Season of consolidation seems nigh on MF St

Industry abuzz that a leading AMC is planning to sell its mutual fund arm.

Does size matter? The issue has always generated a debate. Sometimes, takeovers and buyouts change the entire spectrum of an industry. At other times, they are just a way for stronger players to consolidate their positions.

The reasons behind mergers and acquisitions range from gaining quicker means of growth than organic growth would allow, to gaining economies of scale or a more dominant position in the market.

Across industry verticals around the world today, M&As, joint ventures, consolidation or other forms of strategic alliances are increasingly becoming the order of the day and mutual funds aren’t untouched by the trend.

The industry has seen a spate of mergers and acquisitions in the last few years, including merger of fund houses and consolidation of schemes within the same fund house.

The mega merger of Pioneer ITI with Franklin Templeton is still fresh in one’s memory. Other successful buyouts included the takeover of Zurich and Alliance Capital by HDFC Mutual Fund and Birla Sun Life Fund respectively. All the three fund houses have now grown into big conglomerates, figuring among the top players in the industry.

Further, Cholamandalam Finance bought out the stake of its partner Cazenove Investment Management of UK and Sundaram Finance bought out the 39% stake of its partner Newton Investment Management. Principal MF bought out Sun F&C MF’s schemes, while Indbank MF sold out to the Tatas.

As such, joint ventures have been common in the industry. SBI Mutual Fund is a joint venture between the State Bank of India and Société Générale Asset Management, Chola Mutual Fund is a joint venture of the Murugappa group with DBS Bank of Singapore and so on.

Recently, the industry has been abuzz with news that a leading mutual fund house is up for sale.

The larger the portfolio an AMC handles, the more are its economies of scale and profits. At the end of the day, the mutual fund business is essentially a volumes game.

The business of fund management is linked to performance as much as it is to the quality of service and long-term approach. Funds falling short on any of these counts and getting unviable attract integration, though not all M&A deals that have taken place in the past were due to these factors.

Pioneer ITI being acquired by Templeton and Zurich being acquired by HDFC had more to do with their parent companies abroad losing interest in running Indian ventures.

The mutual fund industry is fast growing and could well be poised for realignments and consolidation. Asset managers must respond to the changing dynamics of the industry and adopt new strategies that take advantage of the opportunities in creating the desired value.

As for investors, the mix and match should be judged from the costs involved, performance and synergy in style of fund management.