Aashish P
Somaiyaa is the Managing Director & CEO of Motilal Oswal Asset Management
Company. He was earlier with ICICI Pru AMC for 13 years. He
firmly believes that equities are the way to wealth creation. In this
interview, he puts forth his views on why equities are the asset class to
be in and speaks with us on the investment philosophy at Motilal Oswal Mutual
Fund. He was one of the few voices early in 2013 passionately advocating
investment in equities and investors would do good to listen to what he has to
say on wealth creation the healthy way…
Aashish, Wishing you and the entire Motilal Oswal family a Happy Diwali and a prosperous new year!
As we enter a new year, what is your outlook on the
economy?
I
believe we are on a significant growth path as far as economy is concerned. In
fact I find it quite funny when people perpetually keep inventing new reasons
to postpone their investments. One year back we were fearful of a hung
parliament or a third front, Rs 69 to a dollar, high interest rates and
inflation, USD 120 oil, and possible “end-of-the-world” scenario for developed
markets. Today we have none of these issues and people are still not confident
of India’s prospects. We are well on our way to 6, 7 and 8% growth in the next
few years.
What is your advice to investors on handling their
investments for the coming year(s)?
Buy as much
equity as you can possibly afford to buy after setting aside for your liquidity
requirements and short term goals. If you miss the next 10 years of India’s
growth, you will have missed serious wealth creation. Fear is temporary; Regret
is permanent. Let me explain why.
India will be on
its way from being a USD 2 tn economy to a USD 4 tn economy in the next 5
years. In this process we will see many small and mid sized companies becoming
large and many large companies becoming global companies. The GDP will grow
because you, me and your readers will work hard, consume, and save. It will be
entirely our contribution which will make the economy grow. Let’s ensure that
as we contribute, we must also participate in the growth. Today we are staring
at a scenario where over 80% of our market capitalization is owned by promoters
of companies and FIIs. So we contribute 100% of the economic growth but the
benefit of the profits goes to promoters and FIIs. The only way to participate
after contributing is to own equity.
Equity is the
only asset class which can create wealth. When we send emails, whatsapp and FB
messages we quote how 10,000 invested in Wipro has become 700 crs today, the question is, will we ever try and practice owning equity for the long term or
that is stuff only to be marveled at by forwarding on emails and social media?
What
is the biggest challenge the Mutual Fund industry faces in increasing
penetration – product or distribution or communication?
We have too many
products, too few distributors / advisors like you and extremely complicated
communication.
Look, when you
go to a doctor and he or she decides to treat you, they explain you in simple
language why you have the symptoms, what’s the diagnosis and what is the
requisite medication. Do they actually explain chemical compositions of the
drugs that are being administered? When they have opened you up in the
Operation Theater, do they really give you live relay of what they are seeing
inside of you and “Oh my God, that’s terrible, how did you get that!!!” kind of
statements? Our industry communicates in a very complex manner and we don’t
impart enough confidence or trust.
We need
investors to know that the only way to create wealth is by investing in the
equity of good quality companies with a long term perspective like say ten
years. Not because I expect markets to go up and down every three years, that
we are saying invest for ten years. I say invest for ten years and above
because the best of companies are in business for decades. It takes decades to
implement a business plan, exploit a market opportunity to the fullest and to
build a scale business. If you think the new kid on the block Flipkart is new,
think again – they started in 2006! L&T started in 1946, HDFC in 1970,
ICICI in 1955, Infosys in 1981, TCS in 1971 and so on and so forth. There are
many examples of long term investment in
companies that has generated outstanding results. If we take a call on the
businesses by way of buy, hold and sell recommendations every quarter we will
always miss the wood for the trees. This is the limited message we need to
communicate; this needs one simple large cap oriented fund which buys todays
bluechips and one simple midcap fund which buys tomorrow’s bluechips.
You have decided to convert MOSt Shares M50 into a passive ETF even
though it has outperformed the NIFTY over the past 1, 2 and 3 year periods.
Like
I said in my previous question, I just felt that people don’t have much awareness
about mutual funds in general (I am sure your readers are more aware as a
result of your educative efforts and kudos for that). When we have a product
like MOSt Shares M50 which is an actively managed ETF, there are layers of
complexity we are adding. First of all we are telling people about ETFs which
can be bought and sold only by finding a buyer on the stock exchange. People
are used to filling forms and cutting cheques or doing an internet based
purchase for buying funds while here we are telling them to transact in demat
with their broker. Secondly, forget mutual fund, we are talking ETF which is an
exotic investment as of today and then on top we are saying actively managed
ETF – index rebalanced based on quantitatives of fundamentals. Hence, my
decision was a move towards simplification, let’s make it a simple Nifty fund
to begin with.
.
You have placed overall limits on the number of
securities that your funds can hold. MOSt Focused Midcap is limited to 30 securities.
