ValuePickr Forum

HDFC Asset Management Company

Financial literacy increase would be good for HDFC AMC …first an investor would start with MF before if at all direct index or whatever…but I agree you never know…

Does anyone how ETF funds have been performing in the last three years (before Covid came in picture)? Were the returns better than regular equity funds?

Just found this report on AMC. A bit dated but I found it useful.AMC-in-India-Listing-and-Valuation.pdf (3.5 MB)

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Shareholders Presentation Q1FY21 - SV - FINAL_0.pdf (680.0 KB)

Earnings presentation Q1FY21

Highlights -

  1. Total income of the company declined 11% YoY and PBT by 12% but PAT increased by 4% due to less tax expenses

  2. Equity as percentage of Quarterly Average AUM stood at 37% Vs 40% YoY

  3. Increasing individual folios 91.1 mm Vs 89.3 mm QoQ

  4. Increasing SIP Accounts 32.3 mm Vs 31.2 mm QoQ

  5. Declining trend in Equity-Oriented Quarterly Average AUM market share -
    16.1% June-19
    15.2% March-20
    14.5% June-20

  6. Declining Individual assets market share

  7. Strong and stable SIP order book

  8. Increasing trend in going direct Vs distributors. The distribution channel share of banks & HDFC bank declining( Covid-19 impact as less physical presence?)

Disc - Invested from IPO and added few more at current price

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Here is my analysis of this stock.

AMC Sector Analysis

Financialization theme - India is a developing country and the per capita income & literacy rates are rising. The FD rates are on a decline. It was 4-6% in US for the FDs in the 1990s just similar to what we have in India now. The preference towards financial assets is mainly triggered by demonetization but the other triggers are difficulties in liquifying assets like land/real estate apart from safety. The education & healthcare costs are on an upward trajectory, mutual funds given a longer time frame can be of the most viable option for increasing wealth and securing the future mandatory needs given the ticket size and the returns compared to other asset classes. MF sector in India is at a nascent stage and equity funds are just 4% to GDP whereas for US, it is 63% to GDP. So, it is a sunrise sector with huge opportunity and underpenetrated.

Pros -

  1. Brand - Backing of one of the most reputed business groups in India.

  2. Longevity - Have deep experience in handling multiple crisis situations - 2000, 2003, 2008. Their PAT more or less remained the same even though there were fluctuations in AUM during the period 2008-2012 as mentioned in the latest earnings concall.

Q1FY21 Earnings Call - https://www.youtube.com/watch?v=ptZ2_uc8nPk&feature=youtu.be

  1. Distribution Network - 65K+ Empanelled distributors. HDFC Bank itself is expanding in B-30 cities and so does HDFC AMC. NJ India Invest is the third biggest MF distributor in India and they are with HDFC AMC. In the previous quarter earnings concall, Milind Barve(MD) said that the mutual fund commission of the distributors is tagged to the transaction. For example, if NJ is committed to some commission in 2010 for one customer, the commission amount changes for the same customer distributed by NJ in 2012 as it is a different transaction. In the early days of MF penetration, the commissions and perks were very high compared to the current regulation by SEBI. So, most probably the distributors will stick with the then mutual fund schemes as they get more commission amount. As per new terms, the amount that goes to distributor is less. HDFC AMC clearly understands how important is the distributor edge and so they even tried for pre-ipo placement to distributors for a discount.

Q4FY20 Earnings Call - https://www.youtube.com/watch?v=fYM1KKFGwxY

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  1. Trust factor - HDFC AMC has taken the losses in its books in the case of Essel group NCD fiasco whereas Franklin displayed the default MF risk disclosure statement concerning closing of 6 debt funds

Think about an average person who wants to keep some fixed savings aside as SIP till his retirement and bought the mutual fund story from a distributor. He/she looks for an MF he/she can trust.

  1. Asset Light & Zero Debt

  2. Stable SIP order book - 70% SIP Book from over 10 years. 960 crores is the SIP inflow in June-20. So, at least 672 cr is most probably coming as guaranteed inflow per month. In general, it is hovering above 1100 cr from March-18. 10 years of SIP of 672 cr will be approx. 80,000 cr AUM.

