Fidelity Planning to Sell India mutual fund business

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Losses hit Mutual Fund unit which oversees assets worth Rs 8,800 cr

 

International mutual fund giant Fidelity is considering the sale of its India business, hurt by mounting losses and years of underperformance. Fidelity has appointed multinational investment banking firm JP Morgan to find a buyer for the business which oversees assets worth Rs 8,800 crore. People close to the situation said JP Morgan has sent a 'request for proposal' to prospective buyers.

"Fidelity Worldwide Investment is conducting a strategic review of its onshore asset management business in India; as with strategic reviews, all options are being covered. The review is underway and it is too preliminary to discuss any outcome. We remain fully engaged in and committed to the process of successfully managing money for clients using all the resources of the company as required. In addition, the outcome of this review will take full account of our fiduciary duty to, and the interests of, our clients," a Fidelity spokesman told ET. A JP Morgan spokesperson declined comment. Indian equity markets have experienced a roller-coaster ride over the past five years but are still among the strongest performers in emerging markets. The Sensex has risen 80.87% since 2005, the sixth best performer after Brazil, Chile and China, Philippines and Malaysia. Mutual funds were at the forefront of the bull run till 2008 when the financial crisis overwhelmed global markets.

Some funds, which had entered India in the 1990s, have exited while others have grown exponentially taking advantage of the unprecedented bull run. Nippon Life recently bought 26% in Reliance Mutual Fund, where 35% of the money is invested in equities. The deal was valued at about 6.8% of Reliance's assets and while Fidelity is unlikely to get the same price due to its losses and high cost structure, it has an advantage in its asset composition.

Over 60% of Fidelity's assets are invested in equties mutual fund, industry officials say. A higher percentage of equity assets help funds get a better price as many investors prefer equity over debt.

Very few mutual funds in India have a 50%-plus exposure to equity and Fidelity can take advantage of it, say experts. Fidelity, they add, may seek a price of 3.5% to 4% of the total assets which would work out to about Rs 300-350 crore. But the Indian unit also has accumulated losses of Rs 306 crore and that may work against a higher valuation. The boom helped Fidelity lift its performance but it could never match the pace set by Indian competitors. Since April 2006, Fidelity's assets have grown 137% compared with a 301% jump for HDFC, a 219% jump for Reliance and a 152% rise for ICICI Prudential.

In August 2009, markets regulator Securities and Exchange Board of India (Sebi), banned the practice of levying an upfront fee on investors. The ban was widely criticised and ended up hurting the profitability of funds, who use these fees to pay distributors.

"With the kind of cost structures Fidelity has and stringent selling rules by the regulator, it was getting tough to estimate the turnaround period," a person with close knowledge of the development said. Employee remuneration costs at the fund rose 51% to Rs 68 crore for the year ended March 2011 while business development expenses rose 102%. Rentals, during the same period, have risen 51%.

Fidelity has spent heavily on marketing and employee costs were also quite higher than industry standard. Despite this, it could not make much headway in India. It is more of a failure in strategy than anything else. It could not read the Indian market well. Fidelity's decision also comes in the wake of the regulator's direction to shift the fund's trading desk from Hong Kong to India in July last year.

Sebi wanted Fidelity to shift its trading desk here even if it meant making India the regional trading hub. This would have been too tedious. The Indian mutual fund, as well as the foreign institutional arm of Fidelity, run their trading desks in Hong Kong, which also serves as the firm's regional trading centre.

 

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