How is it to invest in the stock of a company whose job is to invest in others?

Vimal Joshi
Updated: 16 Dec 2021, 09:45 AM IST
TL;DR.

Some new investors are likely to be intrigued by the public offer of a company that invests in other companies. Let us decode how an IPO of an asset management company is different from a regular IPO

We explore how the IPO of an asset management company is different from those of other organisations

We explore how the IPO of an asset management company is different from those of other organisations

An asset management company that manages funds comprising stocks of other companies, at times, also invites investors to invest directly into its stock, and become a shareholder. Let us find out how the IPO of an AMC is different from those of other companies.

For instance, Birla Sun Life Asset Management Company announced its IPO (initial public offer) in Sept-Oct 2021. It was an offer for sale (OFS) where no new shares were announced and two promoters divested their existing stake.

 

How is AMC IPO different from regular IPO?

Investing in an AMC’s IPO is different from a regular IPO. In a regular company, the organisation has a core business (finance or non-finance) that brings revenue. Based on its profit-making ability, and the past performance, the demand for its shares increases or falls, and hence the share price.

But when the company’s core business is to invest in other companies’ stocks, and the company manages funds comprising the portfolios — the investors have two investment options. The first one is to buy units of mutual funds managed by the asset management company.

Alternatively, the investor can also buy stocks of the company and take part in the AMC’s growth story – which is incumbent on the collective growth of all the funds it manages.

Sandeep Bagla, CEO Trust MF, explains the rationale behind investing in MF stocks: “Mutual fund schemes provide diversified equity exposure, but MF stocks allow them to participate in the high growth asset management business prospects. However, high valuations could imply that investors should be prepared to hold the AMC stocks for a reasonable period of time to earn good returns.”

 

What can investors expect?

A fund house or an asset management company can have a dozen odd funds and each fund tends to post return at a different rate in different years. But the AMC’s overall growth will be manifested in the collective returns of all the funds. And this growth is reflected in its own stocks.

For instance, a fund house XYZ has 10 equity funds – including two index funds, four sector funds, and the remaining thematic funds. The returns on each of these funds will depend on an interplay of several factors – the performance of companies that comprise the portfolio, investment strategy followed by the fund managers, stocks chosen for hedging, and the overall economic growth of the sector, etc.

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We explain what does it mean to invest in the securities of an asset management company (AMC). 

Let us assume that the returns on these 10 funds range between 7 percent to 13.5 percent per annum. Overall, the AUMs of AMC rise and the overall profit posted by the company is 11 percent of its assets. When someone decides to buy shares of XYZ, what will matter is the overall growth of the company and not necessarily the individual growth of each of the 10 funds.

By subscribing to the XYZ shares, one can take part in its growth story, instead of confining one’s financial destiny to one or two funds only.

We can highlight that investing in an AMC is different from investing in a fund managed by the AMC. If an AMC manages 15 funds across categories, then some investors who want to ride the company’s growth would want to buy the company’s shares instead of parking money in all the funds separately.

 

First Published: 16 Dec 2021, 09:45 AM IST
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