  3. Lower operating costs - 6 bps to revenue. One of the lowest in the industry as per latest earnings concall, they are planning to reduce it even further giving a ballpark estimate. Prashant Jain in his recent interview with Nirmal Bang also attributed this particular aspect to be one of the reasons for thriving during tough periods in the past.

  4. Experienced JV partner – Standard Life is the largest active asset manager in the UK, with investments in equities, multi-asset, fixed income, real estate and private markets as mentioned in the Wikipedia page.

Cons

  1. Old school thinking/Complacent – When other mutual fund houses have done massive inroads into thematic MFs, there are almost nothing from HDFC AMC even though it was the leader in equity for the most part. SBI MF on the other hand understood the game well. Ex – SBI Healthcare Mutual Fund.

  2. Zero International Markets Exposure – FAANG+ stocks are the flavour of the season. The management is planning to discuss with Standard Life about entering this space. In the latest earnings concall, they mentioned about Multi-Asset scheme in which they are going to add exposure to foreign securities

  3. Not much product differentiation – The management agreed during the concall that most of their schemes were more or less on the same lines and so when the downtrend came, all the schemes started behaving in the same manner. Like they say in IT, selling the same box with a different name. This worked till SEBI did the reclassification exercise where a MF can have only one scheme per category. It means HDFC AMC cannot have two different Value Oriented schemes. They hired 3 new fund managers recently to correct the situation. It may take 2 to 3 quarters for the restructuring results to appear.

Based on my recent interaction with a financial planner, there are some MF investors who prefer only HDFC funds like HDFC Top 100 fund even though he wants to give other fund options. I asked him how can you convince a client looking at the performance of HDFC Top 100 fund. He mentioned that due to SEBI’s reclassification exercise HDFC Top 200 was changed to HDFC Top 100 and so the performance has affected. Based on his experience, returns for HDFC funds are better during normal/bull periods and ICICI funds perform better during turbulent times. Sankaran Naren, CIO of ICICI MF is a famous contrarian.

Like @zygo23554 mentioned in one of the earlier posts, if the scheme is not performing, it is HDFC AMC/Prashant Jain’s fault. In case, he recommends say Taurus or Quantum MF, it is the distributor’s fault.

The risk is less in the case of Prashanth Jain as he is still is in top 3 fund managers in terms of generating long term CAGR returns. The whole mutual fund story is based on investing for long term.

Apologies in case of repetitive content and lengthy writing.

Disclosure – Invested and biased. Even though I have multiple SIPs running, not one in any of the HDFC AMC funds.

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Deepesh …even when people invest directly, money in the end will go to AMC only …right ?

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Yes… The only difference is when you invest directly, you save on distributor commission, generally around 0.5- 1 percent…

I think by investing directly would mean - directly investing in equity or passively managed funds like Index investing, ETFs etc. which are more real risk to AMC business and here comes the management insights and distribution/marketing/product differentiation strengths of the individual AMC company and demographics of the country like first a person would be hand held to AMC and then would venture out on own or passive investing (unless passive catches up like west - but the demography there was already financially literate people since decades)
Thanks

Let me tell you what I was thinking -

in MF, you can invest 2 ways - direct and regular. Regular goes thru broker and Direct means you go to Fund house website and buy there (SIP/LS).

In that case, if that is the “direct” then also AMC will get funds.NO ?

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Let me try to clarify.

Direct Investing Any mutual fund scheme through AMC Portal (Broker not involved) – Lower Expense ratio

InDirect Investing Any mutual fund scheme through Broker (Broker takes some commission) – Higher expense ration

Index Investing (Passive Funds) Here funds are invested in Index (Sensex, nifty50, NiftyPharma, etc). They mimic exactly index stocks and in same weightage. Surprisingly this also comes in direct and in-direct. Here expense ratio is as low as 10 paise for every 100 Rs.

Direct equity - buying stocks
Mutual fund direct plan - buying mutual fund through AMC
Mutual fund regular plan - buying mutual fund through distributor.

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what I am saying is u invest in MF via direct or regular - AMC funds inflow will be up and increasing only …so HDFC should be in a fine position.

If you invest in HDFC mutual fund it will benefit HDFCAMC. The benefit will depend upon the type of fund you use.

Debt funds have low expense ratio than equity funds.

