Big worry! This is why HDFC AMC, Reliance Nippon Life AMC need to fret

The cut in the total expense ratio by Securities and Exchange Board of India (Sebi) sent the share price of two listed asset management companies (AMC) plunging on Wednesday. HDFC Asset Management Co and Reliance Nippon Life AMC saw a massive decline in their stock prices on Wednesday.

Both publicly traded mutual fund (MF) companies touched a record low on Wednesday before recovering slightly. Shares of HDFC AMC, which went public last month, slumped as much as 9.29% on BSE before closing at Rs 1408.55 per share, down 8.55%. Reliance Nippon Life Asset Management too closed at Rs 190 on the 30-share barometer, falling 11.28% from the previous close. This was the worst single day fall for both the companies from the time of their listing.

The market regulator, on Tuesday, announced a slew of proposals approved by its Board, including a downward revision in the total expense ratio charged by the fund houses. Sebi capped the fees charged by AMCs in the range of 1.05-2.25% for open-ended equity schemes, depending on the asset size of the companies. An AMC having assets over Rs 50,000 crore can charge a TER of 1.05%, while a fund house with an asset up to Rs 500 crore can charge a TER of 2.25%.

Earlier, the TER slab structure for open-ended schemes started at 2.5% base TER on the first Rs 100 crore of the asset under management (AUM) of the scheme, moderating gradually to 1.75% on all AUM above Rs 700 crore, according to a report by Morgan Stanley.

A research report by CLSA said it is anticipating an impact of around 25% on the sector’s income. The brokerage firm said that the move can lead to 15-25 bps reduction in equity fees and bring down equity TER to 1.7-1.8%. This will impact all funds and should be effective in the coming two-three months. Larger AMCs may see a higher impact given a higher share of equity AUM and larger funds.

The fee cut could lead to a nearly 25% impact on sector earnings in FY18 or a 17% impact for Reliance AMC (FY19CL) and 25% for HDFC AMC, the report said. CLSA also said mutual fund distribution fees form 15% of revenue and a 10 bps cut in their fee could impact FY19 PBT by 4%.

Radhika Gupta, CEO, Edelweiss MF, said that schemes with size will now be cheaper to investors, who enjoy the benefit of scale. A focus on trail based income, more transparency in commission structures and correcting the incentives for marketing closed-ended fund is a positive.

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On the other hand, Morgan Stanley in its report said the magnitude of TER cut was sharp and surprising. “We cut our estimates for equity and overall gross revenue/ annual average AUM (AAAUM) by about 20bp and 11bp, respectively,” it said, adding the stock has been weak in anticipation of adverse regulation.