Portfolio

‘Investors should not look in the rear-view mirror’

Parvatha Vardhini C BL Research Bureau | Updated on November 28, 2019 Published on November 28, 2019

Aashish Somaiyaa, MD & CEO at Motilal Oswal AMC

They should avoid under-estimating their investment time horizon, says Aashish Somaiyaa of Motilal Oswal AMC

With many new investors joining the industry every day, digital and DIY (do-it-yourself) are the chief trends. If they’re not sure about what to buy, it may be a good idea to start with index funds, Aashish Somaiyaa, MD & CEO at Motilal Oswal AMC, told BusinessLine in an interview. Excerpts:

The bellwether indices are touching new highs. However, except for the boost to the bottomline from the corporate tax rate cuts, the slowdown remains. How sustainable is this rally?

Tax cut can result in price discounting to bump up volumes, higher compensation or hiring or in more capacities being set up. Thus, the mere fact that taxes have been cut can lead to PE multiples moving up. That apart, markets by nature are forward looking and hence, despite the current slowdown scenario, markets are looking towards a possible bottom to the economy in the next couple of quarters.

A combination of loose monetary and fiscal policy, push to expand credit and better demand numbers for auto companies and a few other discretionary goods seems to have given encouragement to the markets. One can see that the rally has become more widespread from the highly localised index moves that were seen until recently. Sustainability will clearly depend on better numbers across sectors.

What is your take on the present market valuations? Where are the current investment opportunities?

We believe that investment opportunities are clearly in high-quality small- and mid-cap companies. Even well-positioned mid- and small-cap stocks have been beaten down irrespective of their business potential or prospects. Further, the performance differential (in terms of price) between large-caps and small- and mid-caps is at historic highs. Either large-caps correct sharply in response to the huge differential or small- and mid-caps appreciate. Either way, investors are better off making incremental allocations to small- and mid-caps.

What is long term, when it comes to SIPs in equity funds? When investing in SIPs in equity funds for long-term goals, what is the ideal portfolio returns that one can expect?

There is no definition really of long term but I have seen that most investors consistently underestimate their time horizon of investment and overestimate their need for liquidity. They panic on seeing a negative spell in the markets. Whatever intelligent discussions we all may indulge in, the fact remains that in December 2017, the total equity MF gross inflow was ₹45,000 crore, where SIP contribution was about ₹6,500 crore and the discretionary ( i.e. lumpsum) investment for that month was approximately ₹38,000 crore. Those numbers in October 2019 are approximately ₹22,000 crore, ₹8,300 crore and about ₹13,500 crore respectively. If this is the behaviour of investors then the biggest issue is not the definition of long term, but the rear-view mirror driving where investors put in money based on the previous one year’s market moves. Let’s say the average return expectation is even as low as 10-12 per cent. If this behaviour persists, the rear-view mirror drivers will make 0-5 per cent CAGR while the smart investors will make 20 per cent CAGR.

Your Multicap 35 fund alone has net assets of over ₹13,000 crore while the other funds that were launched more or less around the same time — Midcap 30, Long-Term Equity and Focused 25 — have garnered less than ₹2,000 crore each. What is the reason for this wide divergence despite the three funds being above-average performers?

I think part of it might pertain to the ineffectiveness of communication and ability to distribute multiple products at our end. But one must notice that in any case, for the industry as a whole, multi-cap, large-cap and large-and- mid-cap funds would be nearly 60-70 per cent of the total AUM (assets under management). On our smaller base with fewer funds, the numbers may appear more skewed but it’s not way out of line with the industry trends.

Your Midcap 30 fund performance has picked up recently and sports a 14 per cent return over one year. What has worked for the fund?

Akash Singhania, who joined us in July 2017, has executed our investment philosophy of owning quality growth names well over the past two-and-a-half years. Since the inception of the fund in 2014, it was basically one bad patch in 2017 which temporarily impacted the returns profile. There were growth disappointments with a few holdings which he was able to identify and correct in time.

A slew of index funds have been launched recently by Motilal Oswal AMC — Nifty Bank Index fund, Midcap 150 Index fund, Smallcap 250 Index fund and Nifty 500 index fund. Are index funds getting more popular today than, say, five years ago? Why ?

If investors do not derive value out of the fees paid to active managers, they will move over to passive products. Let’s accept that. When that tipping point happen, I don’t want to forecast. We have created a range of index funds keeping in mind that, in India, with many new investors joining the industry every day, digital and DIY are the trends. Hence, I believe in the philosophy that — if you don’t know what to buy, you buy the market. This is where the idea of launching efficient, economical and effective choices like index funds comes.

The total cost of ownership — after factoring in transaction costs, administrative costs, and buy-sell spreads on retail orders — is lower in the case of index funds than ETFs. We have offered a large range because index funds are like building blocks for asset allocation. But if you enter equity markets and don’t know where to start, Nifty 500 index is the right place to do so.

As an AMC, you don’t have a big presence in the debt category. Why ?

We do not consider fixed income to be an area where we can add much value besides what is already available in the market for investors to avail. Hence we do not see any need for us to play a role in this category.

Published on November 28, 2019
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