The Mutual Fund Show: Don’t SIP, But Gulp, Says Motilal Oswal’s Aashish Somaiyaa
Investors should make the most of lower valuations, says the CEO of Motilal Oswal AMC
As Indian markets tumbled in the past few days, eroding billions in investor wealth, over repercussions caused by the global outbreak of the novel coronavirus, Aashish Somaiyaa said this is the time to “not just SIP, but gulp”.
The managing director and chief executive officer of Motilal Oswal likened the ongoing market scenario to that during the sub-prime mortgage crisis in the U.S. involving Lehman Brothers and other investment banks, and asked investors to make lumpsum investments over the next three months and not panic as the NSE Nifty 50 would recover in 3-6 months.
He, however, advised people to invest in companies that could benefit from lower oil prices and interest rates, higher liquidity and an increased domestic market exposure.
Somaiyaa also suggested consumption funds as stocks of consumer goods makers have declined recently—implying room for upside. These stocks could outperform the markets, he said, adding that they could also be a safe haven for investors.
The government’s rescue plan for Yes Bank Ltd.—which stipulates that 75 percent of the lender’s shares held by existing shareholders would be locked in for three years—has worried index fund holders as the stock is now not a part of the NSE Nifty 50.
Somaiyaa said that while 75 percent of their equity in the private lender will be marked down to zero from the fund, its end value will be available to those holding these shares from March 13 (date of announcement) till the end of the three-year time frame.
Disclosure: Motilal Oswal doesn’t hold any consumption funds. The leaders in this category, based on net asset value, include the likes of Sundaram Rural and Consumption Funds, Aditya Birla Genext and Tata India Consumer among others.
Watch the full show here:
Here are the edited excerpts from the interview:
We’ve titled this mutual fund show as “Where To Take Cover”, because frankly, right now, that’s the question that most people would have in their minds.
I was talking to someone and I said that everything is not always about markets and investments. Considering that this is a very different kind of scenario that we are facing, I think the first thing to do is to take care of your health and the people around you. So whatever is being spoken about social distancing or taking precautions needs to be taken very seriously.
Most importantly, what is the market reacting to? The market is basically reacting to the fear that this can spread, and it can go beyond control. How do we ensure it doesn’t spread and how do we ensure it doesn’t go beyond control? First, we need to make sure that you are not participating in carrying this virus anywhere. As far as taking cover is concerned, my sense is that these kinds of circumstances are unavoidable as far as markets are concerned. Every once in a while, when it comes to equity, the plain and simple truth is that for some time, there is no cover. You just need to stay there.
A lot of people must be thinking that since the multi-year returns in the mid cap, small caps, maybe even in large caps. I mean, frankly, if you look at the levels right now, and look at an index fund investing done since 2008 or 2009, you have probably done about 35-36 percent thus far. So the returns haven’t been spectacular. So what would you tell people who might think that when ‘ab tak raah dekhi hai, paisa nahi
aa raha’ (I‘ve waited for so long, the money isn’t coming) let me try and switch out because ‘isse jyaada paisa toh debt fund me aa jaata’ (more money would come about in a debt fund).
So, there is something, I don’t mean to give a tricky or a technical answer, but there is something called an endpoint bias. It’s like this: if you had done the same evaluation, say on 31st January, the numbers would have looked very different. If I think in fact, even in mid-February, the numbers would have looked very different. Now in one month, we are just about 30-35 percent down in a flash-crash kind of scenario.
So exactly when it’s 30-35 percent down, if we want to make a performance evaluation, then whether we like it or not, it’s not going to look good. Worse, if we are going to make an investment decision based on that very endpoint bias, then that’s not going to serve us very well in the future. So let me give you another way, we all work in this corporate setups and if I tell all my colleagues that I will do your performance evaluation, exactly on the worst day of your performance, or if my promoters or bosses tell me that your performance will be evaluated only on the worst day of your tenure out here, then I don’t think that would be the right judgment or right assessment. At the same time, that will not be the right data to make decisions for the future. So there are the same decisions- same way, right now, we’re discussing this in March 2020. If you and I had had this conversation in May 2013, or March 2009, or say February 2016, the numbers would have looked as bad. Endpoint bias is something which one needs to keep in mind because where you start and which day you measure the numbers it really matters.
I wonder if you are an investor in mutual funds, would you use these opportunities to top up and increase your SIPs or lump sum? Would you go out and do lump sum investments? Or would you just essentially, because the thing is a bit uncertain, stick to your SIPs because I believe that is something that he would anyways do?
