HDFC Asset Management Company

[Southern_Cross]

@Investor_No_1

Agree, but that’s true for every AMC business. I think the point all critical investors here want to make is that yes the business is excellent but the execution of HDFC AMC has not been on same lines in last few years - with the likes of SBI/ICICI AMCs etc leading the show. As far as that happens, underperformance would be guaranteed, as majority of the huge runway and market ahead would be taken over by competitors…

Let’s look into HDFC AMC journey from 2020.
In terms of debt market segment, HDFC MF is still going strong based on the trust it enjoys among institutions.

For equity, the management acknowledged the problem last year itself - Q1FY21 Concall.

@Southern_Cross

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.

Then new CEO who was earlier chief investment officer of SBI is brought in.

@Southern_Cross

@Southern_Cross

What Mr. Navneet can bring to HDFC MF

• Thematic funds
• Bring in his macros expertise
• Lure some of his team members who are delivering well at SBI MF to HDFC MF. HDFC AMC is giving ESOPs more these days and SBI MF is not yet listed. This ESOP amount can be handy.
• Use of some strategies which are working well at SBI MF. For example, SBI Small Cap is hedging their portfolio using NIFTY options. I did not see this in HDFC MF schemes if I remember correctly.
• SBI MF was 6th when he became CIO of SBI MF and now it is first. He will be asked to replicate the success mantra in HDFC MF like in SBI MF.

Navneet has broadly worked on all the things mentioned above. There are launches in thematic funds, international funds, new recruits and also into ETFs.

In fact, the financial advisors/planners enroll the new investors into balanced funds in the initial days as it contains ~35% debt component and so lesser drawdowns. HDFC Balanced Advantage Fund is still one of the best in its category. Its AUM constitutes around 20% of overall AUM of HDFC AMC Equity Segment.

Source - Valueresearchonline.com

Regarding others, HDFC Funds are not the best performers from a long time but please check the trend of SIP order book. The trend is whenever there is good equity performance, HDFC AMC with its MFDs and National Distributors just rides the success of overall equity market success.

Now, if the concern is about existing AUM loss. Except, Direct route, rest all work on incentive model and as I explained earlier, the commission rate is tagged to transaction and all the transactions in the past gives them higher incentive. Even NJ Invest which is the biggest national distributor of MF industry will not advise to withdrawal of HDFC funds. They can also convince clients that it is tax inefficient.

@Southern_Cross

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.

For direct route, you mentioned the rationale about investing in HDFC MF Midcap scheme. I believe, I will also take the same route in coming years. In the end, I can sacrifice 1 to 2% alpha for safety and long-term performance.

@Investor_No_1

Now coming to AMC and lot of things I hear about underperformance, if you see the long term performance of HDFC midcap opportunities fund…10 years and above…it is industry leading. Also, how many Mutual fund companies’ units we invest in and can be sure that 10 years down the line even that company would exist or not? Very few…although investor rights are somewhat protected and such companies are eventually sold/consolidated etc. (I would suspect whenever that happens, long term performance would be impacted as strategy changes with new management/culture. Although, I have no data points and not researched this aspect).

Point is, if a fund house is industry leading in 10 years and above, then my every penny, if at all goes to an AMC for mutual fund investment, would be HDFC AMC. I will not mind in between fluctuations but would rather take them as opportunity. Otherwise, why would I invest in mutual funds if horizon is not long and discipline is not right from my side.

I think maturity is needed from the consumers/mutual fund investors perspective and as long as their education happens in right direction and HDFC AMC is a long term outperformer in their mutual funds, I would hold its shares and also its mutual funds units, if any.

To conclude, the chance of HDFC AMC losing majority its existing AUM is minimal.

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I was watching one video of SOIC about portfolio construction approach and he mentioned the below points.Thanks @Worldlywiseinvestors

• Investing is probabilistic at the end of the day - Nothing is cast in stone
• Business is like a living organism and you need to have a probabilistic mindset assessing how much risk and reward it carries

At this point of time, I am of the view that my risk is less in HDFC AMC due to below reasons.

1. It seems to be ticking all the boxes I was looking for
2. As I understand this business, I will still be able to average when there is more pessimism

If HDFC Funds turnaround, the reward can be good to great.

@zygo23554 - I was checking the PMS returns in SEBI website and amazed at the AUMs of many PMS funds. As you are closely tracking HDFC AMC, want to understand from you, what are the roadblocks/issues which are stopping big AMCs like HDFC going big on PMS funds?

Discl - Invested and biased