If one manages money to create wealth one may beat the index as a byproduct, but if one manages money to beat the index, neither can be guaranteed
Motilal Oswal Asset Management Company (MOAMC) Ltd is a leading equity fund house managing seven equity funds and two debt funds, besides five PMS strategies. The total funds under management for mutual funds is over Rs 17,000 crore. The largest fund of MOAMC is Motilal Oswal Multicap 35 Fund with about Rs 12,790 crore under management, and five-year returns of roughly 22%.
In an interview to RupeeIQ, Aashish P. Somaiyaa, MD and CEO of MOAMC, talks about the investment philosophy of Motilal Oswal Mutual Fund, why they will not focus on debt funds as a strategy, and also throws light on if special events like elections have a bearing on the Indian markets.
Before joining Motilal Oswal AMC, Somaiyaa spent over 13 years in sales and distribution, channel management, product development and institutional sales at ICICI Prudential AMC, where he was the senior vice president and head of retail business. There he was responsible for mutual funds, PMS and real estate offerings. Somaiyaa has also worked in project management at Bharti AXA Investment Managers. He holds a Masters in Management Studies in Finance from Narsee Monjee Institute of Management Studies and a Bachelor of Engineering in Polymer Science.
Tell us about the investment philosophy at Motilal Oswal Mutual Fund?
The investing philosophy of Motilal Oswal AMC is to buy high quality growth-oriented companies in a focused portfolio of 20-25 stocks and then hold them through their growth cycle. We believe in buy right and then sitting tight over years. Our annual churn ratios are much lower than industry benchmarks that one normally observes for open ended funds. Further, we back this up with very high levels of skin in the game and complete alignment of interest with our investors. We have over ~Rs 2,500 crore of proprietary commitment to the equity portfolios managed by our AMC.
Motilal Oswal AMC is popularly known for being an equity fund house. Do you plan to change this perception? Could we see more debt funds being launched in the year ahead?
Motilal Oswal AMC is an equity house and we strongly believe in sticking to our core which is our equity expertise. The perception has been worked up on and built over a number of years deliberately. We have no intention of changing this perception. We do not intend to launch any debt funds. The only debt funds we manage currently are a liquid fund and an ultra short term fund in order to enable investors to park their funds and transfer in and out of equities when required. We have no further plans of launching any debt funds.
Speaking of debt funds, your Ultra Short Duration fund which has majority investment in money market instruments to the tune of 80% has delivered negative returns over 6 months, 1 year & 2-year period. Can you help our readers understand the cause for this as such funds are typically considered to be low risk funds?
The ultra short-term fund had a 7.5% exposure to commercial papers of IL&FS. We do not manage any long duration funds or credit risk funds so we did not have any long exposure. While our maturities were in end September 2018 and January 2019, the sudden event of default forced us to mark down the said exposure which has resulted in a fall in NAV.
How long do you think it will take for your ultra-short duration fund to recover investors’ losses?
My estimate is that it may take a year for the entire losses to be recovered. At the same time, investors park money in this fund for moving in and out of equity so they would be served well if they strategise the equity exposure.
Are you planning on venturing in the close ended space – any FMP or close ended equity fund?
We have never launched any FMPs because we do not offer any fixed income funds. We have never launched any closed ended equity funds because there is no real evidence that closed ended equity funds’ performance is better than open ended funds. The only space where one may consider closed ended funds is in case they are investing in small cap stocks or a concentrated thematic exposure and hence the corpus or flows need to be restricted. We do this in our AIF offerings that too very sparingly but when mutual funds say that they are creating closed ended funds in the MF space to restrict corpus and flows, and yet they get into launching an NFO a month in the same space it defeats the purpose. Let’s just say we are not a big votary of closed ended equity funds.
Would we see any new offering coming to market from your fund house?
We have no plans of launching any new funds around the corner.
Coming to equity funds, what would be your favourite themes and sectors in the year ahead? And what makes them your favourite?
Our portfolios are usually built bottom up and we are agnostic to the index. Our portfolios end up being 60-70% away from the benchmark index. To that extent from benchmarking perspective it is a high-risk strategy considering that we may have a very high alpha at times and we may have significant underperformance at times. On the other hand, we believe this is an ideal strategy in the long run because not only it can create wealth but beating the index could be a significant byproduct of doing this. The regulatory construct of products and recent market behaviour shows alpha generation is becoming difficult and hence our kinds of strategies are required. If one manages money to create wealth one may beat the index as a byproduct but if one manages money to beat the index, neither can be guaranteed.
In this light, we never have a favourite theme for the year but generally our portfolio ends up being a fair mix of private sector financials like banks and insurance companies, select NBFCs, consumer discretionary like white goods and autos, domestic pharma companies, industrials and capex companies and oil marketing companies.
Will the upcoming election results halt the momentum of Indian equity markets?
There will be an impact no doubt but it will be short lived. Also, it is worth noting that usually market activity has been a poor predictor of election results. Hence, we advise people not to make any decisions with the elections in mind. It’s a phenomenon for short term investors but for a long-term investor it will barely be a blip on the chart of wealth creation.
What would be your advice to investors in general? What sort of portfolio positioning they should adopt according to you?
Our advice to investors is to keep in mind that a lot of commentary that goes around in the public domain is given with a one year forward or next quarter kind of time horizon in mind. Investors should defocus from such commentary and utterances and focus on the long-term wealth creation potential of equities. Hence, our advice is always to segregate one’s portfolio by way of goals to be achieved and then make well directed, asset allocated investments towards each goal. Equity will have to be viewed for five years plus kind of term and it will have to be a dominant exposure for anyone whose goals are beyond five years and who is not dependent on the investments for their regular sustenance.
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