We need bear markets – they are like pesticides in farming. Nobody likes them, but it is necessary to remove the weeds.

Not long ago Cholamandalam had a mutual fund business. It was obviously not making money, so they got rid of it. However the ‘getting rid’ does not happen so smoothly with Indian business houses. First there is a lot of blood letting and then the business is given up. Then they found a buyer and got rid of the business.

In the scenario that interest rates were low – internationally and nationally – capital was not being used very efficiently by most people. This is what happens when one important tool of business gets priced wrongly. So you had many companies – which entered so called ‘related’ business. Or copied what Deepak Parekh did about 5 decades ago. Housing finance. Mutual fund. Bank. Securities. Life Insurance. Educational loans.  General Insurance.

Not everybody can pull it off.

So Dhfl which has made its money in lending money to the bottom of the pyramid too wanted to do a Hdfc. Fair comment? Not sure.

However, money got dearer. I heard about a month back that Dhfl is exiting the asset management business. This is good for Dhfl and for the mutual fund industry. Pramerica the worlds biggest Retirement management company takes charge of the business. That means (perhaps) a greater ability to attract professional talent. Will Dhfl get out  of wealth business, life insurance, general insurance….? Your guess is as good as mine.

In the Asset Management Business – I have no clue why a person would want to be in the business at all. Indian Amc have beaten down the margins so bad that a new comer will not be able to make money for a very long time.

The industry has ensured that a new entrant cannot just come in, and the old established players will make lots of money. In Economics we were told this is the characteristic of an oligopoly market. Go figure it out for yourself.

Fidelity, Morgan Stanley, Goldman Sachs, Pioneer, Threadneedle, Blackrock – there is a graveyard out there. Those are smart business houses which exited the business when they saw that there was no legitimate money to be made. If you are an Indian conglomerate you may have some excuse to be still hanging around. That leaves Franklin Templeton, Mirae, etc. the only foreign fund houses – with no other business. Will they stay for the long haul?

My guess is yes. They will have better margins – technology will help them achieve scale – not physical distribution.

Will Sebi allow a foreign fund house to set up just a sales office in India? In the current scenario NO. The big established players are well entrenched, have got themselves listed, and have enough influence to stop that.

For a new entrant to establish – he has to give up the bottom line to build the top line. That is difficult because the regulator does not allow the amc to pay more money to the distribution channel. It is like asking a new start up manufacturer of soap to adhere to Hul’s cost structure. Sounds good, but it is actually great for HUL, not for the start up.

A start up incurs a lot of costs – including CIO and CEO salary – and the faster that it can spread it over a bigger aum the better off will the company be. So if as a promoter I incur some ‘launch’ expenses or pay more to bigger distributors, or do joint promotions with my sales partners it is business sense.

Ha, don’t we know that the regulator almost always speaks the language of the strong players?