Aashish Somaiyya, MD, Motilal Oswal AMC answers a few of my questions on their upcoming NFO

Congratulations Aashish, on the sustained good performance of the schemes of Motilal Oswal AMC and on become one of the fastest growing fund houses in the equity segment. It is great to see an equity focused AMC with a strong emphasis on process doing well.

You are launching your MOSt Focused Dynamic Equity Fund on 6.9.2016 – a fund which allocates investor money dynamically between Debt and Equity - and it would be great to get some details from you on this.

Balanced funds / Dynamic-asset allocation funds as a category have done very well in the last couple of years. Are you a bit late in launching this fund?

The appreciation for a concept like Dynamic Equity is higher when markets are very volatile. In the last 12 to 15 months we have seen 9000 on Nifty and then 6700 as recently as Feb 2016 and now again we are near 8700 as we write this. In such an environment you would expect that a Dynamically managed fund which calibrates equity allocation would perform quite well. Due to recency bias, such funds are popular currently and strictly from that perspective one can say we are late! But just like change is the only constant, when it comes to capital markets, volatility is the only constant and from that perspective such funds can never be in our out of vogue. They are ever-green solutions for one of the biggest challenges of equity investing, that of volatility.

Can you explain a little to investors on how an investment in this scheme will work for them?

The Scheme through dynamic asset allocation aims to generate reasonable returns even in volatile markets.  A low MOVI level (our proprietary index) indicates that the market valuation appears to be cheap and a high MOVI level indicates that the market valuation appears to be expensive.  The equity exposure percentage based on the MOVI levels is depicted below.

The Scheme conducts asset allocation between equity, Equity derivatives and debt instruments based on the MOVI levels.

Equity: The Fund shall follow an active investment style using bottom-up stock picking based on the ‘Buy Right : Sit Tight’ investment philosophy. The Fund managers shall identify and invest in shares of businesses run by high quality management & having sustainable and scalable business models thus using QGLP (Quality, Growth, Longevity& Price) as the key evaluation parameters.

Debt: The Fund shall invest in various types of permitted Debt Instruments including Government Securities, Corporate Debt, Other debt instruments and Money Market Instruments of various maturities and ratings with the objective of providing liquidity and achieving optimal returns. The fixed income component will be passive in nature.

Arbitrage and Derivative Strategies: The Fund shall undertake Cash/Futures Arbitrage to take advantage of the volatile situation in the market. The Fund may use Derivative including Index Futures, Stock Futures, Index Options and Stock Options etc.

Following depicts more clarity on MOVI based Scheme allocation.

Scenario 1 - Let’s assume the MOVI level is at 60 which means it falls in the range of 100% equity allocation. Therefore, the fund manager in the above case will take upto 100% long only equity exposure.

Scenario 2 - Let’s assume the MOVI level is at 100 which means it falls in the range of 55% equity allocation. Therefore, the fund manager in the above case will take 55% long only equity exposure and minimum 10% in equity derivatives or hedged exposure. The balance upto 35% will be invested in debt instruments.

Scenario 3 - Let’s assume the MOVI level is at 150 which means it falls in the range of 0% equity allocation. Therefore, the fund manager in the above case will take 30% long only equity exposure and minimum 35% in arbitrage opportunity. The balance upto 35% will be invested in debt instruments.

Can you share the results of a 10 year back test done using the investment pattern of MOSt Focused Dynamic Equity Fund and a graph/graphs comparing with the NIFTY?

The historical back testing of the dynamic asset allocation on the Index (Nifty 50) suggests that the rebalancing provides better return than the Index with very low volatility.

	Index-Nifty	Index (Nifty)Rebalanced
Annualized Returns	12.73	13.34
Standard Deviation	23.68	14.47

Index – Nifty 50; Index Rebalanced - Nifty 50 rebalanced based on MOVI levels

Index and Index rebalanced are rebased to 10 as on 1^st January 2004

However when applying the dynamic asset allocation to Value PMS strategy of Motilal Oswal AMC, the results are different. While annualized return reduces by few percentage points, the volatility is cut in half.  Here we are taking liberty of using Value PMS strategy because that’s the longest running embodiment of BUY RIGHT : SIT TIGHT investment philosophy that we practice. Please note this below chart is only for explaining how MOVI rebalancing works, it meant for this discussion and it is not meant to be circulated to investors or used as marketing literature.

Since Inception	Value Strategy	Value Strategy Rebalanced
Annualized Returns	26.10%	22.73%
Standard Deviation	21.13	12.64

You had once mentioned in a column that alpha comes from the right asset allocation in place. Essentially, in this scheme you are deciding the asset allocation for the investor?

I personally believe that an asset allocation decision is to be made by the investment advisor or distributor in conjunction with the client and yes the larger decision is to be in the right asset class; that’s what produces alpha or what is called advisor alpha before we get into seeing the fund managers alpha. But this logic works when an investor has maturity to view his performance at portfolio level and not at product level. We don’t have that maturity in the system yet.

As far as I am concerned I don’t even see the Dynamic Equity Fund as a segregated scheme. It’s a solution to a problem that we face. If I had it my way I would continue to offer what we have always offered i.e. MOSt Focused Multicap Fund and a MOVI index for taking asset allocation calls in and out of equity. This is why even now this Dynamic Equity Fund will have a passive fixed income allocation and the equity will be similar to our multicap fund. But some of these beliefs of mine are as of now only theoretical and difficult to execute but in future they will be more practical.

 There are few issues we have faced:

·        Investors see performance product by product and not at portfolio levels so a fund like Dynamic Equity has the great ability of improving investor experience amidst volatility and enhance their stickiness and willingness to remain invested

·        There are taxation issues with switching asset allocation on an inter-scheme basis hence it is more efficient to do it intra-scheme by maintaining 65% equity and equity arbitrage

·        There are emotional biases which prevent people from making right asset allocation decisions, since these get hard-coded in the scheme structure they will surely get implemented

·        Volatility is a reality and volatility is here to stay, instead of worrying about it we need to create structures that benefit from the volatility

·

Let me also tell you what are the issues with making a Dynamic Equity Fund kind of structure

• The asset allocation decision which according to me is an investment advisor or distributors decision after understanding the client’s requirements, is being outsourced to manufacturer like us by embedding it into the product itself
• We are pandering to the client’s requirement of viewing performance product by product not at portfolio level, this is slightly regressive instead of advancing client behaviour in the right direction
•  If equity and fixed income are managed separately some discretionary decisions can be taken by clients and intermediaries to enhance performance or to improve liquidity of the investment, which now would not be possible

You are known for your straight talk. Why should investors choose this scheme from your basket of schemes?

I think the concept has been explained clearly up this point in our discussion, and there are similar funds which are available in the market. First of all someone should consider us only if one believes in our philosophy of BUY RIGHT : SIT TIGHT and hence it follows that wealth is created by holding high quality companies through their entire earnings growth cycle. Secondly, the MOVI index is proprietary to us and it is quite comprehensively designed, as you might have seen from the back tested data the concept seems to have worked in the past. This fund is a good combination of bottom up fundamental stock picking with top down asset allocation decision making with macro market level indicators.

Thank you Aashish for giving us comprehensive responses and wishing you success.

Contact me if you wish to invest in this NFO

Mutual Fund investments are subject to market risk. Please read the scheme documents carefully before investing