A change in any status quo is often a cause for disquiet. When that happens in the corporate sector, various stakeholders-be they employees, customers or shareholders-have to put up with a phase of uncertainty.
The mutual fund (MF) industry, too, has had its share of frequent ownership changes, much to the chagrin of unitholders. While funds talk about the virtues of long-term investing, many fund sponsors behave in a diametrically opposite manner by selling out too soon as they are unwilling to bear short-term pain, unitholders feel. In these matters, unitholders (though directly affected) are not consulted. However, all takeovers are not the same, and your (unitholders') response to them should vary accordingly.
When this happens, you could remain invested if the purchaser's pedigree inspires comfort. In such cases, you will usually have a clear idea about who will manage your scheme. These schemes may either continue to exist separately or may be merged into an acquirer's existing scheme in due course.
For example, Birla Mutual Fund took over Alliance Mutual Fund's schemes. Some of the earlier schemes still exist, including Alliance Frontline Equity, which is now Birla Sun Life Frontline Equity. The performance of the schemes has not deteriorated due to this takeover.
Majority shareholder changes
In an increasingly globalized world, where the proverbial flutter of a butterfly's wings in China causes an earthquake in California, such "sponsor" changes may be due to reasons completely unconnected with the local outfit's performance or business outlook. For instance, in 2009, Barclays Bank Plc had to sell off its profitable exchange-traded fund (ETF) business to BlackRock Inc owing to losses suffered in its other divisions.
It may also be the result of a "strategic review" conducted by the sponsor or be based on the recommendations of a management consultancy.
Whatever the reasons, such changes are a cause of concern to unitholders. In such cases, they should first inspect the credentials of the new owners and the relevant skills that they bring to the table. Often, the purchaser will be some deep-pocketed industrial or financial powerhouse, but unitholders should not be unduly impressed by this. MFs are essentially pass-through vehicles. Hence, the risks faced by unitholders are neither mitigated nor enhanced by the financial standing of the sponsor. What really matters, is the quality of fund management. If the fund managers of the old fund are competent but the new owner is unable or unwilling to retain them, then investors could consider exiting, especially if the purchaser currently lacks a good fund management team. However, if the new owner categorically states that the old team will be retained, then unitholders may breathe easy.
Two such instances are, HDFC Mutual Fund's takeover of Zurich Asset Management Co. and Infrastructure Development Finance Corp.'s takeover of Standard Chartered Mutual Fund. Here both the purchasers were financial behemoths but they lacked fund management expertise. Hence, instead of reinventing the wheel, they retained the old team. This move has immensely benefited both unitholders and fund sponsors.
In the case of Templeton's purchase of Kothari Pioneer, the new owner could easily have jettisoned the old team, considering that it is a formidable global fund house itself. However, they chose to retain and nurture this team as they had acquitted themselves well in the Indian markets. Again, this proved to be a boon for unitholders who held on.
Today, takeovers are in the limelight once again, owing to the recent stake sale by Fidelity Mutual Fund. I am not too sanguine about this particular transaction. While the purchaser is part of one of India's largest conglomerates, the performance of the equity schemes of another fund that they own, is nothing to write home about. Also, while the new owners have given an assurance that the existing fund managers will help facilitate the transition, it is highly likely that the old team will move on immediately afterwards.
So where does that leave unitholders in this particular instance? While there is no need to bail out in a hurry, the ultimate decision whether to stay put or exit should hinge on clarity regarding the composition of the new (permanent) equity fund management team.
Unfortunately, this clarity may only emerge over the next six months or so. Prior to that, unitholders in all Fidelity schemes (except equity-linked saving scheme and fixed maturity plans) will be given the option to exit via the month-long zero load Securities and Exchange Board of India-mandated exit window. Intuitively, I believe that many may choose to sever ties at this stage.