Mutual Fund Management Change - Do I need to WORRY?

Like some learned Person had once said: The only thing constant in life is Change. The change in ownership of a fund does not necessarily endanger your investments in the fund's scheme. Change is constant; here we are going to find out whether the change is for good or not.

Investors use Mutual Funds to reach long term goals like Investing for Retirement, Child Education or even a Family Vacation. The Investor of a Mutual Fund Scheme is prepared to hold the funds for as long as 10 Years. But what happens if the Mutual fund scheme you choose has a change of hands? Or its star fund Manager moves out. Will such changes affect the fund performance and in turn hinder your aims of a reaching a particular goal?. We at Inquisitive Investors will like to throw some light on how to handle your investments during periods of change.

The Type of changes here we are talking about...

1. Change of Ownership 

2. Fund Management Change

In this post we will discuss about the Implications of a Change in Ownership in a Mutual Fund House.

The change of sponsor is a change in the fundamental attributes of the scheme, which makes it necessary for the fund house to provide an exit to the investors with no exit loads. If the new sponsor shows signs of changing the investment philosophy or plans to bring in some changes that contradict your expectations you may choose to exit. Of course an exit in such cases will save you from exit loads but tax implications will be there (Short term as well as long term capital gains tax).

I would want to bring to your notice that change may also occur not just because of sponsor change but even due to a deliberate change in the investment philosophy of the Fund House. A recent example would be a very conservative stand taken by HSBC Mutual Fund post the 2008-09 Stock market collapse and the real estate collapse which led to severe measures in the management of HSBC Funds especially Liquid funds.

Some Major Mutual Fund Merger & Acquisiton Deals
Year	Acquiring Company	Acquired Company	% Stake Acquired
2002	Franklin Asset Management Company	Kothari Pioneer	100
2003	HDFC Asset Management Company	Zurich Asset Management Company	100
2003	Principal	IDBI Principal Asset Management Company	100
2003	Principal Asset Management Compnay	Sun F&C Mutual Fund	100
2004	Birla Sunlife Mutual Fund	Alliance asset Management Company	100
2005	DBS	Cholamandalam Asset Management Company	37
2005	BNP Paribas	Sundaram Asset Management Company	49
2007	Robeco	Canbank Asset Management Company	49
2007	Eton Park	Reliance Capital Asset Management Company	5
2008	Religare	Lotus India Asset Management Company	100
2008	IDFC	Standard Chartered Asset Management Company	100
2008	BlackRock	DSP Merrill Lynch Asset Management Company	40
2008	Fortis Asset Management	ABN Amro Asset Management Company	100
2009	T Rowe Price	UTI Asset Management Company	26
2009	Nomura	LIC Asset Management Company	35
2009	LNT Finance	DBS Chola Asset Management Company	100
2010	Daiwa Securities	Shinsei Asset Management Company	100
2010	Sundaram Finance	Sundaram BNP Asset Management Company	49
2011	Goldman Sachs	Benchmark Mutual Fund	100

Let’s discuss some recent changes and the respective impact on Fund Schemes.

One of the earlier cases of Merger and acquisitions have been where Franklin took over Kothari pioneers, the schemes were good performers then and post acquisition have been even better due to the strong investment pedigree of Franklin Templeton. Takeover of Zurich Mutual fund by HDFC, The Fund performance of HDFC schemes are one of the best in the country. So a takeover might not necessarily mean a bad performance. On the more recent side takeover of Standard Chartered Mutual Fund by IDFC the Fund Performance has been good and the AMC size has grown by 100%. So in any take over watch out for the pedigree of the acquirer. Some other examples of mergers are Merrill lynch acquisition of part stake in DSP Merrill lynch by Blackrock. Birla acquisition of Alliance capital Asset Management Company the schemes of the erstwhile Alliance are still running and doing extremely well.