No, SIPs continue eventually there might be such a time in the market, which is why SIPs are registered in the first place. Of course, most of us have monthly incomes, which is why we do these SIPs. Anyway, from market perspective, there’s the right thing to do. That is why you call it an SIP. I think these are times when not just sip, you should actually gulp. The reason being that it’s not very often that you get these kinds of extraordinary times.
There are a few unknowns out there. I don’t mean to take this lightly. I am not an expert on understanding how this Covid-19 actually spreads and plays out and how deep the impact can be. There is serious panic and just take a measure of the panic. South Korea, which is by far producing the best data, and which have supposedly conquered the spread of this virus. By the way year-to-date basis, they are also 33 percent down from their starting levels, which is approximately where our Nifty is. So this is not about India, this is a panic mostly emerging out of the western markets. This time, it’s the widest. That time, it used to be Lehman Brothers. It always starts with a huge amount of panic from foreigners where they sell every market quite indiscriminately. I don’t think we should react to it.
It’s very easy. I’m mindful of the fact that it’s easy for me to say this, very difficult for your listeners to believe as well as implement. But the short answer to your question is that if and when I have liquidity, I actually would do lump sum investments also. And those lump sum investments, I would spread between now and maybe maximum of three months, two to three months. Maybe by May, I would try to get fully invested.
Ashish, let’s talk about some specifics. By the end of December, the whole of January, everybody was talking about how mid caps and small caps would come back into favour. Thus far, we’ve seen year-to-date, which is January and February, the data that is available right now, the flows have looked pretty strong, much stronger than what we’ve seen, arguably as an average for the whole monthly flows for 2019. What do you tell these investors? Presuming that some of them have done lump sums or otherwise, should they stop that and move on to large caps because they also have corrected so much and arguably the first recovery tends to happen in the larger names and then tends to percolate downwards?
I think somewhere reflection of what you’re observing, the reflection of that is there because right now in this fall; if I’m not wrong, small cap, mid cap, large cap has pretty much fallen as much or equally. Nifty 500, Nifty 50, mid-cap 150, small-cap 250, maybe a little bit more, but broadly, everything has fallen in a similar range. It’s not like a very stark difference. That’s the first point. The second point is that now we will have to see what is the implication- which companies irrespective of whether they’re large cap and mid cap, what their sensitivity to global growth is. Imports exports, commodities, I think all those exposures will need to be seen. Long story short, the key criteria is I would like to look at companies that benefit from low oil prices. I would like to see companies that benefit from low-interest rates and very high global liquidity and I would like to invest in companies that are very inward-looking, very domestically oriented as far as the India story is concerned.
I mean, I’m not saying that we should rule out, there will be a quarter or a couple of quarters of growth disruption. But I think that this is not a time to be very choosy about large cap or mid cap. I think there is enough potential in mid cap. The factors which I just mentioned, that will determine who does well, rather than the ‘cap’ actually being a matter of concern right now.
AUDIENCE QUESTION: What are you telling your investors who invested a lump sum in 2018 in the mid-cap fund, and who cannot add more surplus the outlook was for five to seven years from the period of 2018. What would you tell them?
They should just stay on the course. I mean, I understand that when the market tanked so badly in an unprecedented fashion, two or three things have to be kept in mind. One is that you should keep in mind where this all started. We are still to watch for any implications as far as India is concerned. But let’s keep in mind where it started. Second important point is that you just stay on the course. In fact, today, maybe I was writing a newsletter to our clients and our investors, and maybe everybody will receive it in a few days, maybe a couple of days. But in fact, that is what I started off by writing that a lot of times when the market falls, everybody says, why don’t you invest? I think it’s perfectly fine. If you don’t, if you’re not able to invest or if you don’t feel like investing right now, it’s perfectly fine. You just stay on the course without reacting or panicking. There is a very high probability. See, the way this thing is played out is not like 2008 2009. Right from 2007, there were early signals that the U.S. market is in trouble. At that time, there was this new phrase that was coined saying India is “decoupled from the Western world”. So although they were early signs of stress, they were actually ignored. Then eventually there was no decoupling and everything crashed. Now 2020 also panic has started from Western markets, but it’s almost like a flash. There was nothing that was actually there in the background, which would lead one to believe that there’s going to be this trouble. Why I’m giving you this background is because this kind of sharp downturn in the matter of next three, six months at some point in time, I’m not trying to make light of the situation, I’m just saying that this kind of a sharp decline is very susceptible at some point in time to a very sharp reversal. The reason being that you see and watch for data in the next month or two months; how the situation evolves, how the data plays out, because in the background, you look at what central bankers and governments are doing.
