Thursday, October 18, 2007

Franklin Templeton - Kothari Pioneer Mutual Fund Deal

Aparna N., Dawn Mathew Varghese, Varghese Zacharia, Vivek Jayadevan 9PGDIM 13), K.V.S.S. Narayana Rao

In July 2002, Franklin Templeton India acquired Pioneer ITI, to create an organization with rich investment experience over market cycles, one of the most comprehensive product portfolios, footprint across the country and an in-house shareholder servicing function. The huge synergies that existed in the two organizations have helped the business grow at a rapid pace, catapulting the company to among the top two fund houses in India.

The agreement of Templeton Asset Management (India) to acquire Pioneer ITI AMC, created the country’s largest private sector fund (replacing Prudential ICICI) and the second-largest overall (after UTI) at that point in time.

About Franklin Templeton

Franklin Templeton's association with India dates back to more than a decade as an investor. As part of the group's major thrust on investing in markets around the world, the India office was set up in 1996 as Templeton Asset Management India Pvt. Limited. It flagged off the mutual fund business with the launch of Templeton India Growth Fund in September 1996, and since then the business has grown at a steady pace.

Since starting its operations in India, Franklin Templeton has invested a considerable amount of time, effort and resources towards investor and distributor education, the belief being - to be successful in the long term, the fundamentals need to be correct, at whatever cost. This has resulted in various advertising campaigns aimed at educating investors, participation in seminars and distributor training programs. Franklin Templeton has played a pivotal role in devloping steering the industry in India.

Templeton AMC started off by launching its Templeton India Growth fund, a diversified equity fund. In the next few years it added to its product line by launching an income fund (Templeton India Income), a liquid fund (Templeton India Liquid) and a government securities fund (Templeton India Government Securities Fund).

The early years were not too good. The flagship Templeton India Growth Fund (TIGF) under performed its benchmark till 1998, mostly due to its strict adherence to its value-investing credo. In both 1997 and 1998, the scheme landed in the category's basement and under performed its benchmark, the Sensex. A third quartile standing was all that was achieved in 1999. Strict adherence to its value investing philosophy was the major factor behind this dismal showing. Thus the fund avoided sectors such as FMCG and pharma, which were booming in late 1997 and 1998. The absence of stocks like HLL capped the fund's upside. Heavy investments in cyclicals and PSUs saw the funds NAV take a hammering in the wake of the South East Asian economic crisis in 1998. The absence of IT stocks also held the fund back in 1999.
By 2000 the fund had a makeover and introduced IT stocks into its portfolio. The AMC also launched Franklin India Growth fund, which would follow a growth oriented investment approach. As the equity rally came to an end a bull market in fixed income securities replaced it. Templeton AMC had the basic debt fund products in its stable, and benefited strongly. By February 2002, Templeton AMC had grown to become the 6th largest AMC in the country.

Templeton International is a wholly owned subsidiary of Templeton Worldwide, which is in turn a wholly owned subsidiary of Franklin Resources. Franklin Resources operates as Franklin Templeton International. Franklin Templeton manages assets worth US$ 350 billion (Rs 15,40,000 crore) and operates in 28 countries making it one of the largest global asset management companies. Franklin Templeton is the third largest independent fund management group in the US, and also has the distinction of being the first and the only mutual fund company to be added to the S&P 500 in the U.S.

About Kothari – Pioneer AMC:

Kothari-Pioneer began functioning in 1993 as a JV between the Chennai-based Shyam Kothari family (through ITI, Investment Trust of India) and the Pioneer Group, a US-based mutual fund. The AMC's ownership changed in 2000 when ITI was acquired by TCK Finance. This change came into effect in 2001 and the AMC was now called Pioneer ITI. In 2001, Pioneer was acquired by UniCredito Italiano, an Italian bank and so there was a change of ownership once more. Kothari-Pioneer (and Pioneer-ITI, as it was later called), was run in a fiercely entrepreneurial and innovative manner by CEO Vivek Reddy, who headed the AMC till it was acquired by Franklin Templeton in 2002. Its innovations include the first launch of open-end funds in India, at a time when infrastructure and market dynamics made it look like an impossible task to manage.


Templeton had signed a memorandum of understanding with Pioneer ITI on 18 March 2002 to acquire the latter’s asset portfolio in India through a 100-per cent acquisition of the asset management company from its promoters Pioneer Investment Corporation and Investment Trust of India. The value of the deal is around $ 50 million. According to reliable sources, the deal is expected to be worth about Rs 300 crore.


