Aashish P Somaiyaa, CEO, Motilal Oswal Asset Management Company, believes that despite the market hitting record highs, there is growth potential in a few pockets. He expects the strong inflows into mutual funds to continue, thanks to greater awareness among investors. Excerpts:

What are your expectations from this earnings season? How has it been so far?

I don’t think the market is very worried how a TCS or an Infosys is doing. We are not particularly worried about consumer areas either — be it high-end discretionary segments such as auto and white goods or staples.

Demonetisation was a scare for consumption. But the segment has turned the corner and there are encouraging signs already. The focus is on public sector banks, more particularly corporate lending or wholesale banking, where not many of the results have come.

A second area of focus is sectors such as capital goods which are economically-sensitive. Results in this segment will reflect the capex or investment demand. So, signs of improving capex spends or a bottoming out of PSU banks are awaited. Results thus far are in line with expectations. Some of the highly watched sensitive ones are still to declare results.

With the Sensex touching the 30,000 mark, has growth potential across sectors been priced in? Where is the opportunity?

A lot of the action in the recent past has been in the area of lending from the non-banks. The other exciting area is insurance and investment management. Like how there is a play in credit, there is also a play in savings. I am particularly excited because this year a couple of AMCs are expected to come out with IPOs.

Secondly, we continue to be overweight on segments such as cement and building materials in some of our portfolios. Then there are segments like white goods where demand has only scratched the surface. Growth here is linked to power generation. The biggest positive impact will be on fridges and air-conditioners.

The asset sizes of many small- and mid-cap funds, including your own Midcap 30 fund, have zoomed since the 2014 rally. Does the sharp rise in inflows create a problem for deployment of funds?

Broadly speaking, the top 100-150 companies are large-cap. The rest of the stocks are mid- and small-caps, making the universe quite big. With our investment style of holding a compact portfolio, we are concerned about buying some 15-20 stocks whose earnings will grow 20 per cent year-on-year. So right now, we are not worried as we are managing only about ₹1,300 crore using 17-18 stocks.

The universe is also expanding, thanks to some good IPOs. In the last two years, some of the good ideas have come from IPOs. In our portfolio, we hold Alchem Laboratories, SH Kelkar, RBL Bank — all IPOs of recent times. I don’t think we have to really worry until we near ₹2,500-3,000 crore. In a ₹3,000-crore portfolio, the largest position will be ₹300 crore. With about 20 stocks, we can easily manage ₹3,000 crore.

I think a lot of the other fund houses that have taken some action such as halting the inflows or changing the mandate are also around this size. If it comes to it, we would rather cap this fund than change the mandate.

A recent analysis by BusinessLine shows that the outperformance of large-cap funds vis-à-vis index funds has narrowed in the last one year. Do you think index funds and ETFs will become more popular in future as the gap narrows?

A lot of times your alpha comes from owning the right stocks. A lot many times, your alpha also comes from not owning the wrong thing. One of the key reasons why large-cap and some mid-cap funds have suffered in the last one year vis-à-vis the index is that not many had commodities or PSU banks or Reliance.

But if you have a mandate to not invest in commodities, you can’t set that aside for one year just because commodity companies have done well. So, ideally, people have to stick to their investment style and mandate and over one cycle, they must comfortably beat the index and justify the fees that they are charging. It will not be right to draw a conclusion from what happened in the last six months or last nine months. With our investing style focused on high-quality and high-growth stocks, what we are aiming for is that at a portfolio level, our weighted average earnings growth should be in excess of 20 per cent. This is our mantra to beating the market.

The year 2016-17 saw record inflows into mutual funds. Is this sustainable?

I believe that the current trend will sustain for the reason that habits have changed with generations. When I joined the industry 20 years back, most of those who invested in mutual funds did so after they had exhausted all their options. Today, a mutual fund investment is a core product.

When I got my first salary, I opened a PPF account in SBI. Today, when someone gets his first salary, he will probably begin a SIP. Interest rates have come down dramatically. Any big market correction can slow the pace of mutual funds inflows. But incremental corrections will have less impact.

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