Citi on Mutual Funds: UTI AMC is top pick; sector may deliver Healthy (15%) AUM / profit growth likely

Mutual funds outlook: India's AMCs should deliver healthy (15%) AUM / profit growth in the long term, given a large untapped base of savers and high operating leverage, a view reinforced by Citi’s analysis of the performance seen in other countries at a similar point in the industry cycle. Citi scanned into 113 ETF schemes and concluded that the industry could take a fairly aggressive uptake of ETFs with a <2% impact on fee CAGR. 30 Year valuation trends of global AMCs make us cautious on players with elevated valuations, especially in light of our scheme category level market share analysis. Citi initiates on UTI AMC and has it as their top sector pick.

Citi scanned into 113 ETF schemes and concluded that the industry could take a fairly aggressive uptake of ETFs with a <2% impact on fee CAGR: Reuters

Mutual funds outlook: India's AMCs should deliver healthy (15%) AUM / profit growth in the long term, given a large untapped base of savers and high operating leverage, a view reinforced by Citi’s analysis of the performance seen in other countries at a similar point in the industry cycle. Citi scanned into 113 ETF schemes and concluded that the industry could take a fairly aggressive uptake of ETFs with a <2% impact on fee CAGR. 30 Year valuation trends of global AMCs make us cautious on players with elevated valuations, especially in light of our scheme category level market share analysis. Citi initiates on UTI AMC and has it as their top sector pick.

Mutual Funds: Expect 15% AUM CAGR

With AUM / GDP at 11% vs. 63% global average, mutual funds are under-penetrated, other countries saw >15% AUM CAGR for 10 years after touching this level. In India, currently <2% of the population invests in mutual funds which should rise given AMCs provide a seamless / transparent investing experience. A 15% AUM CAGR over 10Y equates to 1.5x nominal GDP growth, which is still below the rate seen in other geographies.

TRENDING NOW

Mutual Funds: Profit growth should match AUM growth:

Flow through from AUM growth to profit growth will depend on:

1) change in expense ratios
2) AUM mix
3) realization of operating leverage

Citi expects a 2bps annual decline in equity expense ratios based on lower regulated caps on higher AUM. While the share of ETFs should rise, so should that of higher yielding equity assets (debt / liquid falling) which, along with sharing of expense ratio cuts with distributors / RTAs, can limit impact on average yield. Similar to global asset managers, India AMCs have also historically demonstrated operating leverage – profit / AUM of AMCs in India rose by 5bps over FY15-19 despite lower fee yields.

Mutual Funds: Resilient from shift to ETFs

Citi analysis of 113 ETF schemes shows that large cap ETFs account for 75% of ETF AUM, followed by thematic / sectoral ETFs (17%) and gold (6%); others are 1% or lower. Large cap ETFs follow the benchmark most closely though they still have a 40bps return gap. Thematic / sectoral, gold and fixed income ETFs has 1% gap with benchmark returns. Large caps, therefore, seem most susceptible to ETF disruption. Citi estimates that large cap funds may account for 5-10% of industry fee income. Citi estimates that even in a fairly aggressive ETF uptake scenario, the impact on the sector's fee CAGR should be less than 2%.

Growth drives valuation; UTI AMC top pick

Indian asset managers trade at richer multiples compared to most global peers owing to higher growth. In the domestic context, high free cash flow / dividend payout are also key advantages. Citi believes a higher profit growth for UTI AMC from cost optimization and market share gain can drive a rerating from below-peer valuations.

TAGS:

mutual funds