What Next for Investors of Fidelity Mutual Fund Schemes
Mar 30, 2012

Author: PersonalFN Content & Research Team

You being an investor holding your investments in mutual fund schemes of one of the respected fund house in India might be worried with the news of your fund manager exiting its India business. And what next, it has finalized the buyer of its India business, though subject to regulatory approvals.

Yes you might be well aware till now that L&T Finance, a subsidiary of L&T Finance Holdings Ltd. and operating L&T Mutual Fund will acquire FIL Fund Management Private Ltd. (Fidelity AMC) and FIL Trustee Company Private Ltd., which are carrying on the Fidelity's mutual fund business in India. The acquisition transactions are however subject to regulatory approvals from SEBI and Competition Commission of India.

With this acquisition, L&T MF intends to become one of the top players in the 6,82,000 crore Indian Mutual Fund Industry. After the deal is through, L&T MF will become the 13th largest fund house with a market share of around 2%. As of December 2011, L&T MF is the 24th largest fund house in India with just 0.7% market share. With this deal L&T MF also aims to strengthen its equity base and balance its overall assets.

(Rs in Crore)	L&T MF	% of AAUM	FIL MF	% of AAUM	Post-Acquisition	% of AAUM
Equity Funds	259.2	5.6	6,068.4	69.0	6,327.6	47.2
Debt Funds	4,165.7	90.2	2,693.9	30.6	6,859.5	51.1
Hybrid Funds	191.2	4.1	34.5	0.4	225.8	1.7
AAUM	4,616.1	100.0	8,796.9	100.0	13,413.0	100.0

Average AUM Date as on December 31, 2011
(Source: AMFI; PersonalFN Research)

The reason for sell-out of Fidelity Mutual Fund India business

Fidelity Mutual Fund which had setup its business in India in the year 2004 has been sailing with accumulated losses to the tune of Rs 306.85 crore (as per its annual report 2010-11)
The employee remuneration and establishment expenses have proved to be the major cost centre for the fund house
The employee expenses for Fidelity MF had shot up to Rs 68.1 crore until last financial year as against Rs 8.9 crore (for the year financial year 2004-05); which is whooping increase of 666% in the last 7 financial years
Fidelity MF could not manage to generate the required amount of income year-on-year to compensate for the huge costs for the company
Fidelity MF, with around 69% in equities and around 31% in debt earned a hefty Fee of around Rs 71 crore in FY 2010-11 out of which it spent around Rs 68 crore on its employees, which was 50% higher than the previous year
The abolition of entry loads in 2009 and weak economic conditions held back Fidelity MF from boosting its revenue and the increase in its fixed cost added to its losses

In terms of size, Fidelity MF is the 15th largest mutual fund in India with a market share of 1.3% and an average assets under management (AUM) of Rs.8,796.9 crore (Net) for the quarter ended December 2011. It also held around Rs. 83.6 crore in Fund of Funds, which is invested in other Fidelity MF schemes.

What changes for Fidelity MF Investors?

Only the AMC is being sold, the brand will change but your fund will continue to exist
Any change in the existence of Fidelity MF scheme, like closure or merger will be with prior intimation to all the Fidelity MF investors from the new fund house
There will not be any impact of this deal on your current portfolio valuation
Your funds NAV will be accounted regularly and will continue to be based on the portfolio valuation of the schemes
Your fund managers will change in future and your Fidelity MF schemes will be managed by the new fund managers from L&T MF
Any change in consistency in performance of the Fidelity MF schemes will be only when the new fund managers take over the schemes from the existing fund management team
There might be some challenge for the fund managers as some ill-informed investors may hurry to sell their investments in Fidelity MF schemes
You should not panic and rush to sell your investment in Fidelity MF schemes, but be cautious of future developments

Is this deal for the investors?

Fidelity MF seems to have agreed to sell its assets to L&T MF, as L&T MF is ready to acquire Fidelity MF’s employees as a part of the deal. Though L&T MF might acquire the sales and marketing staff of Fidelity MF, but the part of the deal that is not in the best interest of its investors is - that its equity fund management team will be retained by L&T MF only till the integration process is on. Fidelity which has worldwide asset management business is keen to retain its equity fund management team which is also engaged in research and fund management of Asia-Pacific region for its parent company.

As Fidelity MF’s well experienced fund management team and strong investment systems and process has been the key to success of Fidelity’s performance so far; the benefit of Fidelity MF’s stringent fund management may not be available to its mutual fund investors in future.

Fidelity seems to have parted with its Indian mutual fund investors to get rid of its losses and has handed them over to a fund house that is yet to prove its worth for the investors and has to stabilise on the performance front.