New Name	Old Name	Type of Scheme	Year of Launch	Performance in %
				1 Year	3 Year	5 Year
Birla Sun Life 95 - Growth	Alliance 95	Balanced	10-Feb-1995	13.2	18.4	20.6
Birla Sun Life Basic Industries - Growth	Alliance Basic Industries	Diversified	15-Jan-2000	-1.6	5.4	10.8
Birla Sun Life Equity Fund - Growth	Alliance Equity Fund	Diversified	27-Aug-1998	2.8	7.3	13.4
Birla Sun Life Frontline Equity Fund Growth	Alliance Frontline Equity Fund	Diversified	30-Aug-2002	11.3	15.3	24.3
Birla Sun Life Tax Relief 96 - Growth	Alliance Capital Tax Relief 96	Tax - Diversified	06-Mar-2008	2.5	4.9	8.2
Franklin India Bluechip - Growth	Pioneer ITI Bluechip - Growth	Diversified	01-Dec-1993	12.8	16.3	19.2
Franklin India Prima Fund - Growth	Pioneer ITI Prima Fund - Growth	Diversified	01-Dec-1993	4.3	9.7	7.2
Franklin India Taxshield - Growth	Pioneer ITI Taxshield - Growth	Tax - Diversified	10-Apr-1999	13.9	15.3	15.5
Franklin Pharma Fund - Growth	Pioneer ITI Pharma Fund	Sector Fund	31-Mar-1999	13.6	43.6	20.9
HDFC Capital Builder Fund - Growth	Zurich I C B F - Zurich India Quantum Growth Fund	Diversified	01-Feb-1994	14.9	15.7	17.1
HDFC Equity Fund - Growth	Zurich India Equity Fund	Diversified	01-Jan-1995	19.9	23.6	24.5
HDFC Prudence Fund - Dividend	Zurich India Prudence Fund	Balanced	01-Feb-1994	17.5	22.5	24.9
HDFC Taxsaver - Growth	Zurich India Taxsaver - Centurian Tax Saver 96	Tax - Diversified	13-Jun-1996	13.2	17.7	15.5
HDFC Top 200 - Growth	Zurich India Top 200 - (ITC Top 200)	Diversified	11-Sep-1996	17.1	21.2	24.7
IDFC Classic Equity Fund - Plan A - Growth	Standard Chartered Classic Equity Fund - Growth	Diversified	09-Aug-2005	4.8	3.7	9.4
IDFC Premier Equity Fund - Plan A - Growth	Standard Chartered Premier Equity Fund - Growth	Diversified	28-Sep-2005	13.8	18.7	28.8
PRINCIPAL Balanced Fund - Growth	SUN F&C Balanced Fund	Balanced	14-Jan-2000	1.8	6.5	8.7
PRINCIPAL Growth Fund - Growth	IDBI-PRINCIPAL Growth Fund	Diversified	25-Oct-2000	1.4	-1.0	1.7
Principal Personal Taxsaver	SUN F&C Personal Taxsaver	Tax - Diversified	31-Mar-1996	6.6	3.5	-3.1

From the data above you will understand the A take over has not been bad for the existing schemes of the fund house.

Merging Schemes

The most striking feature of the take-over is the merger of schemes. Well it is necessary for fund houses to merge existing schemes or schemes with similar investment objectives as it gives better economies of scale and reduce the overall expense ratio of the merged scheme. But in some cases where the investors had entered a particular scheme for a certain investment objective and the merged scheme ends up diversifying the objective then it could lead to redemptions. Most of the Fund houses during acquisitions have never tried to merge schemes and has allowed the individual schemes to continue as it is.  Mergers do occur and examples could be available when principal acquired Sun F&C as.

Some fund houses have had a general bad performance due to frequent fund manager change and other internal issues during these periods they are prone to acquisitions. Acquisitions at this time should be used as an opportunity to exit the fund. Take for example Chola AMC, the fund house showed intermittent performances and after the acquisition of DBS had a 2 good years 2006 and 2007 post which the schemes collapsed, the fund house was later acquired by LNT finance who has failed to make any impact.

Here we need to analyse the pedigree of the acquirer and his experiance in managing Mutual Funds. Religare’s acquisition of lotus has not led to above average performance but reasons could also be due to poor fund manager performance.

Sleeping Acquisition

There has been other piece meal acquisition where the acquirer has preferred to be in the background and not tried to intervene in the daily management. Like Eton park acquisition of Reliance, T Rowe Price acquisition of UTI, Nomura acquisition of LIC.

There is nothing to panic in case of change; look at things like how big and how focused is the acquirer. I wouldn't suggest a wait and watch if the scheme is only been an average performer and the acquirer does not have a great pedigree to talk about my suggestion would be is to exit the fund and make use of the free exit load window. In case like Benchmark takeover of Goldmansacs I would suggest hold on as the Acquirer is an industry veteran.

Tax Angle

From the tax point of view, post-merger, the investor who stays with the fund will be considered as having exited the earlier scheme and making fresh investments in the new scheme. Thus, they will have to pay a capital gains tax—long-term or short-term—depending on the duration of the investment. While exiting the scheme on a exit window during the acquisition will also attract the necessary tax and the transaction will be considered as a redemption. 

So far in my experience I have found that the change in ownership has never been really bad for existing mutual fund schemes as typically the new management tries to keep the existing staff and processes in place internal changes have been there but they have not brought about drastic changes in scheme performance. Schemes which have been underperformers continue in the same line post merger as the new management obviously will not be able to bring about sudden changes. Yes a Fund manager change could lead to some underperformance or outperformance and we will be discussing about that in another post.   
Key Words
Acquisition of Kothari by Franklin Templeton, Acquisition of Alliance by Birla AMC, Acquisition of Benchmark by Goldman, Acquisition of Zurich by HDFC, Acquisition of Meril Lynch by Blackrock