see some passive flows going forward.
This said, valuation is not within the comfort zone right now. I love the business but not sure I like the stock enough at CMP to be able to buy with conviction in one shot.
Disclaimer: I am a SEBI registered IA, hold this in personal portfolio and in customer portfolios. You may assume that my buy price is much lower than CMP. This only presents my views on the business and does not constitute investment advice