As a matter of fact, HDFC midcap opportunities fund is lagging slightly behind industry in short term but over 10 years period it is slightly ahead. Whatever little I invested in MF is with HDFC. With them I feel at least my capital is safe and no Franklin like incident would happen (you never know but still where else would you go then) and I have seen their debt funds are most conservative and that’s what is needed for long term players. Many would think alike. Also, changing a manager or even a team for any company is doable and so is making an outperformance…look how some junk stocks also have excellent returns in last 3 months and also some herd investors…so when hdfdc wants outperformance, they can and will make it happen…but that’s not what they or many investors are aiming for.
This comment leads me to believe that you have not seen more market cycles than current one. During 2005-10, L&T was Bajaj Finance of markets. Easy to make jokes about it now, but Infrastructure growth was one of the key elements needed back then to get growth form 8% to 10%. After, various scams got unearthed and major changes made by NDA(DeMo, GST), focus on infrastructure was shifted away to other stuff. NBFCs gave huge returns beause last market cycle favoured them. Remember Wipro? Its price is stuck for many years and still it has outperformed every company in compounded returns since its IPO. ITC, L&T may sound laughable compared to Bajaj Finance, but what happens to investors who entered it at 4000+ levels and get caught up when moratorium NPAs start showing up? PSUs are beaten for last decade even with rising profits in many Mahanavratna companies. When trust deficit starts showing up in market, only the companies with strong businesses and valued properly remain safe. Page Industries got battered due to valuations, Bajaj Finance may face NPA issue. HDFC AMC follows a method of stock picking, which might not have fetched them good returns in previous cycle, but that doesn’t mean that they don’t know what they’re doing.
I think we need to analyse the HDFC AMC stock separately for the equity funds and debt funds. And within that also separate active and passive funds.
Their equity funds have huge AUM and have to outperform the index by 3-4% on a CAGR basis, to consistently generate alpha in large and multicap funds as the management fees and brokerage commissions are about 1.5-2%. There is an increasing trend to move towards passive equity funds where the management fee is barely 0.1%.
The change in percentage of AUM under active funds where the management fees are fat is a key trend to analyse profitability.
Similarly, if Debt Mutual Funds only invest in AAA rated bonds and ultra safe government bonds, what percentage of HNI / moderately large retail investors will say - I’m better of investing in such safe bonds directly and avoid paying the AMC management fees’?
In general, I see a trend across all industries and businesses that most buyers want disintermediation. Buyers want to buy directly from producers and skip the middlemen. This doesn’t mean that all investors are going to try to disintermediate; but long term growth may be a lot less favourable if the AMC doesn’t show a great value add in terms of consistently generating higher returns / minimising loss of capital for their investors.
Having stayed invested in their equity funds for 15 years (long before the ‘mutual funds sahi hai’ bandwagon started), their fund performance over the last 10 years has been plain disappointing. Most of their equity funds have failed to beat the benchmark indices in the 10 year - 5 year - 3 year - 1 year - YTD comparisons.
Hi Chaitanya,
We can establish your argument around Infrastructure rosy days as much as we want but let’s remember that we won’t frown on long term investing then. Any BajFin investor who got caught around 4k would be able to recover most of the cost within 6 months or may be many have already Look at their recovery, It is in any case sitting around 3300 from 1700 within 2 months, whereas in these Companies investors may be stuck for a decade, so you pls weigh in properly which is better, being stuck for a decade in the name of long term investing or consistently performing for a decade? A simple Retail investor cannot , just cannot time the Cyclicals. But mocking L&Tand ITCs of the world wasn’t the major point in my write. They are a great company but not so great company to own for many obvious reasons especially for a decade.
I am concerned about the HDFC AMC style of thinking of investing the SIP money which they are receiving. I think I have already written my points, it’s a great top class management, clean company but we must know that financial literacy will increase people will try to invest directly. Pls go through my points again on HDFC AMC and I invite you to share your thoughts on them.
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)
Shareholders Presentation Q1FY21 - SV - FINAL_0.pdf (680.0 KB)
Earnings presentation Q1FY21
Highlights -
-
Total income of the company declined 11% YoY and PBT by 12% but PAT increased by 4% due to less tax expenses
-
Equity as percentage of Quarterly Average AUM stood at 37% Vs 40% YoY
-
Increasing individual folios 91.1 mm Vs 89.3 mm QoQ
-
Increasing SIP Accounts 32.3 mm Vs 31.2 mm QoQ
-
Declining trend in Equity-Oriented Quarterly Average AUM market share -
16.1% June-19
15.2% March-20
14.5% June-20 -
Declining Individual assets market share
-
Strong and stable SIP order book
-
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
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 -
-
Brand - Backing of one of the most reputed business groups in India.
-
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 - HDFC AMC Earnings Call for Q1FY21 - YouTube
- 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 - HDFC Asset Management Company (AMC) Earnings Call - Q4FY20 and Full Year - YouTube
.
- 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.
-
Asset Light & Zero Debt
-
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.
-
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.
-
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 –
-
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.
-
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
-
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.
Deepesh …even when people invest directly, money in the end will go to AMC only …right ?
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 ?
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.
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
- Index fund etf
- Index fund
- Balanced fund
- Large cap equity fund
- Mid to small cap fund
- Sectoral fund
- 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.
HDFC AMC in its latest SAI (Statement of Additional Information) provided the information about new recruits.
sai9.pdf (962.2 KB)
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