If you are among the investors who have invested in the brand ‘Fidelity’ based on its past consistent track record and its promising ability to create wealth for its investors; then you may not appreciate this deal as you may not find the same flair in the new fund manager post integration.

Also L&T MF is projected to have valued this deal at around 5% to 6%, which is way above than what it paid while acquiring the assets of DBS Chola MF in late 2009. L&T Finance paid a consideration of just Rs 45 crore to DBS Chola MF at a mere 1.56% of the AMC’s August 2009 assets of Rs 2,893.16 crore and with its fund management team.

This time L&T MF might have agreed for such a high consideration, as it has aimed to acquire the ready assets of long term investors comprising of Retail and HNI’s along with many investors holding SIP portfolios, who might have and are investing in Fidelity schemes to meet their long term financial goals. This deal gives L&T an opportunity to become the 13th largest fund house with a market share of around 2%. But only time will tell if this acquisition can bring a turnaround in performance of L&T MF, as it does not have any lucrative track record to show. It has a challenge to retain the investors who are focused more towards investing in good funds managed by preeminent fund management. Also L&T MF will have to add new fund managers to its role and will have to efficiently manage the high cost of employees it procures from Fidelity MF.

To know what you should be doing next, your first step should be to have a detailed knowledge about who is your prospective fund manager, who will be managing your money that you invested to meet your long term financial goals.

About L&T Finance Mutual Fund

L&T Finance Mutual Fund entered into the Indian mutual fund business by acquiring assets of DBS Chola Mutual Fund in January 2010 and its average AUM stood at Rs. 4,616 crore as on December 31, 2011. L&T MF is the 24th largest fund house in India with just 0.7% market share, and once this acquisition deal is through then L&T MF can become the 13th largest fund house with a market share of around 2%.

L&T MF at present holds 32 mutual fund schemes under its banner of which it manages 8 equity funds (259.20 crore), 22 debt funds (4,165.65 crore) and 2 hybrid funds (191.24 crore). With over 90% of its assets in debt funds and around 4% in debt oriented hybrid funds, L&T MF manages just around 6% of equity in its total assets. The fund house till now has been more inclined towards debt assets and seems to have less expertise in managing equities. The success of this deal will balance the asset base of L&T MF as the acquired assets of Fidelity MF comprises of around 69% in equities and around 30.6% in debt, with just 0.4% being in hybrid funds.
Performance of equity mutual fund schemes of L&T MF

Scheme Name	Avg. Corpus (as on Dec. 2011) Rs in Crore		1 Year	3 Years	5 Years	SI	01/Jan/10 To 27/Mar/12
L&T Growth	30.81	Large Cap	-5.4	23.3	4.6	20.9	2.1
L&T Hedged Equity	8.11	Large Cap	-8.1	18.9	-	4.9	-0.5
L&T Midcap	53.71	Mid Cap	-4.6	33.1	8.3	18.4	0.8
L&T Opportunities	98.21	Opportunities	-8.6	24.4	8.5	9.9	-2.4
L&T Contra	7.77	Value	-5.7	20.9	-2.2	-0.7	-1.0
L&T Infrastructure	31.26	Sector	-13.3	14.7	-	-10.7	-9.3
L&T Tax Advantage-I	2.90	ELSS	-5.6	23.4	-	23.4	0.3
L&T Tax Saver	26.43	ELSS	-11.3	23.1	2.1	5.4	-3.2
Benchmark Index
BSE-200			-7.7	22.1	6.4		-1.0
CNX Midcap			-3.1	30.8	9.4		0.9

Performance as on 27th March 2012. Returns over 1 year is compounded annualized
(Source: ACE MF)

The overall performance of L&T MF has not been great. Some of its equity schemes have been incurring long term losses for its investors and have been constantly underperforming the broader index like BSE 200.

As can be seen in the above performance comparison table of the equity schemes managed by L&T MF, many of its equity schemes have ended in red over a period of 1 year, 3 years as well as 5 years. Even since L&T MF took over in January 2010, it has not been able to show much improvement in the equity funds performance. In the past year, the funds managed by L&T MF have ended among the laggards. While all its 8 equity schemes have ended in negative, 5 out of 8 schemes have underperformed the BSE 200 index and also the CNX Midcap index and the assets of these 5 schemes comprise of around 84% of its equity schemes corpus. With an underperformance of 84% in its equity assets, L&T MF has not been able to show any strength on the equity side which comprises of around 70% investor asset that it will take over from Fidelity MF. L&T MF has to still improve on the performance front, and this will be possible only by having a proper investment and risk management system in place.

