The unofficial gray market, often seen as an indicator of the mood in the IPO market, has so far been lukewarm in its response to Birla’s IPO. The stock currently commands a premium of just 6% over the high end of its price range of Rs 695-712.
And it has to do with more reasons than the sudden weakness that has crept into the wider market over the past couple of days.
By all means, Birla AMC should be a solid bet for investors who want to ride the wave of financialization of the Indian economy. Mutual funds have gained more and more acceptance over the past decade and have multiplied their assets under management, suggesting that the only way is to increase.
“In addition, a strong generation of sustained cash flow against a background of continuously increasing level of penetration and improvement of assets under management of equity is likely to ensure a healthy payment in the future,” wrote Vikas Jain of Reliance Securities in a pre-IPO note.
Transition from investors to direct capital
Before the pandemic, the above narrative would have guaranteed that the asset manager’s IPO would sell like hot cakes. The industry, however, has undergone significant changes over the past 18 months that have made the asset management space one of the less interesting places.
Aditya Birla Sun Life AMC’s peers, Nippon India AMC and HDFC AMC, both languished in a fierce bull market, reflecting a gradual decline in investor prospects for the asset management industry.
HDFC AMC has only grown by 50 percent in the past 18 months, while Nippon Life India AMC has grown by 75 percent in the same period. Both are pale compared to the Nifty500’s 114 percent increase over that time span.
Part of the reason for such underperformance of mutual fund companies relative to the rest of the market is that this bull run was linked to the rapid change in retail investor behavior since the start of the pandemic. With the biggest market crash in over a decade in March 2020, retail investors jumped straight into direct stocks instead of mutual funds, and they’ve been successful.
The increase in the number of active clients for stockbrokers at all levels and the rise of a new cult of trading has meant that individual investors are no longer dependent on mutual funds to meet their investment needs. .
Competition on the rise
The biggest risk for mutual funds comes from the rise of platform companies looking to provide universal investment solutions to investors.
In 2021, the Securities and Exchange Board of India (Sebi) approved Zerodha, Navi MF, Bajaj Finserv, Samco Group, White Oak Capital and NJ India to launch asset management activities.
Companies like Zerodha, Groww, and PhonePe are looking to create a one-stop-shop for investment and are reportedly trying to disrupt the business by changing current cost structures, which many see as very high.
“Investors may find it convenient or reassuring to use one platform or brand to meet all of their financial services needs and may choose to divest their business to our competitors on this basis,” said Aditya Birla Sun Life AMC in its prospectus.
On top of that, Groww has been given the green light to take over the business of Indiabulls MF, while payment platform PhonePe is considering an entry.
Many of these companies are technology leaders looking to capitalize on the high fee model of incumbents, which will make profitability more difficult.
Consolidation, regulation & recent incidents
The Franklin Templeton episode, in which the fund house suddenly closed seven debt funds after facing defaults, and other cases where some fund houses had to resort to various delaying tactics to stop the buyout after some of their bets deteriorated severely damaged MF investors. confidence.
To address these issues, Sebi introduced a series of changes aimed at reducing the tendency of fund companies to mess around with public money by trying to generate better alpha and ensure better communication to investors about the risks involved. to individual products. Sebi has also established a new role to ensure a better skin in the game for fund management professionals by linking their compensation to fund performance.
Industry watchers claim that while these measures will go a long way in ensuring investor safety, at the same time they will make alpha generation difficult and, therefore, take away the charm of the product from investors as a component of wealth.
Threat to profitability
On top of that, the relative underperformance of a wide range of mutual funds against the broader market over the past few years has provided the right situation for low cost index funds and ETFs to flourish. .
The bright side
But the fund house looks very optimistic about the outlook ahead. They see a saving grace for the mutual fund industry in the recent increase in inflows to equity funds as well as increased inflows to systematic investment plans.
“Investing in SIPs has become the way of life for most investors. Given the deep underpenetration, the AMC industry will be on a high growth trajectory, ”A Balasubramanian, Managing Director and CEO of Aditya Birla Sun Life AMC told ETNow in a recent interview.
What may work in favor of the IPO is the low cost of the offering compared to the valuation of peers like Nippon India Life AMC, HDFC AMC and UTI AMC. In this regard, Aditya Birla AMC has left a lot on the table for investors, it remains only to see if they are eager to get it back.