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The one-fund asset management companies

Aabhas Pandya

They are one-fund asset management companies (AMCs) or simply put, fund houses whose fortunes are linked to the performance and duration of a single fund. Hence, if one fund were to be redeemed or face a run on its assets, it may be the end of the road for the mutual fund. For instance, if a close-ended fund were to come up for redemption, overnight, the asset base of the AMC will drop from over Rs 10 billion to less than Rs 1 billion! This is indeed a dangerous sign for the AMC and its investors, who have locked their money in other funds under the same mutual fund.

The shrinking of an AMC's flagship fund could, for one, destabilise the mutual fund. The fall in the AMC's assets under management will push it into the red as the investment management fee takes a plunge. The cascading impact could also see an exodus of fund managers to greener pastures, thereby impacting performance of other funds.

Take for instance, BoI Double Square Plus from Bank of India Mutual Fund. The AMC has a size of Rs 14.23 billion as on March 31, 2000 while BoI Double Square Plus accounts for a whopping 97 per cent of the total assets under management. Worse, the fund is due for redemption in August this year. If the fund were to be redeemed (and not made open-ended), it would effectively make BoI Mutual Fund a defunct AMC with a size of only Rs 0.4 billion in two remaining funds. The AMC launched its last fund way back in 1995.

Or, take for instance, JM Mutual Fund, which has a size of Rs 11.84 billion on March 31, 2000 while the fund's petrochemical fund, JM Basic, has a size of Rs 9.57 billion. Take away JM Basic (which accounts for 81 per cent of the total corpus) and the assets under management fall to Rs 2.27 billion. After JM Basic, the largest fund is JM Liquid with a size of only Rs 1.13 billion as on March 31, 2000. Launched in 1997, JM Basic is a close-ended fund with a 15-year tenure and will open for the first time for repurchase at net asset (NAV) in July 2000. The fund's NAV was Rs 23.9 on June 26, thereby giving an annualised return of 32 per cent since inception. Though the fund is listed on the bourses, the units are hardly traded. Given the fund's high returns and lack of liquidity, it will not be surprising if some investors seek redemption in July.

Leave aside some of the weaker AMCs in the Indian mutual fund industry. Some of the strong names in the fund industry have also gradually transformed into one-fund AMCs. Take for example, DSP Merrill Lynch Mutual Fund, which has as many as seven open-ended funds under management. However, almost 70 per cent of the fund's assets are managed under DSPML Bond Fund. The fund had a size of Rs 8.68 billion as on May 31, 2000. Or for that matter, Sundaram Mutual Fund, which also has seven funds with a total size of Rs 2.8 billion but Sundaram Bond Saver alone manages over Rs 2 billion.

Even in the case of Prudential and Templeton, the medium-term debt funds account for almost 50 per cent of the total assets under management despite the fact that the two AMCs have a complete range of products. Templeton, for instance, has a total size of Rs 17.88 billion with Templeton India Income Fund managing Rs 9.8 billion.

There could be several reasons behind a fund commanding over 50 per cent of an AMC's assets ranging from a fund's performance to its aggressive selling or the relative underperformance of other funds under the same management. For instance, while none of Sundaram's equity funds are ranked among top performers, its medium-term debt fund has been the top performer in the last one year with a return of 14.53 per cent as on May 31, 2000.

In the case of BoI Double Square Plus, the AMC has promised a guaranteed return of Rs 400 against the initial offer price of Rs 100 in the ten-year fund. Some funds have also attracted inflows from corporate investors and this could spell danger for the AMC when these investors withdraw.

Source: Value Research

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