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Thursday, March 31, 2011

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