Franklin Templeton has a fairly conservative fund management style and marketing approach which is similar to that of Pioneer ITI. In Franklin Templeton's hands, the Pioneer ITI schemes have continued without too much change. If more aggressive players had emerged as the new owners, there would have been some significant changes. Alternatively, if a global player without a presence in India had bagged the fund house, it would have created pressures of a different sort. There would have been uncertainty on both the fund management and marketing side. Pioneer ITI has a wide range of schemes that Franklin Templeton does not in India. Franklin Templeton has a similar bouquet of schemes in the US, which led to only modest changes once the exercise was through.

In India, Templeton — despite a strong comeback by its growth fund, Templeton India Growth — had not delivered the goods for first-time investors in the equity segment. However, it had done well in the last three years before the acquisition. In this backdrop, the crop of Pioneer ITI schemes with a good track record was a good marketing face for Franklin Templeton. This is another reason why integration disturbances at the level of schemes would be modest.

Franklin Templeton had built a good reputation in the fixed income segment in India whereas Pioneer ITI had a strong presence in equity. Also, Templeton's distribution was strong among the broker, dealer and banking network while ITI was focused on the retail segment. Hence, there was no overlap in the marketing strategies of both the organizations which led to a phenomenal fit.

For the fund house, the merger helps in achieving economies of scale for marketing the products. It becomes easier for investors to understand these products. Moreover, this also helps the fund house in adhering to the Securities and Exchange Board of India’s (Sebi) guidelines not to launch similar types of schemes.
Some of the prime reasons cited by fund houses for the mergers are:

* Individually both the fund houses have low assets under management.
* Individually both the fund houses have high expense ratios.


Templeton ensured continuity in investment options, investment personnel and fund management styles of the acquired entity. There was no clash in the investment philosophies of the two fund houses. All Pioneer ITI fund managers were retained.

A majority of the schemes of Pioneer ITI AMC continued in their present form;

some whose profile matched that of a Templeton scheme were merged into the latter. However, there were only a handful of such schemes, given the contrasting profiles of the two fund houses, and the transition was smooth.

Templeton operates its equity schemes under two brands–Templeton for a value-based investing style (a conservative strategy, it involves identifying undervalued stocks for long-term returns) and Franklin for a growth-based investing style (a relatively aggressive approach, it involves buying emerging growth stories), which most Pioneer ITI schemes follow.

Post Merger Performance

The Templeton-Pioneer ITI merger is a win-win proposition for unitholders of both fund houses as investors would have a bigger and broader product portfolio to choose from. Both fund houses would also become more accessible. Their presence would increase from 11 to 34 cities, with more points of sale. Templeton markets its schemes through brokers and banks, while Pioneer does so through individual agents. The acquisition thus led to continuity with more choice.

When Templeton acquired Pioneer ITI, it instantly gave Templeton a product basket, which contained some of the oldest and best equity mutual funds in the country. The stars of the Pioneer line-up were Bluechip and Prima, which are India's oldest private sector funds. Both funds have unmatched long-term performance, with 28.30 per cent and 21.54 per cent p.a. returns over more than a decade.

Along with the Pioneer products and assets came a vast pool of retail investors. The Rs 4,022 crore of assets took Templeton AMC's total AUM to nearly Rs 8,000 crore, making it the largest AMC at the time. More important was the manner in which the merger was handled. Not a single equity fund manager of erstwhile Pioneer ITI left the new organisation. Undoubtedly this gave Pioneer ITI investors much comfort and to this day the schemes continue to flourish with equity managers who have one of the longest track records in the industry. The fact that the AMC's CEO today is Ravi Mehrotra, who came over as Pioneer ITI's CIO, is proof that this was a genuine merger of two companies.

Templeton also acquired the registrar operations of Pioneer. This gave it an in-house ability to service investors, while maintaining an eye on the quality of service. At the same time as funds are allowed to charge for the registrar function this was an attractive business in its own right. In 2003 this business was hived off into a separate entity in the form of Franklin Templeton International Services.

Advisors to the buyer and seller:

Rabo India Finance Private Ltd, a subsidiary of Rabobank International, was the sole strategic and financial advisor to Pioneer and ITI in this transaction.


Jacob said...

hi, its very informative, Merger And Acquisition , thanks


Dear Rao,
It is very informative & useful

Bala Abay said...

You have provided a Great Information regarding Franklin Templeton Mutual Fund.Investment in international stocks provides additional diversification benefit and seeks to reduce country specific investment risks
franklin templeton mutual fund

deepak soni said...

i want to know kothari pioneer is franklin templeton. This both are same company or other.