The performance of HDFC Asset Management Co Ltd during the June quarter disappointed investors on many parameters. For starters, the fund house’s net profit did not meet the expectations of the street. Its operating expenses jumped 28% due to the 59% increase in payroll taxes due to employee stock option charges.

Granted, this is a one-time hit and the fund company has managed to overcome these expenses compared to the 26% increase in their other income. Nevertheless, the impact on the result was visible. But that’s not what made investors angry. The company’s shares have fallen 7% since the release of June quarter results on July 16. What bothers investors is that the fund house has not been able to stem the erosion of market share.

HDFC AMC’s market share based on aggregate assets under management (AUM) was 12% in the June quarter, down slightly from 13% in the previous quarter. But, the market share has eroded 159 basis points since the pandemic broke out last year. A basis point is one hundredth of a percentage point. Over six years, erosion reaches 5.5 percentage points. This loss of market share is mainly attributable to equity funds, although this segment performed better during the June quarter. The fund house has also lost market share in terms of unique investors. In other words, HDFC AMC is neither able to attract more customers nor to keep its existing customers.

The law of averages, however, appears to be on the fund house side. Analysts at Jefferies India Pvt Ltd point out that the monthly average flows through the Systemic Investment Plan (SIP) in the June quarter are higher than the first nine months of fiscal 21. This shows that the fund house is doing better. withstood the impact of the second wave as the early stages of the pandemic last year.

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The fact remains that the HDFC mutual fund has improved its performance. Management was also optimistic about the outlook for the future. New fund offerings, the willingness to venture further into exchange traded funds (ETFs) and a digital push can work for the fund house on growth. “These measures, coupled with strong distribution and brand appeal, should help gradually improve its market share,” Jefferies analysts wrote in a note. That said, those at Kotak Institutional Equities warn that ETFs could reduce the profitability of actively managed asset management firms.

Its smaller counterpart Nippon Life India Asset Management Ltd has managed to increase its presence. The company gained 20 basis points of market share in the June quarter, although it was largely driven by an expanding debt fund. Nippon’s overall profitability did not thrill investors, but its flagship equity funds performed strongly. New partnerships with banks and other distribution channels are seen as a big plus for the company. Meanwhile, for HDFC AMC, its access to an extensive distribution network gives it much needed leverage to recover growth. HDFC Bank’s share of cross-selling remains low at 5.4% of the fund company’s assets under management, and the potential for leverage on branch distribution is high.

HDFC AMC has underperformed Nippon Life and the overall market since April, possibly reflecting the fund company’s struggle with market share.

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