Fidelity, one of the largest fund managers in the world, is looking to exit India. The exit plans of Fidelity poses two questions: a) Is India relevant for big fund managers? and b) is the mutual fund industry in India not an attractive enough business proposition?
Taking each by turn...
Fidelity manages around $310 billion of assets worldwide. The fund manager came to India in 2005, and has built up an asset base of around $1.6 billion as of end-December 2011. Of the $1.6 billion of assets under management (AUM), equity assets, at $1.1 billion, constitute around 68 percent of total assets while fixed income assets, at $0.5 billion, were around 32 percent of total assets under management. India as a percentage of Fidelity's total worldwide assets is minuscule.
India's largest fund house, HDFC Mutual Fund, manages assets of $17.6 billion, 10 times the size of Fidelity. Fidelity in India is a minor player as compared to Fidelity worldwide, which is a major player. Why is Fidelity not confident of growing its business in India to become a more relevant player?
The relevance of India for global fund managers comes into question. A Fidelity 10 times larger with around $18 billion of assets will still be a speck in its total worldwide assets of $310 billion (assuming that total assets do not grow) at around 7 percent of total assets. Fidelity's move to exit India assumes that retail investors will not embrace equities wholeheartedly in the coming years and hence it is not willing to spend huge amounts of money on hopes built on the invisible retail investor.
This brings us to the second question of whether the mutual fund industry is an attractive proposition for investments?
Fidelity had carried-forward losses of $60 million as on 31 March 2011. The company had incurred a loss of $12 million in the financial year 2010-2011. The average assets of the fund house have fallen from $1.78 billion to $1.71 billion in the October-December 2011 period on a year-on-year basis. Fidelity will close this year with losses, thus increasing the total loss incurred in running the mutual fund business in India.
Fidelity worldwide has revenues of over $12 billion and is in a position to take on more losses. However if the fund manager believes that it is not worth taking on more losses for uncertain returns, then the attractiveness of the mutual fund industry in India is in question. There are 44 mutual funds operating in India and most of them are making losses.
Fidelity bailing out of the fund management business in India is a fund manager's view on the profitability of the industry. A fund manager who doesn't like a stock or sector will not hold that in his portfolio. Similarly, Fidelity clearly does not like India's mutual fund business and thus does not want to hold on to it. The loss-making asset management companies in India must re-evaluate their business plans on the back of Fidelity exiting the business.
Fidelity could be totally wrong in its assessment of the Indian mutual fund industry and may be making a big mistake in exiting the business prematurely. Hopefully, Fidelity is proved wrong for the sake of the industry.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com, a web site for investors.