Performance of debt mutual fund schemes of L&T MF

Scheme Name	Avg. Corpus (as on Dec. 2011) Rs in Crore		1 Year	3 Year	5 Year	SI	01/Jan/10 To 27/Mar/12
L&T Liquid(G)	2,609.81	Liquid	8.6	6.2	6.9	6.7	6.9
L&T Ultra ST(G)	733.75	Liquid Plus	9.4	6.7	7.3	8.1	7.4
L&T FRF(G)	1.67	Floating Rate	9.6	6.5	6.9	6.9	7.5
L&T ST Debt Fund(G)	3.35	Income S.T.	-	-	-	8.7	-
L&T Select Inc-Flexi Debt-Ret(G)	210.61	Income M.T.	9.5	-	-	7.2	7.5
L&T Triple Ace(G)	5.14	Income M.T.	7.1	6.5	3.1	7.2	5.3
L&T Gilt - Investment(G)	1.30	Gilt	4.9	5.6	4.9	7.4	3.9
L&T MIP	119.84	Hybrid - MIP	5.6	7.5	9.3	6.4	4.8
L&T MIP Wealth Builder Fund	71.41	Hybrid - MIP	-	-	-	4.9	-
Category: Benchmark
Crisil Liquid Fund Index			8.4	6.1	6.9		6.9
Crisil Short-Term Bond Fund Index			8.4	6.4	7.6		6.5
Crisil Composite Bond Fund Index			7.9	6.1	6.7		6.3
Crisil MIP Blended Index			5.6	8.2	7.3		5.5

Performance as on 27th March 2012. Returns over 1 year is compounded annualized
(Source: ACE MF)

Even on the debt side which is strong base of L&T MF, the funds’ performance has not been consistent across the board. While its liquid funds and floating rate funds have been showing average performance, its medium and longer duration funds have been consistent underperformers in the long term. Even in its hybrid funds category, the MIP schemes have been underperforming its benchmark Crisil MIP index since January 2010.With such a performance track record, it may not entice investors to stay invested in the fund if it continues with the same for the new Fidelity MF schemes.

By acquiring the asset of Fidelity MF to its kitty, only time will tell if L&T MF will be able to do justice to its picked up investors, who invested in Fidelity based on the kind of consistent performance the fund house has on its card. The past performance of L&T MF may not turn out to be attractive for the investors of Fidelity MF schemes.

Fund Management Team at L&T Finance Mutual Fund

On the equity fund management side, L&T MF currently has just 3 fund managers - Mr. Pankaj Gupta, Mr. Anant Deep Katare and Venugopal Manghat managing the 8 equity schemes of the fund house.

Mr. Pankaj Gupta is the Senior Fund Manager - Equity holding around 8 years of experience. He has been associated with the fund house since September 2010. Mr. Pankaj Gupta manages 3 equity schemes of L&T MF and also the equity portion of its hybrid funds.

Mr. Anant Deep Katare with over 14 years of experience has been associated with L&T MF as Equity Fund Manager since February 2007. He manages 4 equity schemes of L&T MF.

Mr. Venugopal M. is the Co. Head - Equity Investments and has over 18 years of experience in the equity markets. He joined L&T MF in January 2012 and currently manages just 1 equity scheme of L&T MF.

Being its major strength on the debt side, L&T MF currently has just 4 fund managers on the debt fund management side. - Ms. Bekxy Kuriakose, Ms. Shobheta Manglik, Mr. Hareshwar Karekar and Ms. Richa Sharma manage the 7 open ended debt schemes, 2 hybrid schemes and 15 FMP’s of the fund house.

Ms. Bekxy Kuriakose is the Senior Fund Manager - Debt at L&T MF and holds over 12 years of experience. She has been associated with L&T MF since December 2008 and manages 4 open ended debt schemes and 4 FMPs at the fund house.

Ms. Shobheta Manglik is the Fund Manager - Fixed Income at L&T MF and has over 10 years of experience in fixed income markets. She manages 3 open ended debt schemes and co manages the debt portion of both the hybrid funds at L&T MF.

Mr. Hareshwar Karekar is the Fund Manager - Fixed Income at L&T MF and has over 10 years of experience in debt markets. He has been associated with L&T MF since June 2008 and co-manages 1 open ended debt schemes and 11 FMPs at the fund house.

Ms. Richa Sharma is the Fund Manager - Fixed Income at L&T MF and has over 8 years of experience in debt markets. She has been associated with L&T MF since March 2011 and co-manages 1 open ended debt schemes and 11 FMPs at the fund house.

Who will be managing your Fidelity schemes in the interim?

In the interim the equity fund management team at Fidelity MF will continue to manage the schemes till the integration process is completed. After the smooth hand over of the schemes to L&T MF, the equity fund management team will join its parent company to manage their Asia Pacific funds.

