Interview: Aashish P Somaiyaa, MD & CEO, Motilal Oswal AMC - "Our goal is wealth creation the healthy way"

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.

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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.