Indian equity markets are at an all-time high currently even as a new government is less than two months away. Market indices rallied very quickly – in a pre-election election uptick – but its sustainability is still in doubt. Equity mutual funds’ recovery is also set in motion after a bad year. However, there is one fund house whose funds didn’t succumb to high market volatilities, and emerged largely unscathed from last year’s small and mid-cap led bruises. The fund house is Mira Asset Management Company. We spoke to Swarup Anand Mohanty, Chief Executive Officer at Mirae Asset Global Investments (India) Pvt. Ltd, to understand what they did differently to protect investors’ hard earned money.
Mohanty has several years of experience in the field of financial services. He is overall responsible for the India AMC. Previously, Mohanty served as the Head of Sales at the firm since July 2011 and was responsible for driving sales in the organisation and looks at overall sales function. Prior to this, he served at Religare Asset management. Co Ltd. Previously, Mohanty served at Birla Sunlife Asset Management Co Ltd, Franklin Templeton AMC, Kotak Mahindra AMC, Tata Finance, and Arihant Credit Capital Ltd in sales function. Excerpts from our conversation.
Mirae has always taken the slow but steady route to build its assets. Your track record is a testimony of your fund house strength. Can you speak about the culture and philosophy of investing at Mirae? How much of it is influenced by the parent company in South Korea?
It is a business of asset management which is fiduciary in nature. And we are cognisant of the fact that people invest with certain expectations of the product and we try to cater to that. A lot changed in the industry post Sebi’s recategorisation, but if you track us before the categorisation, we already had one fund per category. We never aspired to fulfil the product basket like the industry would do. We stick to one simple rule that we will launch a fund only if we can manage it, if we have the necessary fund management skills for that. Probably that’s why we have the thinnest product lines in the market. So, we focus on building good track record for our funds and once we do that, we believe there is no reason an investor might not want to be associated with us. This reflects in our AUM growth as well. In 2014 our AUM was merely about Rs 700 crore, which is Rs 24,000 crore as of March’19. When investors saw consistency in performance then they started coming to us. We at Mirae live by the philosophy of delivering consistent performance to build a good fund house.
While we agree with your view, but we also see good products from small fund houses not gaining much popularity among investors. Do you think the investors are running behind just brand?
Yes, investors have done that. In the first half of our business cycle even we struggled, however, over last four to five years we have seen this distinct shift – in both advisor as well as investors from a good brand to a good product. In the end, you want a good product and not a branded one and that is taking centre stage slowly. I also don’t think money is going to (only) large funds in the industry. If you see the AUM flow, all the incremental money is going into products that are performing well. At the same time, large funds which could not perform as per investors’ expectations are losing out. I see more mature behaviour among investors and distributors as their requirements are moving from rash alpha generation to consistent performance.
You have recently repositioned India Equity Fund to a large cap fund effective May 1st. Will it not affect the fund manager’s ability to generate alpha for the investor? Considering it has been a multicap fund till date and now the investment universe will be restricted to large cap companies?
Normally, I don’t believe in talking about the past performance of a fund. But let’s look at last 11-year journey of India Equities Fund. Since its inception, it has always had ~75% portfolio invested in large cap companies. It has never taken an aggressive stance, we have seen some midcap runs and some small cap runs in the past, yet the fund has refrained from participating during such environment. Still, this fund outperforms the other funds in its category. The fund has delivered ~22% over 10-year period while the industry average stands at ~17%. Even if you analyse multicap funds in the market, they parked ~75% assets in large cap stocks. Even in the focus funds category with 25-30 stock portfolios, average is 75% assets in large cap stocks. We see enough opportunities in large cap segment in India, new companies cannot replace the stocks like HDFC Bank or Maruti that have built huge businesses.
In addition, when FIIs invest they are very large cap driven. So, we still see dramatic opportunities in large cap category. And I keep saying that if categorisation was everything then why pick a fund, you could invest in any fund. If you track all our schemes, they have different positioning from that of the category. When our Emerging Blue-chip was a midcap fund it used to invest 25-30% in the large cap fund and the remaining 75% of the midcap has large midcap stocks. We never had any small cap stocks. Even then the fund has outperformed large midcap category by 7-10% across tenors (1yr, 3yr, 5yr). Our hybrid has 65% large cap – debt and equity assets combined. Yet it is the no 1 hybrid fund in the market.
Your data points certainly prove the merit of investing in large cap stock. But the large cap funds have generated nil to very low alpha over Nifty ETFs.