By adding the new assets to its pool and with the extension in its corpus, L&T may have to increase its capacity and put new fund managers on the role.

Preferably on the equity side, as L&T MF will add another 7 equity schemes and 3 hybrid schemes to its portfolio, which it will have to manage efficiently to retain its investors. It will be tough for the fund house to manage total 15 equity schemes and 5 hybrid schemes with just 3 equity fund managers. Also managing the Fidelity MF fund which have offshore exposure may be a problem for L&T MF if it does not get a fund manager on the role who can manage the offshore assets.

On the debt side the fund house will add another 8 open ended debt schemes, and opt for merging the similar debt schemes, while the acquired FMP’s will cease to exist on maturity and may not be an issue as it has less active management.

What you should do right now?

First of all, with all the news around, you should not panic and may not rush to sell your investments in Fidelity schemes
With all the approvals yet to be taken, the integration process will take another 2 to 3 months’ time. Till then your schemes will be managed by the fund management team at Fidelity MF
If you are satisfied with the performance of your Fidelity MF schemes, then you can continue to hold on to your investments for some more time.
But you may not commit any fresh investment in Fidelity MF schemes, i.e. you can discontinue your further investments that you intend to make or are having through SIP / STP route
Rather choose an alternative scheme and re-invest in diversified equity scheme with a similar objective, having consistent performance track record and being managed by a fund house following strong investment systems and process
If you are not satisfied with this deal and are not looking for your money to be managed by L&T MF, then you can opt to exit your fund when SEBI offers you an exit window at the finalisation stage
This exit window is generally open for a 30 day period where you can opt for an exit from your investment without paying any exit load
However if you have invested in the tax saving fund of Fidelity, then you will not be able to exit until your statutory lock-in period of 3 years is complete
Also any capital gains that you make may be taxable as per the tax rules for mutual fund investments

Add Comments

Comments
dbilimoria@hotmail.com Apr 07, 2012 L & T is a top notch Company with an impeccable pedigree. However, it is the mutual fund distributors who will decide its fate. If the distributors interests(commissions/trailing orotheer wise) are looked after they will ALL recommend. L & T will hire Fund Managers and will be a Good MF one-day.
sunil.shah@gmail.com Apr 09, 2012 As the distributors are advising unitholders to redeem their Fidelity units in the 30-day window after Sebi approving the deal when withdrawals are not subjected to exit load. A top wealth management official of a foreign bank said, "If our customers are really concerned about the change of brand, we'll ask them to exit Fidelity funds when the one-month-no-exit load-window starts." the bigger question is why is Fidelity India leaving in such haste ? The reason is obvious that Fidelity India is not comfortable with the regulator SEBI and never followed their diktat like in the case of their Fund Management team to be shifted to India from their Singapore offices. They violated key investment decisions like investing in quite a no of unlisted Entities like National Stock Exchange of India and which was split across their various schemes averaging about 15% when not more than 5 % was the norm. They had not invested a large capital in India operations in the year 2004 and had office at Gurgaon and a centre in Mumbai only. The media played a vital role in their growing up as Neera Radia who helped quite a few corporates to jump major political and regulatory hurdles faced by them. Now they have cited mainly that they have incurred major losses here in the Indian operations nearly about 330 crores and since they are getting 530 crores in the L & T Finance buyout deal looks very fishy to even a layman
som2006.iyer@yahoo.o.in Mar 30, 2012 Excellent analysis for all the Fidelity investors (I have investment in Fidelity Equity fund since its launch date). In my view the best option is to exit out of the investments during the 30 day window as per SEBI rules and wait it out until the L&T Mutual Fund team demonstrates better performance compared to its past track record. After the exit , one can add or commit fresh funds in excellent and proved fund houses like Franklin Templeton, HDFC Mutual Fund etc. The exit is sad for Fidelity mutual fund investors in India and we will miss their proven investment techniques and procedures. Best Wishes. Somnath Iyer Chennai
kjn3936@naver.com May 10, 2012 Do both as soon as possible with more ehpsamis on the emergency fund, then car loan, then student loan. I am guessing that your car is still driveable for at least two years. If so, add up all the deductibles on your insurance short-term disability, health, car, life, renters etc. That is your emergency fund (should be around $ 1000), once you have that you will immediately feel a little better. Then go great guns to get the car debt paid off, nothing sucks worse than your car breaking down and still owing on it. Now save some $ for the next car (or at least down payment), still have time before the car dies? now knock out the student loans.Also, be sure you are adding $ 50 a month to a mutual fund Roth IRA from day one and start pitching into your 401k at work.