Sector view on one of the emerging sectors - asset management and wealth management. As of now we hardly have companies in this sector but this number is likely to go up over the next few years.
This presentation was oriented towards presenting ground up insights and qualitative viewpoints which one may not be able to get from annual reports and investor presentations. One should look at my related posts on the other threads on this forum for a much more basic view, those have some basic industry sizing numbers for financialization as a theme and a deep dive into the specifics of HDFC AMC
What do you make of Edel’s efforts to scale up wealth and asset management biz? They plan to grow WM 20-25% yoy and rise 1bn USD in AIF per year. Still they are quite diversified and not a pureplay. However, they might demerge their business into 3 verticals in long run i.e. Credit, WM+AMC+ ARC, Insurance.
Edelweiss - not the first time they have been announcing big plans on wealth management. If you see their history since 2010 it has always been fits and starts, however from 2017 onward they have been big on hiring senior wealth managers unfortunately at very high & unsustainable fixed salaries. Gone are the days when wealth managers could move 50% of the book in the very first year from previous employers, as of today 30-40% over 18 months is a reasonable estimate. This AUA is unlikely to be revenue accretive in the first 24 months, hence you just see AUA on books that is not yielding much. I would tone down expectations significantly from the wealth management franchise
ARC - One of the best teams in the industry and they will continue to be the leader in this space. However this space is very small as of now and will be a good 5-6 years before it starts becoming a big enough pool to start building a hypothesis around. Edelweiss has a very large structured products book so they have very good capabilities in house when it comes to evaluating and underwriting.
AMC - The MF piece is a marginal player and will continue to be so. The AIF category holds more promise given their skills and positioning, I would expect Edelweiss and IIFL to continue to lead the market when it comes to long/short funds and other early stage offbeat strategies in the asset management space. Their MF business will grow surely but it will be a long time before they become a meaningful player unless they acquire an AMC that already has 50,000 Cr AUM
Demerger will eventually be forced by the PE investors who are keen to separate the non-lending, non balance sheet heavy annuity models like AMC, PMS, AIF and WM out of the parent entity.
Wealth management firms are going through challenging times after the SEBI TER cut, their yield to AUA has been falling which reflects in lower revenue YoY starting with Q3 FY2019. One can observe this in IIFL Wealth mangagement and ICICI Sec P&L.
SEBI is likely to soon bring PMS and AIF too under the all trail model in line with what they did for MF. Companies like IIFL Wealth will be hit since their strategy of acquiring this large AUA of 1.5+ lakh Cr has been to commoditize the MF advisory part and do it for dirt cheap price while they make their revenue from selling products like lending, PMS, AIF and structured products. The average PMS/AIF has been paying 4% upfront to distributors with a trail fee starting from the second year. The yield to AUA of 0.7% that IIFL Wealth has been doing over the past few years will most likely fall lower due to this reason in my opinion.
Coming to how does one value IIFL Wealth, the 22,000 Cr AUM under asset management should probably be worth 2500 Cr at best which means the remaining market cap should be attributable to the wealth management franchise. At almost 8000 Cr, this works out to almost 5% of the Wealth AUA of 1.6 lakh Cr which appears to be on the higher side at first glance.
IIFL Wealth is an interesting story but given that my view on wealth management franchise is bearish over the next 2 years, I would wait and watch for the expected SEBI ruling to play out, see the impact on numbers before taking an investment bet.
Disclosure: I am a SEBI registered IA, not invested in IIFL Wealth.
you said that Reliance NIppon AMC would be interesting once the change of hands takes place. Given that its done now (and after bit of a catch -up with HDFC AMC) , what’s your take on this counter? they have a lot of work to do, but they have a very good distribution network
Just to add to Bikash’s question, what’s your view on RNAM vs MOSFL. I’m not including AB Capital, as it is a holding company and house many other businesses including NBFC, insurance, etc. While I agree that the former two names are not strict apple to apple comparison and given that you are relatively bearish on asset management companies in the short term, what would be your thoughts for long term horizon? Should the investor who has completely missed the bus in respect of the ongoing rally in HDFC AMC / RNAM hope for dips or wait for other asset management companies to list (such as SBI or ICICI or UTI for that matter) which may take a longer timeframe of approximately 12 -24 months? Thank you…!
I am doing some channel checks on this front - yet to come to a firm conclusion. The points I am pondering over -
Institutional investors & HNI categories pulled money out significantly earlier this year. Though the promoter has now exited, the Q these investors are asking is - So what? The management team is still the same, the same people made commitments and then went back on them. Part of the AUM thus lost has come back but will take some time to get back on track
RMF AMC has lost market share over the past 7-8 years, this in spite of having an aggressive sales culture. With Nippon, a Japanese company in charge one should not expect a strong focus on sales immediately. My medium term expectations from Nippon AMC is 9-10% AUM growth, thus under performing the industry. Is this worth 45 PE?
If the transition had been effected and the market cap was under 15,000 Cr it would have been an easy bet. Now that junta is chasing the AMC theme, I am not so sure.
Not chasing the AMC theme, but I was thinking that with Nippon being such a large player not only in Japan but also as a major global asset manager, would it not help in getting AUM from global institutions? Also, Nippon would be advisors to other large buy-side global firms.
I’ve already posted my views on Motilal Oswal in respective thread, I think it is an emerging capital markets powerhouse with a lot of positive possibilities as and when the broader markets revive. Of course the AMC part is what I like the most but the other segments (other than the HFC) aren’t bad either.