In equity funds, the expense ratio increase in following order

  1. Index fund etf
  2. Index fund
  3. Balanced fund
  4. Large cap equity fund
  5. Mid to small cap fund
  6. Sectoral fund
  7. International funds

Mutual fund direct plans will have lower expenses than regular plan due to saving from distributor fees. The fund house will however gain the same amount.

If you invest directly in stocks (direct equity) or mutual fund of any other fund house it will not benefit HDFCAMC.

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HDFC AMC in its latest SAI (Statement of Additional Information) provided the information about new recruits.
sai9.pdf (962.2 KB)
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Among the two new fund managers, Amit Ganatra seems to have delivered good returns. Invesco India Contra Fund which he used to manage is one of the best performing mutual fund schemes in Equity: Value Oriented Category

Disclosure - I am invested in Invesco India Contra Fund

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This stock is a clear example of how calibrated and how accurate the market is when it comes to estimating near term earnings. The stock was trading at elevated PE multiple for almost a year since the near term earnings trend was very attractive at 40% YoY growth but once the low base started normalizing the multiple is back to the more reasonable range of sub 42.

Over the past 2 years I have come to the view that I cannot be better than the market when it comes to estimating near term earnings. The only way I can generate alpha is to either have an edge on insights (this can happen only if I understand the business very well) or through a temperamental edge (this is more behavioral). Or to load up good business when there is a sudden dip in the markets overall (no better example than March 2020, but this becomes obvious only in hindsight).

No easy money in the Indian market any more, information edge no longer works. Within 10 mins of a conference call ending you have messages being forwarded about management commentary and how the near term outlook is likely to be.

Unless the fund managers at mutual funds pull up their socks it is going to get more and more difficult to keep pace with what the index delivers. Over the next 5 years or so MF will get positioned as a retail product with the HNI segment moving into a combination of ETF + AIF/PMS as opposed to MF being the mainstay.

This stock continues to be one of the lowest risk way of playing the financialization theme in India, a 15-18% earnings growth story at 30%+ return ratios and free cash flows combined with a low cost of capital makes for an interesting combination. As is the case with such businesses, the most important thing is to participate without overpaying for the stock.

Disclosure: Invested for self & customers

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I was checking the past articles about how mutual fund industry fared in previous difficult years.

Apart from the article, there is a very good write-up in comments section by one user Sandeep Consul. It is a long write-up, I am just pasting the first few lines.

Key takeaways

  1. Fund managers are basically getting incentive only if they beat index and most fund managers were buying shares of those few heavy weight companies like HDFC Bank, Reliance etc in percentage of their index weightage for most of the new money coming to the fund by default so that they have less uncertainty about their bonus. Safe game. Had the KPI metrics also include beating FD returns an extra perk, they would have been more dynamic. The SEBI reclassification of MFs came only in 2018.

  2. Some good fund houses like Fidelity have tried their hand in penetrating the mutual fund market in India but eventually left the market. So, due to cut throat competition, the expenses would have been more for the new fund houses while penetration. The advantage HDFC AMC has is the distribution edge which helped in keeping mostly predictable flows coming in and HDFC AMC is process driven to keep their expenses under control.

In India, there are some years in equity markets where the returns will be touching the roof like - 2017, so all the SIPs collected before that becomes fruitful. The distributors will showcase the returns of last one year etc conviniently and will add more people. Apart from distributor edge & expense control, what is helping HDFC AMC is the consolidation of MF industry - Morgan Stanley, Goldman Sacchs, Fidelity(taken over by L&T) etc were acquired/merged. L&T Finance itself wants to put their MF business up for sale. I agree as the AUM increases for a particular scheme it is difficult to generate alpha but people like Peter Lynch generated CAGR of 29% return for 13 years. It certainly is an exception though.

As an investor, I wish one such Peter Lynch joins HDFC AMC!
Like @zygo23554 I too feel ETFs + PMS/AIFs are the way forward for asset management companies.

Disclosure - Invested

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Posting a video… Decoding Jul- monthly MF data

Key takeaways-

Resilient SIP flows
Strong inflows into Debt Schemes

Disc:invested in HDFC AMC, looking to add more on dips

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NFO from HDFC - banking ETF - good to see them responding to market dynamics

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