The mutual fund industry has seen a spate of exits of star fund managers. The trend will continue says Sunil Singhania, who quit Reliance Mutual Fund, to set up Abakkus Asset Manager. In an interview to Samie Modak during CFA Society’s third India Wealth Management Conference, says running a hedge fund allows more flexibility to manage money sophisticated money. Edited excerpts:
We have seen big MF names quit the industry at a time when the growth has been robust. Are there better opportunities in the AIF space?
The asset management industry has seen rapid growth in India. However, my view is that this growth is visible for longer periods of time and it can only get stronger from here. As is the case globally, successful portfolio managers will eventually set up their own asset management companies. The AIF structure offers the manager the flexibility to manage money for sophisticated and smart investors in an operationally efficient manner. For alpha generation, AIF offers a good avenue.
The benchmark indices have done very well this year. But the broader markets have fared badly. Does this trend make investing challenging?
This is a cycle which is seen every few years. From August 2017 to January 2018, the mid and small cap companies saw euphoria. Prices and valuations of stocks went berserk. The current challenges in this segment reflect this over valuation. Of course, the additional margins as also the MF reclassification also had an impact. However, my view is that mid- and small-caps should stabilise from the current levels and start to see renewed interest. Markets are always challenging, and I consider this to be an opportunity.
Passive funds are under the limelight as majority of the actively managed funds have failed to beat benchmarks. Do you think this trend will continue?
The sizes of some of the mutual fund schemes have become too large. In the current scenario, any scheme over Rs 150 billion of asset will have big challenges to outperform. Also, with enhanced regulations, the fund managers must stick to the stocks that the fund name denotes. However, the Indian fund management industry has over the past so many years beaten the benchmark and this trend should continue.
Do you believe the MF industry is in a structural uptrend? Or are we near the peak of this cycle? Please elaborate?
Currently, MF industry in India is just 12 per cent of GDP as compared to 50 per cent plus seen in developed markets, hence the industry is just at its infancy in India and has a long way to go. Another way to look at this is that mutual funds today have close to just 20 million unique investors in a population base of 1.3 billion. This shows the level of under penetration.
What are the challenges in bottom-up stock picking approach, especially if you have to pick from beyond top 500 universe?
The biggest challenge in bottom-up stock picking in mid- to small-cap is in handling the volatility. On a small base of operations, these companies don’t have a smooth earnings trajectory and even small variations get magnified. Also, due to technology now there is an overload of information which can get distracting and the time to react on any event has shortened, forcing the fund manager to always be on his toes. However, my view is to use the volatility as your friend rather than get scared by it.
Do you think the near-term returns could be tepid given the sharp run up? How will near-term uncertainties—elections, trade wars and Fed tightening—play on the market?
As always, it is difficult to predict near term market moved. With 25% of equity owned by foreign investors it is but natural that any global moves will have some impact on Indian equities. Globally, investors don’t like uncertainty and the forthcoming elections too will have its share in the near term. However, as it has been historically seen, over the medium to long term, Indian equities have managed to overcome the near-term hiccups and have delivered superior returns. I expect this trend to continue.
Will foreign flows continue to remain lackluster?
I am expecting earnings growth to pick up in India and this should see foreign investor interest coming back to India. Also, an important point to note here is that while equity inflows have been low, India is seeing record FDI inflows. India stands out as one of the best performing equity markets in the world in 2018. Also, it’s least insulated with the happenings in the world including trade tariffs. My view is that even FPI inflows should start again.
Which are the sectors where you see value?
Industrials, capital goods, pharma are some of the sectors where we are currently seeing value. Beyond sectors, I believe as a bottom-up stock picker there are opportunities across the markets for a medium to long term patient investor.
How is your new role at Abakkus different from the previous assignment at Reliance MF?
I am very excited in this new avatar. Apart from the investment responsibilities, as a business head there are new challenges you face daily, which is new learning for me. It has been my constant endeavour and passion to rigorously work on generating alpha and growing the wealth for our investors and the alternative investment space also provides a platform with flexibility to identify and invest in new ideas.