Is Yes Bank Now Saying ‘No’ to Asset Management Business
Jun 06, 2019

Author: PersonalFN Content & Research Team

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The Indian mutual fund industry is going through a phase of consolidation.

Recently, Reliance Capital, a Reliance ADAG company, decided to exit the mutual fund business. Yes Bank seems to be following its footsteps.

[Read: Reliance Mutual Fund Presses The Exit Button: What Should Investors Do?]

Various media reports suggest that Yes Bank has been planning to exit the mutual fund business within a year of receiving approval from SEBI to start operations.

Yes Bank had entered into an asset management business by launching Yes Asset Management Company (AMC) as its subsidiary in April 2017. In July 2018, Yes AMC received the green signal from the capital market regulator. Yet, it launched its first fund-Yes Liquid Fund only in January 2019.

Under the new leadership, Yes Bank seems to have decided to free-up capital by selling non-core assets. Yes Bank has a challenge of raising approximately Rs 7,000 crore to increase its Common Equity Tier-1 (CET-1) capital.

As you might be aware, Yes Bank reported a quarterly loss of Rs 1,507 crore in Q4, FY19. As per the regulatory requirement, the Bank will have to maintain the CET-1 a minimum of 8% by March 31, 2020. Against this, the bank has CET-1 of 8.4%.

On the condition of anonymity, people familiar with this development speaking to the Economic Times, said: "The (mutual fund) business hasn't been able to expand much. Either Yes Bank has to sell the business, which is too small for some big player to be interested in, or it may have to wind it down over a period of time. It just doesn't make sense to continue with it, given the priorities."

However, in the official response, Yes Bank hasn't endorsed these media claims highlighting that "Yes Bank's subsidiaries are core to extending the bank's product offerings and reach."

But the underlying trend is alarming.

Wherever the promoter group of an AMC is facing challenges in the core business, the AMC business is increasingly becoming a choice of promoters to unlock value.

Let's see the impact of the potential exit of Yes Bank from the asset management business

As on April 30, 2019, Yes Liquid Fund, the only scheme of Yes Mutual Fund, had the Asset Under Management (AUM) of Rs 1,233 crore. By generating an absolute return of 7.48% since its inception in January 2019, the fund has underperformed its benchmark Crisil Liquid Fund Index by a margin of 11 basis point (bps).

Considering the tiny size of the business at present, it's unlikely to see Yes Mutual Fund getting attractive bids from bigger players. And, how core it is to the main business is a moot question. Therefore, the only practical option seems to be to wind down operations gradually. Liquid fund would make the potential exit of Yes Mutual Fund a bit easier.

But the recent developments send out a very strong message to investors.

You can't ignore the investment philosophy, intent, and the background of sponsors and their financial strength.

Contrary to that in any other business, many experts believe the success of an AMC depends more on its asset management team and not on the company.

Conclusions to be drawn from the recent industry trends...

  • Any business house that has entered a mutual fund business late, without adequate planning, is likely to feel the crunch during the on-going market phase, given that incremental growth in AUM has been hard to come by.

  • Also, businesses that entered the mutual fund industry just for the sake of participating in the growing industry, about 3-5 years ago --as "asset gatherers" rather than "asset managers" ---might also lose interest given the prevailing tough market conditions.

  • Similarly, loss-making AMCs might struggle to sustain their business operations. And the business houses that are facing financial crisis in their other businesses may look to sell their asset management business if that makes business sense.

In the past five years, Morgan Stanley Mutual Fund, PineBridge Mutual Fund, Deutsche Mutual Fund, Goldman Sachs Mutual Fund, JP Morgan Mutual Fund, DHFL (in DHFL Pramerica Mutual Mutual Fund), and Black Rock (in DSP Black Rock Mutual Fund) have exited the business.

[Read: Should Change In Controlling Stake At DSP BlackRock Mutual Fund Worry You?]

Hence, you must be extremely careful while selecting a mutual fund scheme for your portfolio.

You shouldn't choose a mutual fund scheme by:

Here's how you should select a mutual fund scheme wisely.

Quantitative Parameters:

  1. Performance and risk analysis

    This is to analyse if the fund has shown consistency in performance across various market periods with decent risk-adjusted returns. Under this, the fund needs to be ranked on quantitative parameters like rolling returns across short-term and long-term durations, such as 1-year, 3-year, and 5-year periods, and on risk-reward ratios like Sharpe Ratio, Sortino Ratio, and Standard Deviation over a 3-year period.

  2. Performance across market cycles

    You need to ensure that the fund has the ability to perform consistently across multiple market cycles, i.e. bull and bear phases. Therefore, compare the performance of the schemes vis-a-vis their benchmark index across bull phases and bear market phases. A fund that performs well on both sides of the market should rank higher on the list.

Qualitative Parameters:

  1. Portfolio Quality

    The portfolio quality of a fund is indicative of how it is likely to perform in the future. Here's what you should pay attention to:

    • Adequate Diversification - The fund should not hold a highly concentrated portfolio because it heightens the risk involved. Hence, the portfolio of a fund should be well diversified and the exposure to the top-10 stocks should be ideally under 50%, while concentration to one particular sector should not exceed 30-35%.

    • Credit Quality - For debt portfolios, you need to ensure that the fund does not hold a high proportion of low-rated (securities rated AA or below) or unrated debt instruments. A fund with a higher credit quality should be ranked higher.

    • Low Churn - Engaging in high churning can result in trading and high turnover cost. Therefore, you also need to consider the portfolio turnover ratio and expenses and penalise funds involved in high churning, i.e. those funds with a turnover ratio of above 100%.

  2. Quality of Fund Management

    Further, consider the fund manager's experience, his workload, consistency of the fund house in clocking returns, and proportion of the AUM (Assets Under Management) of the fund house actually performing. Therefore, check the following:

    • The fund manager's work experience - He/she should have a decent experience in investment research and fund management, ideally over a decade. But note that mere experience isn't enough. Some schemes managed by fund managers with 15-20 years of experience have not done consistently well for a long time.

    • The number of schemes they manage - A fund manager usually manages multiple schemes. Thus, you need to check that the fund manager is not loaded with a large number of schemes. If he is managing more than five open-ended funds, it should raise a red flag.

    • The efficiency of the fund house in managing your money - You need to check if the fund house is consistent in performance across schemes or if only a few selected schemes are doing well. A fund house that performs well across the board is an indication of sound investment processes and risk management techniques in place

Yes, we know that the above list is a lot for an average investor to look at. It involves a lot of number crunching and much of the data is not easily available in one place. But if you do need to narrow down on the top funds, these factors are of utmost importance. You may consult with a Certified Financial Guardian in your area.

Editor's Note:

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