Today, you need a blend of growth and value styles : CIO — Equity Investments, Nippon India Mutual Fund

We are taking conscious efforts not to focus only on one way of investing. We have maintained a very diversified set of styles across our schemes. If you take stock of the concentration of AUMs with our individual fund managers, you will find that it is very low compared to peers. Even the manager who oversees the largest funds for us manages no more than 25 per cent of our AUM. This configuration helps us in three ways. One, it gives us scalability. Usually when you have just one style, executing it on an expanding AUM becomes an issue. Two, it allows more predictability in fund performance. Styles can come and go out of favour. But we would like some of our funds to deliver performance irrespective of the style that is working in the market. Three, for better stock selection, it is good to have a cross-pollination of ideas between managers of different styles. For instance, a growth style manager would know more about companies in consumption sectors and a value manager would know more about companies in metals/commodities, etc. We don’t have an issue with individual funds adhering to specific styles.

The key change is aligning the compensation structures of the investment team with fund performance. The measurement of it has to be as objective, transparent and as meritocratic as possible. We’ve made sure the performance measurement is over a reasonable time frame. We have 570 stocks under coverage and we’ve also developed internal methodologies to classify them based on risk parameters around business, management and liquidity. We then differentiate funds based on their risk-profile. We believe this can more clearly align the investor’s objectives with the fund’s mandate and fund manager style.

As an active fund manager, I think this can play out differently over three time zones. One, the last 18 months have been a very polarised market where even within the Nifty50 only 5-6 stocks have delivered. I think that will change very soon and can help active funds perform. Two, over the medium term, I do think alpha will become a challenge as the Indian market gets more institutionalised. If you track the proportion of institutional holdings in the US market, it began rising from the eighties onwards and direct retail holdings began falling. Over the next twenty years, alpha began waning. When the market becomes a zero-sum game between institutions, alpha is bound to get more difficult. Three, over the very long-term, as passive becomes bigger and bigger, that in itself can help active managers. Most stock market indices are momentum-based because they select stocks on market cap. Momentum when carried too far tends to be self-defeating.

Actually, growth in the listed space has been quite slow for the last 5-6 years though the economic slowdown has been evident only in the last one year. So, what has happened is that deep cyclical sectors such as PSU banks have seen a steady de-rating in valuations, while sectors with some growth are at very high valuations. Recently there was a chart from Goldman Sachs showing that the valuation differential between highly volatile businesses and less volatile ones was at a 35-year high. That makes the polarisation worse than the dotcom boom. That to my mind, is the big challenge for the pure growth investor.

I believe that a mix of growth and value approaches is essential today. Two, if you believe that inflation in India has come down structurally, then that theoretically makes a case for PEs to remain high, given that this reduces the cost of capital. Most global markets are today trading at high PE multiples on the back of low to near-zero interest rates. Three, growth stocks are expensive today, so you try to be in sectors with large untapped potential where you can ascertain the longevity of growth. If the growth expected by markets doesn’t come through, the market is also punishing stocks severely. Look at how auto stocks have been battered in the last one year.

We are putting new processes in place so that debt portions of these funds will have much lower risk than their historical portfolios.

Nippon has been a 43 per cent owner of the AMC for many years and they’ve been quite actively involved in India. So incrementally I don’t see much change in the investment functions or processes. However, because they are large asset managers globally, we will benefit from their insights on best practices.

This is difficult to predict but let me give my perspective. One, the composition of the benchmark itself is becoming more quality oriented. From an infrastructure, PSU and commodity-oriented index, it has added weights in financials, retail and FMCG. This reduces the cyclicality of Nifty earnings.

Two, earnings in sectors such as pharma or telecom have been weak on account of sector specific issues and not due to the macro slowdown. They can pick up over time as the issues get resolved. Three, a turnaround in corporate banks does seem to be unfolding. Though the pace may be slow, this is definitely likely over a two-year time frame. Recently disappointments are more with sectors such as automobiles, which are a smaller weight in the Nifty50. What I’m saying is that all this will reduce the room for disappointments on earnings from here on.

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