Disclosure: Invested, bought in the past 30 days
Coming to the other part of your question, you may have missed the bus in the short to medium term but not necessarily over the long term. AMC’s have a multi year growth runway from here, all well managed AMC’s are likely to be wealth creators if not multibaggers over the long term. That said, any capital markets business is likely to have higher crests and lower troughs if you observe the stock price. No harm in deciding your buy levels (obviously this changes as the operating numbers get better/worse) and then waiting and watching over the next 1-2 years and hopping on when a decent opportunity presents itself.
I am bullish on asset management businesses but neutral on their stocks right now
I am bearish on wealth management businesses and may turn neutral on their stocks in 6-12 months
From the 2019 annual report - Total AUM is 4.2 lakh Cr of which the MF AUM is 2.33 lakh Cr.
They already have a large managed funds book (Pension + EPFO + Offshore) of which the Offshore book is relatively smaller at < 7,000 Cr. The EPFO mandate has already gone to SBI AMC, UTI AMC and HSBC AMC in Aug this year
Yet to get a handle on how/if the offshore angle will play out. By definition this will be lower margin business compared to the domestic MF business, also won’t have the secular multi year growth characteristic that domestic retail money inflow has.
I have been looking at AMCs since past few months. I am invested in Rnam and Mosl since a bit lower levels and keenly follow them fundamentally. I am tempted to sell RNam many a times whenever I compare them (results, management) with HDFC amc results. Despite that I realised there are very few companies out there which doesn’t need cash to run the business. Hence market is valuing such companies very differently in this environment.
@zygo23554 Curious to know your views on AMCs now and how the recent data points look like? Has it become more attractive or the market uncertainties/redemptions (haven’t seen data points) will make this even attractive in the coming days?
Some interesting developments in the AMC industry over the past year or so. Just summarizing the broad trends here rather than getting into the specifics of each deal -
Spike in applications for AMC license, this cuts across players like ASK PMS, Zerodha and many more new entrants. In the AMC business one either needs strong distribution or needs to have differentiated products (performance) combined with digital marketing acumen.
Some of the marginal AMC’s now being acquired by the new age players. SEBI has relaxed some of the criteria for AMC sponsor thereby opening up doors to the well funded new age players who can go out and acquire AMC’s that are sub scale
The fastest growing AMC’s are Mirae, Axis, SBI, Kotak. Three of them have banking parentage while the other one is purely performance driven and has focused on beefing up distribution.
What one can expect going forward in my assessment -
This will be a growing market for many more years. Referring to a recent RBI publication, household investments in MF and markets is 16 lakh Cr while the deposit base is 103 lakh Cr. Insurance is 42 lakh Cr while currency is 25 lakh Cr as of Dec 2020. Multi year growth is very likely from current levels given that FD’s are unlikely to deliver 7%+ p.a. anytime soon.
Though there will be many new incumbents coming in, they are competing in a growing market. Over a period of 10 years expense ratios should come down further by 30% from current levels but the growth in AUM more than compensates the fall in TER. The unit economics for this business will continue to be very attractive.
The larger AMC’s will continue to grow at hygienic rates, the yardstick will be set by the second rung AMC’s though who can grow 20% at scale of more than 70,000 Cr AUM.
The age of larger than life fund managers maybe past us, the next generation cares about performance, differentiated portfolios and will be happy to switch more than the previous one. At one point of time people just gave money to Prashant Jain due to long term track record, this cannot be taken for granted anymore. The primary focus will be the 3 year performance and not the 10 year performance
The HNI+ and emerging affluent segments (those who can single cheques of 10 lakh and above) are drifting away from MF to alternatives on the PMS/AIF/Direct equity advisory platforms. This is a natural course of things, MF is primarily a retail product across the world.
The current trend of retail referring direct equity investment is unlikely to continue for too long, once the market takes breather a good chunk of this direct equity money will move back to the MF industry. All it takes from here is one average year where the sub standard stocks fall 20% and the newer bunch of retail investors will learn a few investing lessons.
Sir, what are your thoughts on playing this theme with CAMS?
Given that all the top 5 AMCs are serviced by CAMS and TER/fees/commission is anyway controlled by SEBI for all the stakeholders of the industry.
Completely agree with the points here. In addition, smallcase or similar platforms are becoming fairly mainstream now for young DIY investors. With the ease of mobile apps for trading and access to cheap & sometimes free curated portfolios which can be checked for past actual performance, it is a new way small investors are approaching the market.
With more capital, investors are migrating to mutual funds or PMS/AIF etc. Mutual funds will remain an easy and tax-efficient way to invest for a large majority.
We can look at wealth management companies which address HNIs or ultra HNIs. Scale of operation (AUM) can become barriers to entry. Example - IIFL wealth management has an AUM of over 2lac crs. Wealth management AUM has been stable over past 5 years when we saw mid/small cap index collapse and Covid crisis.
Is that thinking right ?
I don’t own IIFL wealth, I felt to discuss the above only.
The top end of the wealth management pyramid has many players who are very well entrenched like IIFL Wealth, Julius Baer, Citi (now will probably move to Axis Burgundy), ICICI Wealth, Kotak Wealth etc. They have a very solid rolodex of UHNI and family office clients and sticky personal relationships built up over time and as such is not very easy to dislodge.