The inflows into mutual fund industry has been growing leaps and bounds which has helped small and medium sized fund houses to grow faster than their established peers. However, the equity market has hit a air pocket sending chill wave among first time investors. Prateek Agrawal, MD and CEO, Motilal Oswal Asset Management spoke to businessline on the way ahead. Excerpt:
What is the outlook for market in coming years?
Let me break the outlook into two parts. For most people outlook means index. The larger caps are fairly valued, which means one should expect index return equivalent to earnings growth.
If the earning growth is going to be 12-14 per cent, the base level growth is expected to be around in that range. On top of this, if we get a series of rate cuts in India or globally, return expectations can go up or down depending on the benefits to the corporates. However, as a fund house we think this is the time for generating alpha.
It happens in newer spaces of the economy as they tend to grow faster. Several new spaces include electronic manufacturing, new tech, defence, hospitals and luxury consumption items. Even in capital markets there are several new spaces where the growth will be significantly higher than the index. These earnings growth will be faster and sustain for longer. Most of these stocks which can generate alpha are not there in index.
Q: Why some of MF schemes focusing on new tech have failed to deliver?
Being small in size has helped us to deliver good experience for our investors. We believe in growing with our investee companies and new investors are finding us interesting. The weightage of stocks in our portfolio does not change much.
If anything does too well, we take money off the table. Something is left behind. We bump it up later. Renewables and new tech has been a huge success for us. Defence and electronic manufacturing were a decent success over last one year. Luxury consumption, which includes jewellers, real estate, malls and liquor have been very good.
Q: Why you are bearish on old economy sectors like steel, cement and commodities?
Our philosophy is market follows earnings growth. So if earnings growth in a space is going to be lower than the index, market will follow it less compared to sectors where earnings growth is higher than the index. We do not like old economy stocks because they traditionally deliver index kind of return. We are sustainable growth investors with an eye on valuation.
Q: Why your fund house is bullish on passive funds?
Passives cater to high networth investors, family offices and institutions who can take sectoral calls themselves. So there is definitely a set of investors who are emerging for whom passives are very relevant. So we are doing it.
Passives are very relevant for some of the pension funds. Some institutional investors are also warming up to passives. We also see some very smart kids dabble in passives to take an exposure for some time in a particular space and then move on to the other spaces.
Q: Do you expect FPI to re-look India for investment?
FPI flows has become more or less irrelevant. When they pulled out Rs 11 billion, the major indices fell by about 6 per cent. And in the same period, small cap actually dropped less. So the market is driven by our investors, domestic fundamentals and our valuations. When indices in China and the US went up, our indices were dragging. FPI outflows related drop in the market is almost always a great entry point for domestic investors.
Q: What is your view on IPOs amid concern on high valuation?
We are very much interested in this space. We have been anchors in many IPOs. We have bought into these companies even after strong listing. The pipeline will be strong. Many promoters have found IPO as a great way to distribute family wealth. Most companies are getting listed not just for debt repayment. Most of them have zero debt and healthy balance sheet. Investors have to be choosy and avoid companies that are overvalued in IPOs.
Q: What is your view on same day settlement?
This will help a MF. However, I am not sure whether mutual funds will be allowed to invest the realised money on the same day. Today, the industry has to sell stocks and wait for two days to realise the money for further investment. So there is liquidity risk of two days that has emerged. It will be better if people are allowed to buy and sell the same day. Having cash on book is a risk.
Source: www.thehindubusinessline.com
