The financial markets generate a lot of number on a per second basis. There are people who have made it a profession to convert this information into trends, buy-sell signals, charts and pivot tables. Over the last 18 years of financial journalism, I have realised that every number has a story to tell. And these numbers as a trend normally never lie. I am forever looking for these trends.
Fidelity Mutual Fund, a global fund managing assets worth $310 billion, has decided to exit its India operations. This comes as a shock to many industry analysts as its MD and country head Ashu Suyash had single-handedly defied the mutual fund industry by not choosing the traditional channels of distribution and yet managed to build a good reputation for the fund in a span of just seven years.
Apart from being the only woman at the top in the mutual fund industry, Suyash also happens to be one of the most ambitious business leaders. She was not really well-known when Fidelity, the second biggest fund house in the world (next only to Vanguard), hired her as the country head for its India operations in 2005.
In May 2010, she stated that she wanted to put Fidelity India among the top five mutual funds in the country. The fund was then ranked number 20 with assets worth Rs 7,400 crore. Within 18 months, the fund saw its assets move up 18 percent while all the top funds saw a fall. Overall, the industry fell by 25 percent.
But now, Fidelity plans to exit its India operations as it has accumulated losses of Rs 300 crore and the overall return on investment for the fund has not been sustainable. Mutual fund analysts feel that the real reason is not clear as the Rs 300 crore-loss for a seven-year fund, with the backing of an international giant like Fidelity, is actually not very high. Fidelity’s exit will, however, leaves a big blot on the industry as other international funds who want to enter the Indian market will rethink their decision.
Over the last three years, the Indian mutual fund industry has virtually stagnated and has grown only by around 5 percent annually. Much of this growth has happened in the fixed income assets which normally comprise low-margin products. So, even if there has been growth in assets, the same is not happening with the bottomline of the asset management companies (AMCs). Fidelity and other foreign funds would have ideally been able to ride all the issues had they not compromised on costs, distribution and operational freedom. Fidelity India declined to comment on this story.
When Suyash was appointed to head Fidelity India, she decided to concentrate on equity assets that are considered to be profitable. Almost 70 percent of Fidelity’s assets are in equity, but recently the fund has also been looking at fixed income. Fidelity saw its business development expenses double over the last year as it was spending heavily on low-margin products.
The fund was also spending a lot on employees. Salaries of foreign funds operating in India need to be aligned with their international counterparts where employees are paid twice the amount compared with domestic funds.
Of its total expenses, Fidelity was spending half on employee salary and benefits. This is way above the 20-25 percent that Indian funds spend.
“Foreign players have higher costs. They pay higher salaries, and in most cases, they do not have a local in-house distribution agency which can promote their schemes. Domestic mutual funds are very cost conscious about the same,” says Nipun Mehta, a private banker who specialises in mutual funds.