So, this is susceptible to some pain right now, but this is equally susceptible to a sharp turn at some point in time in the next few months. I’m not saying that we should again go back exactly to 12,400. But I’m pretty sure it’s not going to be at this level if you let some time pass.
On what criteria does asset allocation of a particular fund of yours, Motilal
Oswal Dynamic Fund, operate? At present, what percentage of equity does it hold? Can you please explain this operation in detail because it will have some bearing on how people choose some of the funds within your portfolios. Would you be able to answer that?
So, just on the previous question, I want to clarify one thing. So I gave a very long answer, but I’m just thinking about it. I think the message is very clear. You stick to your five years, seven-year, whatever it is, and don’t react to what is happening right now. Coming on to this question about the dynamic fund- we have this Motilal Oswal Valuation Index, which basically takes the valuation of the Nifty 50 index. There is an algorithm that combines P/E price to book and dividend yield. That algorithm is handed over to India index services which are run by the NSE. So, NSE computes and releases a number every day we just dispassionately follow those numbers. The Motilal Oswal Valuation Index takes a 30 day rolling average. Right now, the 30-day average is at about 105 and the current valuation is at 85. That’s how sharp the fall has been. So, the 30-day average is at 105, but the current value is at 85 which means that if the situation persists eventually we will head south as far as the valuation index itself is concerned. At the current level, we are 55 percent in equity. This 85 number is going to drag the average down at some point in time we will go below 100 because this works on averages.
So, right now we are 55 percent equity and if this continues, I think in a matter of a few days, we will head to about 70 percent exposure to equity. So the portfolio managers are doing just one thing, which is that they are doing stock selection for whatever 50-50 percent equity we need to have, that they’re allocating as per their thought process about what works in markets. As far as the fixed income is concerned, we don’t take any credit calls or any duration calls. It basically depends on bank CDs and treasury bills and those kinds of papers. As far as the allocation is concerned, we don’t take any subjective or judgmental calls. We just blindly follow the valuation index, which is sent to us by the guys at NSE.
I was thinking about what the second-order effects of what’s happening currently could be. I wonder if the first pocket that takes a hit immediately and in the near-term could be consumption. While you may not have a consumer fund within your portfolio, what do you think could happen to such things. When infrastructure got hit- infrastructure thematic funds would have gotten hit, so you would have some thoughts on what happens to these thematic funds in times of such Black Swan events. What do you think will happen? Because there are a clutch of your peers- Sundaram has got a rural consumption fund, ABSL has got an India Genext India Direct fund, Tata India Consumer fund. A bunch of your peers have these funds without getting into specific funds, if you can tell us what do you think generally would happen in such a scenario?
Right now, we have to answer these questions with what data we currently have available with us. If you see the background, because of the behaviour of the Agriculture production and the rural trends, and the way the food inflation went up, Agri-food prices improved, production improved, the government has been spending money. See the coronavirus as of now is impacted only stock prices. We don’t have any data to see how much it is impacting our economy eventually, but be that as it may, I would say that anything to do with rural consumption and which is related to staples and FMCG has two drivers to it. One is that it is anyway seen to be like a flight to quality or it is anyway seen to be a safe haven when the rest of the market goes through some kind of disaster.
Second is anyway will consumption it was believed that eventually in the next three to six months there will be tailwinds. Lastly, we have to see that if this virus actually escalates, what is the impact on urban and what is the impact on rural will be. In my limited understanding, the urban impact will be higher than the rural impact. So I would put it this way that consumption is seen to be a safe haven. Rural consumption right now would be seen to be slightly more- especially if you’re talking about FMCG and staples and those kinds of things. Firstly, it could be more like a safe haven. Secondly. my sense is it could relatively outperform. Don’t form your judgement based on panic, because when there is panic, then nobody cares for what I spoke, everybody wants to sell everything. When we were kids, we used to hear about this story, when there was a guy who was selling caps and hats and some monkeys come and steal their caps. Then, he’s advised that first, you wear the cap and you throw it down, if you throw the cap down, all monkeys will throw their caps down. So right now, this is how the market is operating. Just because every morning you guys start selling, everybody starts selling. That’s how it’s been for the last few days.