Over past one year the index was driven by four to five stocks and if you were not invested in them you would underperform. I think it won’t be fair to generalise this over a short-term period.
Consensus is similar to US, India is also shifting from actively managed to passively managed funds. What is your view on this? How much steam is left in active management in India?
I think in India, there are still significant degree of imbalances and data transparency issues. So, what happened in the US may not necessarily happen in India. According to me, we are still good eight to 10 years away from shifting to passive fund regime. Thus, good funds would continue to generate alpha and investors should participate in them.
What is the stock selection process at Mirae? Since we have so many examples of funds delivering stellar performance, so something is surely going right in terms of stocks selection. What would be that thing?
There are two aspects of picking stocks 1) Stock Selection and 2) Risk Management. We weigh both the aspects equally. Risk management must be immaculate. If you look at our story, we are the best diversified story available. Even if we like a stock, we never over allocate towards it and that’s how we protect the downside. If you see a stock having 4-5% allocation in any of our portfolios, then that would be valuation growth. We would never have bought a stock more than 1.5% of the portfolio. At 4-5% level, the fund manager would be initiating a process of getting out of that stock. We only deviated twice in our approach, in 11 yrs of Mirae Asset India Equity Fund, once in the year 2013 when we allocated ~7% to ICICI bank and second time in past year when we allocated ~7% to HDFC Bank.
What led to you allocating ~7% in HDFC Bank?
You can call it a cash call. That stock could not go wrong at that point in time hence its better to be invested in it. Both times when we deviated, both these scrips have delivered outstanding performance. Both the years 2013 and 2018 were volatile and there was a flight to safety so we did what we could to protect investors’ money. And once the market normalises, we would return to our diversified approach.
Do you think the market has already normalised, considering the FIIs have come back and market indices are touching all-time highs?
Not at all! Mutual Fund industry for at least two years has been pumping roughly $1 billion (roughly Rs 6,900 crore) a month in to equity markets and market indices maintained their regular course. We didn’t see any phenomenal rally. Now, with $4 billion (Rs 28,000 crore) inflows by FIIs (from Feb-Mid March), equity markets are soaring. That’s what FIIs do to markets – huge investments over short periods and there is a left out feeling among investors.
Do you think that retail investors typically miss the bus? When they should have bought, they remain fearful, and when FIIs return, the markets peak and that is when they enter?
Let me give you a context, I used to think this way a few years ago – I was a sad equity seller. Now I am a boring equity seller. Investor behaviour has been changing over past few years. SIP and lump sum investors behave differently. This time I think SIP investors have got it right compared to the lump sum equity investors. Since 2016 till date, SIP investors are sticking to their investment which is different from earlier years. Choosing a good product and investing consistently will benefit investors more rather than a rally which is difficult to foresee.
Mirae is coming up with a Focused Equity Fund. How would it be structured? Since Mirae mostly has diversified portfolios, how do you intend to position this fund for your investors?
We would run this fund as per its category mandate. It would have 30 stocks. This would be the riskiest fund in our basket, and we are highlighting the same in our product communication as well.
Can you give us an update on the Mirae Credit opportunities AIF? Is the fund in the closing stage of raising funds? What has been the challenges given the current state of Indian Real Estate market.
The money raised under this fund is Mirae Asset’s own money which has come to India from South Korea. We want to build portfolio, build relationships, build some track record to demonstrate our commitment to this segment. Once we build a track record, we would start raising money under this fund in India.
Currently, long short Equity fund in category III AIF are quite popular in the industry. Will you also be venturing in to such space?
We don’t have any plans of doing that at least in the foreseeable future. We don’t think there isn’t much that we can do in AIF space that we cannot do in mutual fund space.
What would be your advice to retail investors for next three to five years.?
Investors must understand India is a structural growth story. Which means $2.5 trillion economy will become $6 trillion economy in next few years. So, the stock market over a six to eight-year horizon is a good place to be. Before looking at returns I would urge each investor to evaluate why he wants to invest. Because the difference between a bad investment experience and a good investment experience is not knowing what you want. Once you know your goals, then working back on where to invest is easy. In mutual fund industry, there is an investment avenue available for everybody. Fix a goal, discuss with an advisor, plan your investments and stay invested.
There is a risk of investing in equities and there is a risk of not investing in equities, the risk of not investing is higher. Next eight to 10 years are good for being invested in India as the alpha generation possibility is still there. And it won’t be there for long. Indian growth story is a great one so don’t miss out.