Isn’t there a concentration risk especially if your AUM grows?
At Motilal Oswal AMC, we believe in BUY RIGHT : SIT TIGHT.
That’s not a marketing mantra only, it’s a way of life. One of the fundamental
tenets of sitting tight is to have focused / concentrated portfolios with
meaningful allocations to the equities on which we have high conviction. You
ensure the portfolio manager has meaningful positions on each stock by having
an upper limit on the number of stocks that he can hold. So in our portfolios
typically the top stock has 8 to 9% weightage and the smallest stock has around
3% weightage. I don’t understand why mutual funds needs to have 50,60,70 or at
times 100 stocks where the top stock is still a respectable 5%, the top 10
stocks are say 25 to 30% and then there is long long long tail with some stocks
being 0.1%, 0.2%, 1% etc etc. How does that make returns for the investor? Its
completely unproductive!!! If you have 1% in a stock that doubles its market
value, you end up giving 1% return to the investor. On the other hand if you
had done some serious homework and ensure that a stock with this kind of
potential had more significant allocation, you could have created wealth or
your investor.
Whenever an NFO closes and a fund makes a new portfolio they
may start with 25 to 35 scrips. How does it every become 50,60,70 or 100? The
reason could be that one started buying a stock but then the price already
moved up, one was holding a stock but its value seriously declined and didn’t
want to sell at a loss, or you have a “spray-and-pray” something’s gotta work
kind of strategy. Look, investing is not financial democracy or a socialistic
practice. Investing demands thorough work on understanding the earning power –
earnings and earnings growth potential of companies – and then making a
meaningful allocation to those companies in your portfolio. Even if you have
100 stocks in your portfolio bulk of the returns comes from top 15 stocks. So
why not just have 15 or 20!!! How does the long tail help? And its investors
money after all! We are paid fees to ensure very rupee is gainfully deployed
and is in play in the wealth creation process at all times.
The number of stocks also increases because there is a tendency to book profits on the winners and
hold onto the losers to avoid losses. That’s the biggest mistake one can every
make. You need to hold on to the winners and cut losses on the losers.
Investing is about making decisions under uncertain circumstances with
incomplete information. Anyone who buys stocks will get a few right and a few
wrong. If you sell the ones that worked, you will again have to buy that many
more and you will again have few winners and few losers. If you logically
extend this process, eventually you will end up with lesser and lesser winners
and more and more losing ideas in which you forcefully become “long-term”
investor!!! That’s not how wealth is created. Wealth is not created by the
“selling”, it is created by the “sitting” after having bought good quality
companies with superior earnings powers.
Motilal Oswal Mutual Fund is a no-load fund. Please give
your views on exit load in mutual funds and the adding of 20 bps to the expense
ratio.
According
to me exit loads are being deployed for two reasons:
· > To ensure investors invest
for the long term and they don’t react to short term volatility or a
significant dip in the markets. To that extent exit loads ensure that the
psychology of loss aversion is controlled and investors stick to their long
term goals. Handholding in times of market falls and educating investors on the
nature of equity investing will cure this problem once for all. It doesn’t need
loads. Also mostly loads are for one year, now the impact of short term capital
gains is good enough deterrent not to sell within one year so I don’t see what
purpose the load will serve.
· > More often than not, load is
also used to ensure investors stay in the fund for a while such that any
commission paid for raising the money is recouped by time spent in the fund and
expense charged over that period. This again can be resolved by ensure
commissions are trail based – in the long run it benefits investors, fund
managers and the intermediary doing the fund raising.
You are not launching any series of closed end NFOs? :)
It’s
a very unique skill that we don’t possess honestly. Isn’t it difficult to again
and again identify a set of stocks that will deliver returns in exactly 3
years!!! :))
And
then what does the investor do, if exactly one quarter before the maturity the
market goes into a long term decline and falls 10-20-30% from peak value? Also what
does the investor do if the investment was made for long term, but what can one
say about emergencies? Emergencies are just that, if you need your funds, you
cant be locked in whatever your original goal might have been!!!
Our best ideas are already populated in our three open ended no load funds i.e. MOSt Focused 25 (Large Cap); MOSt Focused MidCap 30 (Small and MidCap) and MOSt Focused MultiCap 35 (all cap / multi cap). These portfolios already contain what we would buy with objective of wealth creation and multiplication in our investors’ portfolios. I don’t think I would buy different set of stock if I had to managed a series of closed ended funds – so why create them!!!
If
you went to a restaurant and you were unmindful of calories, cholesterol, sugar
etc., then you would be thrilled to have a wide menu with plethora of choices.
But if you went with the intent of eating healthy, the wide menu serves no
purpose other than that of distracting you from the right path. We want to
offer a focused menu and our goal is wealth creation the healthy way. It
doesn’t need too much rocket science. BUY RIGHT : SIT TIGHT.
No comments:
Post a Comment