What to do if your MF's management changes hands?

In December, Pramerica Financial, the asset management arm of Prudential, said it would buy out DHFL's stake in the mutual fund business. A few days ago, Reliance Capital invited Nippon Life Insurance to acquire up to 42.88% stake it holds in Reliance Nippon Life Asset Management.

Ownership changes are becoming a regular feature in the Rs 24-lakh crore Indian mutual fund industry. While foreign exits were common earlier, we are now seeing domestic partners planning to exit due to various reasons. When the exit of an investor/partner happens, the remaining partner usually says that it hardly makes a difference. But this could be confusing for investors. 

An exit of a partner always has some impact. Sugar-coated messages such as the fund-house is an institution with robust processes and systems that will not be impacted, does not help. DNA Money spoke with a range of experts to help MF investors to understand how to interpret exits and signs of trouble after a key change in ownership.

Exits matter

AMCs (Asset Management Companies) always claim that the exit of a partner does not change anything for investors. Is this really true? Does the exit of a major partner mean nothing for an AMC business, investment or people involved in managing investors' money? 

Ownership change in any company impacts it in some way or another, says Gautam Kalia, head-investment products, Sharekhan by BNP Paribas. Since it is in the AMC's interest that the impact on investors is minimised, limiting the fallout in such situations is always a big consideration. 

"In some cases, the senior management decision-making process gets impacted, which may lead to long-term impacts on the AMC. While in some cases, the exit of a partner could mean reduced access to the skill sets or best practices that the partner was able to provide. We have to remember that the two companies initially partnered up for a multitude of reasons, some of them being synergistic," points out Kalia, who has previously worked in AMCs and banks.

A partner brings along with them a certain level of experience and expertise. "In certain cases, the investment expertise and research insights of a partner in the asset management business can act as a support to the fund management team," says Jason Monteiro, assistant vice-president-mutual fund research and content, Prabhudas Lilladher.

"A change in ownership can also bring about a positive change in how the business is operated, leading to lesser conflicts and better synergies. Hence, understanding the pedigree of the new majority stakeholder is important. Often it is the investment management team, which comprises the chief investment officer, fund managers and analysts, that is primarily responsible for the schemes' performance. They carry forward the investment philosophy of the AMC," says Monteiro. 

Exit events cannot be generalised. They are very specific. "There are two sides of the coin and it entirely depends on the framework with which an AMC business is run. AMCs which have a stronghold, well-constructed investment process and strategies, a well-groomed and experienced investment team, an established track record and investor following, would be better placed if one of the partners exits the joint venture. It entirely depends on a case-to-case basis and, hence, there is no standard outcome of this event," says Himanshu Srivastava, senior analyst manager - research, Morningstar Investment Adviser India.

What should investors look for

For an investor it is difficult to sense signs of trouble within an AMC. What they can track is publicly available information such as fund management change, change in scheme attributes and performance. 

In such situations, investors should look at the exit of talent, especially in fund management. "Most distributors also look at changes to the fund management process and modify the scheme selection for their investors accordingly,” says Kalia.

Investors should turn cautious when there is a change in the fund management team. "The exit of a fund manager will have a long-term effect on the scheme's performance. But this should not necessarily be seen in negative light. The incoming fund manager may turn out to be an equally good or even a better money manager. To deal with such situations, an investor needs to regularly monitor their MF investments. If the performance of the fund, relative to the benchmark and its peers, deteriorates considerably over the following 12-18 months post a change in management, then investors should consider switching their investments to better-managed funds," advises Monteiro.

The other aspect to focus on is if there is any change in the way the AMC goes about conducting their business. "If anything appears out of place, it should be evaluated carefully," says Srivastava of Morningstar.

Leaving the AMC

Investors should exit if they see any red flags. Following a planned and smooth exit strategy for their investments is important, especially if the amount involved is big. "Consider the exit load and tax impact of the fund prior to exit. Also review alternative investment options after consulting your MF distributor or advisor. In some cases, the AMC provides an exit load free window for investors to redeem their investments as well," says Kalia.

The decision to quit the fund house should be based on data, say experts. Invest the money in new funds of a different AMC. Choosing a new fund house and new funds becomes an important task. Morningstar's Srivastava says that investors should consider funds from a strong and stable fund house, with a strong track record. The funds should match investors' requirements and should be in line with their risk profile. 

Don't forget that exit of a partner can prove beneficial for investors too. "There is at least one recent example that comes to mind where the exit of a local partner has helped the global AMC implement its international best practices. While it is tough to say whether this is why some schemes have delivered better performance, it is definitely a source of confidence for numerous institutional investors, as well as large distributors leading to growth in the assets of the AMC," Kalia says.

There are instances when the exit of a partner from the JV has not necessarily had any negative impact on the prospects of the funds or investors. "One of the cases is when Invesco bought over the full stake in Religare Invesco Mutual Fund, which proved beneficial for investors as it maintained continuity in ownership. We also believe that the exit of BlackRock from the JV with DSP will not impact DSP's broader investment framework and business processes," says Srivastava.

PARTING WAYS

• While earlier foreign exits were common in the Indian MF industry, we are now seeing domestic partners planning to exit 
   
• The exit of a partner could mean reduced access to the skill sets or best practices that the partner was able to provide 
   
• Post the exit, investors can track fund management change, change in scheme attributes and modify scheme selection accordingly 
   
• Regularly monitor your fund for the following 12-18 months after the management change before deciding whether to exit or not