Case 092FinancialsWarm up
An asset manager runs Rs 1.5 lakh crore at a blended fee yield of about 0.54%, with equity 45% of assets. What happens to revenue if equity rises to 55% of the same assets?
1The situation
Tarunya Asset Management runs mutual funds with assets under management of Rs 1.5 lakh crore. 45% of the assets are in equity funds, which earn Tarunya about 0.90% a year in management fees, and 55% are in debt and liquid funds, which earn about 0.25%. That blends to a fee yield of about 0.54% on total assets.
Over the next year, strong inflows into equity funds and outflows from debt funds are expected to shift the mix to 55% equity and 45% debt, with total assets unchanged.
2Your task
What does the mix shift do to Tarunya's revenue, and what does it do to the risk in that revenue?
Quick check
Total assets do not change. What happens to revenue?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Revenue rises about 12%, from Rs 813.8 crore to Rs 911.3 crore, with no growth in assets. Ten points of mix, Rs 15,000 crore, moves from funds earning 0.25% to funds earning 0.90%, lifting the blended yield from 0.542% to 0.608%. To get the same lift at the old mix, assets would have to grow 12%. The catch: equity-heavy revenue falls harder when markets fall.
Step 1Why does mix move revenue as much as assets do?
Because the two kinds of fund earn very different fees. A tailor who stitches both school uniforms and wedding outfits earns far more from the second; the same hours shifted towards weddings lift his income without a single extra customer. For an asset manager, mix drives revenue as much as AUM: equity assets earn 0.90% and debt assets 0.25%, so every rupee moved from debt to equity earns 3.6 times as much. Today equity brings Rs 607.5 crore and debt Rs 206.25 crore, Rs 813.75 crore in all, a blended yieldTotal fee revenue divided by total assets managed, averaging the different fees earned on each kind of fund. of 0.542%.
Step 2What is the new revenue, worked out?
Equity becomes Rs 82,500 crore at 0.90%, Rs 742.5 crore. Debt becomes Rs 67,500 crore at 0.25%, Rs 168.75 crore. Revenue is Rs 911.25 crore, up Rs 97.5 crore or 12.0%, on exactly the same assets. The shortcut: the Rs 15,000 crore that switches earns an extra 0.65%, which is Rs 97.5 crore.
| Rs crore | Today | 55% equity |
|---|---|---|
| Equity assets | 67,500 | 82,500 |
| Debt assets | 82,500 | 67,500 |
| Equity fees at 0.90% | 607.50 | 742.50 |
| Debt fees at 0.25% | 206.25 | 168.75 |
| Revenue | 813.75 | 911.25 |
| Blended yield | 0.542% | 0.608% |
| Revenue lost if equity markets fall 10% | 60.8 | 74.3 |
Step 3What is the catch?
Equity assets move with the market. The richer mix makes revenue more sensitive: a 10% fall in equity markets now costs Rs 74.3 crore of fees a year instead of Rs 60.8 crore, before any redemptions, which also rise in falling markets. So an analyst pays for mix-driven growth, but at a lower multiple than for the same growth from steady inflows.
Two limits to say out loud. Fee yields are not fixed: the regulator caps total expense ratios in slabs that fall as a fund grows, so confirm the current framework before assuming 0.90% holds at larger sizes. And some of the fee is shared with distributors, so revenue after commissions rises by less than the gross fee.
Where candidates lose it
The common slip is to say revenue is flat because assets are flat. The interviewer is testing whether you know fees differ by product, which is the single biggest driver of an asset manager's revenue after the level of markets.
The second is calling the richer mix pure good news. It is better revenue and riskier revenue at once, and saying both is the answer.
What the interviewer asks next
- Equity markets rise 15% and the mix shifts to 55% at the same time. What is revenue now?
- How would you split an asset manager's revenue growth into market, flows and mix?
- Why do passive funds change this arithmetic?
Company names and figures are illustrative.