HAMSINI KARTHIK HDFC MF: Sebi norms, slowing biz a double whammy

Redemption pressure could lead to further downside, following 27% correction YTD

The Securities and Exchange Board of India (Sebi) has clarified that it will engage in consultations with asset management companies (AMCS) before implementing the new asset allocation norms pertaining to multi-cap funds.

Among the two listed players — HDFC AMC and Nippon AMC — the former could be at greater risk if these norms are implemented in their current form.

HDFC Equity Fund, launched in January 1995, is among the oldest multi-cap funds and a marquee product for HDFC AMC. With ~19,150 crore in assets under management (AUM) and an 86 per cent allocation to large-caps, HDFC AMC may have a lot at stake. Given the fund’s pedigree, Kaustubh Belapurkar, director (fund research) at Morningstar Investment Adviser India, says a rebalancing — which would alter its dynamics significantly — is unlikely.

AMCS have two options: merge funds to ensure that the existing portfolio doesn’t undergo a huge modification, or rebalance them based on the proposed norms, which require minimum 25 per cent allocation each to large-caps, mid- and small-caps. In the first case, Belapurkar says AMCS may be at a loss if the blended total expense ratio or TER reduces upon the merger of schemes. In the second case, there could be redemptions from the fund, which may entail capital gains tax (cost) for unit holders and loss of business for AMCS.

Rebalancing itself will entail transaction costs. The first option, however, will be less detrimental to AMCS.

For HDFC AMC, the timing of Sebi’s move couldn’t have been worse. The June quarter (Q1) saw revenue from operations decline by 18.4 per cent, resulting in a 21.2 per cent fall in operating profit before tax (net profit grew 3.6 per cent aid by ~80 crore in other income).

The weak showing is attributable to the 20 per centplus year-on-year decline in equity AUM (70-75 per cent of operating revenue). Though it remains the leader, HDFC AMC is also losing market share (down 70 bps YOY to 14 per cent). According to JM Financial, HDFC AMC is looking at effective diversification in investment styles, within the equity segment, in order to arrest the market share decline. It has hired two new fund managers for this. Given that August marked the fifth straight month of equity outflows outpacing inflows, Q2 may be equally weak. JM Financial expects net profit to shrink by 1 per cent in FY21.

The stock has corrected 27 per cent year-to-date. There could be further downside if redemption pressures aren’t arrested.