Industry Trends, Regulations forcing consolidation?,

Many industry participants believe that ever since the entry load regulations of Aug 09, it has become increasingly difficult for the smaller AMCs to remain competitive and that this will eventually pave the way for a round of MF industry consolidation. There is also this widely held belief that incremental money is only flowing to the big 5 AMCs and others are being sidelined in allocations. The big will get bigger and the smaller AMCs face the risk of getting marginalised - this is a very commonly held belief amongst many industry participants. An analysis of actual data however, throws up some very interesting observations :

No evidence of difference in flows between large and small AMCs in 2010

If you look at the AuM of the top 5 AMCs as of Dec 2009 and Dec 2010, there is nothing in there to suggest that the bigger players are any better off than the smaller ones.

The biggest 5 AMCs lost 15% of their assets in 2010, so did the rest of the industry and therefore, so did the entire industry. There will always be some AMCs who relatively gain or lose market share - which is evident even within the top 5, where HDFC has lost far less than others. But broadly, nothing here that suggests that the big 5 were any better off in 2010 than the rest of the industry.

It's not regulations - it was the 2008 crisis that made the big difference

Have the big 5 or the big 10 been gaining market share at the expense of the rest of the industry? If yes, since when has this been happening? Was it around the time that the entry load regulations changed in mid 2009? To get a clear understanding, it's useful to look at a longer time horizon :

As this table shows, through the bull market years last decade (2004-2007), the top 5 AMCs roughly had a 50% share. The next 5 accounted for 22-25% and the rest of the industry accounted for 24-29%. The scenario remained more or less similar until 2008 - where we saw a sharp shift of market share away from the smaller AMCs towards the top 5. In the aftermath of the 2008 market crash and the credit crunch, investors seem to have demonstrated higher preference towards the larger names in the industry. Even after the market recovery, the relative shares have not really changed materially. Market shares in 2009 and 2010 are similar to what we saw in 2008.

A look at Tables 3 and 4 bring out the picture very clearly :

In the year 2008, while industry AuM declined by over 23%, the top 5 saw a total decline of only 11.4% while the rest saw a much bigger decline of over 34% (Table 3). Among the top 5, Birla Sun Life actually grew while Reliance Capital and HDFC saw declines much lower than the industry.

If we look at the picture over the last 3 years (Table 4), while the Top 5 AMCs have recorded a healthy 41% growth in AuM, the rest of the industry seems to have barely caught up with the pre-crisis AuM, registering a meagre 6% growth over the last 3 years.

New entrants fighting for share within the same slice of the pie

What seems to be causing most pain in the industry is that while the number of players in the industry has risen from 32 at the peak of the bull market (Dec 07) to 41 at present, all the new entrants seem to be effectively fighting for market share within the 20-21% that is left for players below the top 10 (Table 2). An increase in number of players has not yet resulted in the market shares of the top 5 or indeed the next 5 being threatened - as yet.

What can change this picture? A look at the past can perhaps provide a peek into the future. As can be seen from Table 2, as the bull market matured between 2003 and 2007, the share of the smaller AMCs consistently grew - and then shrank suddenly when the market crashed. One can perhaps surmise that if we are indeed at the beginning of another secular long term bull market, we may perhaps see an action-replay : where the smaller AMCs gradually gain some share away from the bigger players in an expanding market. As Indian investors begin to repose faith in the markets and participate more meaningfully in equity markets through mutual funds, it is perhaps logical to expect market shares to change at the margin in favour of the smaller and newer companies - especially if they build a good performance track record.

Two AMCs lead the charge…..

Table 2 suggests that the big growth in the industry really started from 2006, when industry AuM galloped from under Rs. 2 lakh crore to cross Rs. 8 lakh crore in 2010 before settling to a year end figure of around Rs. 6.75 lakh crores, after some of the excess systemic liquidity that found its way into ultra short term funds, dried up in the wake of the recent liquidity crunch. A look at who lead this charge in the last 5 years is very instructive :

Although the number of players expanded considerably over the last 5 years from 28 to 41, the largest contributors of growth have really been the top 2 players - Reliance Capital and HDFC. Between them, they accounted for one third of the incremental AuM, taking their combined market share from 16.4% to a commanding 28.1%. We have indeed witnessed a rare phenomenon of a rapidly growing industry, entry of many new players and yet a huge gain in market shares of the leaders. What is especially noteworthy is that neither was the market leader in 2005 - both have moved up to claim the top 2 slots - a truly commendable performance indeed !

AMCs outside the top 10 bracket contributed only 17.8% to the industry's growth over these 5 years - which saw their collective share dipping from 27.5% to 20.7%. As mentioned earlier, this is perhaps more to do with the aftermath of the 2008 market crash and credit crunch than any other factors.

What does this mean for the smaller AMCs?

Does this mean that growth prospects for smaller AMCs are bleak? Will the strangle hold at the top suffocate the others? Will the big only get bigger and the small get marginalised? A look at near term trends may suggest this - but, as always, one gets a far better perspective when one looks at a larger canvas - a longer time horizon. It may be true that the top 5 have always enjoyed a lion's share of the market. But have the top 5 remained the same? Have the top 10 remained the same?

Today's market leader - Reliance Capital - was nowhere within the top 10 in Dec 2002. Four out of today's top 10 AMCs by AuM were not in this big league in Dec 2002. Yet, they have muscled their way into the big league. Enough evidence and comfort for all AMCs in the industry, I would say, that consistently good performance and good corporate governance will help AMCs succeed and gain market share in the long run - irrespective of how distressing market dynamics may sometimes seem at present.

               

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