‘With demonetisation, consumption will stay strong’

The Indian investing public is slowly coming around to handing over its investment decisions to skilled money managers, Prateek Agrawal, Business Head and Chief Investment Officer, ASK Investment Managers, told BusinessLine in an interview, commenting on the growth and potential that still awaits the industry as a whole. Excerpts:

How has 2016 been for the money managing industry?

Indian investors have come around to the view that third-party money managers are doing a better job versus them investing directly. Hence, across the industry, we have seen strong flows both in the mutual fund side and the PMS (portfolio management services) side. Business has been strong for us. From ₹1,500-odd crore of assets under management four years back — domestic and offshore together — today, we’re touching ₹9,000 crore. This is the fastest growth that has taken place in the Indian marketplace. If you compare our AUM with that of mutual funds and some insurance companies too, we’re among the top 20 money managers in the country. We continue to gain sizeable market share.

Your portfolio does not feature many mid-cap picks and nothing from small-cap. Do you stay away from these segments?

Our style is not to look at market capitalisation. People believe that large-cap funds are safer and that mid-caps grow faster. Look at several index names over a period time. At one time, Hindustan Motors, MTNL were part of the index. Many businesses have fallen to a fraction of their prices.

It is not true that large-cap firms sustain their value over long periods. It’s the same with mid-caps. If you look at the top 10 mid-caps from 10 years back, many don’t exist today and several will be at a tenth of their prices then. So, neither is true. To our mind, what makes sense is sustained cash flows and growth in free cash flow over periods of time, and these attributes are more common in the large-cap space. If growth and consistent growth is what you want, then many large-caps do it. We seek those attributes.

What do you make of demonetisation and its impact on GDP?

We need to look at what effect this has on the economy or consumption. People who had more, either still have the same or have a little less and people who did not have anything have something more. For the first, their savings may go down a little. If you believe the news about money now coming into Jan Dhan accounts as a result of demonetisation (using these accounts as money mules), it’s known that people who didn’t have much, when they get a little more, they tend to consume. This means, the consumption part of the economy comes back faster. The people who had more used their money for lavish weddings, buying property or electronics or home refurbishment. Most of these fall under luxury goods and none of that is made in the country. So, hopefully, spending on gold, electronics will reduce, which will bring down imports. Not a lot of this is reflected in the markets either. Behaviourally also, if you are impacted by demonetisation, you wouldn’t want to tell the world that you have been affected.

The people who get money, they will end up spending on something, which in all probability is being made in India.

The unaccounted money that does get deposited in banks or income that is declared, the government will spend these inflows on infrastructure projects. So, I think with demonetisation, consumption will stay strong while we might see more infrastructure being built as a result.

There’s a gradual push towards passive investing options, such as ETFs, over active strategies. How long do you think money managers in India can continue to get that edge over the index?

The concept of passive investing comes from the West, where alpha generation capability (generating superior returns over the index or benchmark) has reduced. But this need not happen in countries where the underlying economy is rapidly growing. Look at mutual funds in the last five years; nothing proves that there is a reduction in alpha generating capability. In fact, the largest Indian mutual fund can still comfortably beat the index.

I don’t think passive investing is a good way to address the Indian market. In India, most money managers behave like long-only hedge funds, which take extremely sharp deviations to the index, while in the West, people use tracking error-based risk controls, which forces a manager to stay close to the index.

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