HDFC Mutual Fund Buys out Morgan Stanley Schemes

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Morgan Stanley on Monday became the second large global giant to exit India's crowded and barely profitable mutual fund industry when it agreed to sell its business to HDFC, the country's biggest mutual fund manager.

HDFC Mutual Fund (MF), with assets of . 1.03 lakh crore, agreed to buy all eight schemes of Morgan Stanley with combined assets of . 3,290 crore. The purchase is expected to help the fund widen the gap with Reliance, the second biggest mutual fund house and consolidate its position at the top of the industry. Reliance has assets worth . 93,249 crore.

Morgan was the first global fund to launch a mutual fund in India in 1994 after liberalisation but its performance in the country has been rather lacklustre. Its asset size is small by international and Indian standards and like Fidelity it has been unable to keep pace with the growth of Indian mutual funds such as HDFC MF, Reliance MF, ICICI Pru, UTI MFand Birla Sunlife which between them control over 50% of the industry's size. The fund posted losses in both 2011 and 2012.

"The mutual fund and insurance industry must go through consolidation. Small funds are not viable and more and more people are beginning to sense that. The opportunity cropped up as Morgan Stanley approached us," Deepak Parekh, chairman HDFC told ET.

Morgan becomes the second big global investor to exit the local market after Fidelity which sold its business to L&T in March 2012. Daiwa sold its assets to SBI Mutual Fund for an undisclosed amount this year and this was preceded by Invesco's purchase of a 49% stake in Religare for . 460 crore and Nomura's acquisition of 35% in LIC Mutual Fund for . 308 crore.

Tough business conditions are forcing many asset management companies (AMCs) to either rope in strategic partners or exit the business completely. India has about 44 mutual fund houses with numerous schemes and they compete for investors' money in the main cities of Mumbai and Delhi. The proportion of small savers investing in these schemes is not very high and the funds depend upon cash-rich companies and high net worth individuals for a bulk of their investments.

"The consolidation in the industry is likely to continue as industry faces tough times, we believe only those companies can survive which have a strong distribution reach," said CEO of a mutual fund AMC, who did not want to be identified.

HDFC is believed to have paid . 150-170 crore for the transaction which is around 4.5 - 5% of Morgan's assets. Acquisitions in the mutual fund industry are a percentage of the seller's assets, unlike in manufacturing where a multiple several times the size of the firm's revenue or profits tend to be paid. "As per industry benchmark, if the AUM is on the debt side then the valuations are pegged around 5% of the asset under management. On the other hand, if the acquisition done on the equity side, then deal value can be estimated around 4% of the AUM," said chief executive officer with a research firm.

The deal comes when HDFC is struggling to grow its assets in face of dwindling investor interest and aggressive competition from rivals such as ICICI and Reliance. For the quarter ended September, HDFC's assets grew by 5.39% compared with Reliance's 8.02% and ICICI Prudential's 11.50%.

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