So don’t form your judgment of how a consumer fund should do based on purely what you see in the stock market itself. Wait for some time to pass and wait for data to flow. Keeping all conditions in mind, I think it would be relatively better compared to a lot of the other areas which are under stress. What is under stress is basically financials and everything to do with the global economy that’s under stress. So this would relatively outperform, according to me, anything to do with consumer.
Ashish, a lot of queries have come in about what would happen, the impact essentially, of exclusion of Yes Bank from both the indices on funds, how would funds treat this exit? Can you throw some light? Do any of your funds, which are benchmarked to the index? Maybe the passive funds have this exposure and therefore, what is the process that you’re doing starting tomorrow?
So we’ve never had any active exposure, but your question is on index funds, so in our Nifty 50 index fund, and Nifty 500. So, some of these indices definitely have Yes Bank exposure. The highest will be Nifty and in my sense it was 0.29 percent in Nifty 50. Now, the association of mutual funds sent out last night, an advisory to all of us saying that clearly 25 percent; when it moves off the index, it when it moves out of the index, a 25 percent of the stock can be sold but 75 percent of whatever we own, we cannot sell. That’s the scheme for Yes Bank revival. So as of 13th March, we have to take the list of investors and 75 percent of the Yes Bank position will be frozen by the depositories or our custodians. So at the end of three years, we will be able to sell that.
So whatever gains happen on that, at the end of three years, those gains will be paid to the people who are our investors as of March 13th 2020. The remaining for those three years till then, the value of that stock has to be marked down to zero. So that’s how it will play out. The rebalance will happen with 25 percent of the Yes Bank money 75 percent gets logged in. That 75 percent, till it’s logged in for three years, will have a value of zero. At the end of three years, we have to check what is the gain and the gain will go to the guys who have been with us as of March 13th, 2020.
Do I understand this correctly that people who were invested with you on March 13, 2020, will get the gains (if there are gains) at the end of three years? What happens to the remaining amount?
So, we are able to sell 25 percent, so when a new component comes into the index, then we have to rebalance the index, and the cash will not be everything because everything of Yes Bank is not saleable. So you will have less cash and when Yes Bank goes out, you will have less cash in the portfolio. So the whole thing will have to be rebalanced and the new component will have to be brought in.
So, you will essentially carry out rebalancing on some of the other Nifty weightages as well in order to account for the weightage that comes in?
Yes. So, we have to weigh the index. There’s no doubt about that will do it within the constraints.
Am I guessing this correctly that you will carve out a special niche for sort of a niche for Yes Bank and that call will be taken after two years and 11 months and 27 days straight to be precise as to what the gain or losses are there?
Yes
One final question really and that is from my end. We are all hoping that this is a buy-on-dips market because usually in the last few years, dips have been bought into. What if it does not turn out to be a buy-on-dips market over the course of the next six to nine odd months. I mean, maybe you do cases spiking, maybe economic slump lasting longer, and people exhaust their lump sum monies and things get worse. Would do you still believe that holding on or holding SIPs until this gets better and then restarting SIPs is not a good solution?
No, because if you hold on to your SIPs, see which day the market turns and how it plays out cannot be forecast. Eventually, we all are living with imperfect information. So at some point in time in the future, I might have to chew my words, but we have to live with it, we have to give our best assessment, based on where we see things at a point in time. So I repeat what I said, my sense is that this has been like a flash crash, because at some point in time, in the background, our economy was actually improving. Suddenly, we kind of hit a wall. So there is a vertical crash. Now, when the data comes better, or when the data is not as bad as what people are fearing, please think carefully. Does this deserve 35 percent of the entire market capitalisation to be wiped out? I don’t think so. Maybe yes, you will have one bad quarter two bad quarters, no GDP growth, no economic growth; some of the worst things can play out.
Like I said, I’m more worried about the people around us. So, some of the worst things can play out. But in my understanding, it is a matter of one or two quarters going really bad. Now, for one or two quarters going really bad, do we deserve to have 35 percent or 40 percent of the total market value? This market value again, and again, I’m repeating it actually represents the earning power and terminal value of these companies. So if they have two bad quarters, where let’s say there is zero growth in the worst case, are we saying that they deserve to lose 35 to 40 percent of their entire market value which encompasses their long-drawn-out future potential? My sense answer is no. So I’m not even saying that you should rush in headlong and just start buying.
I’m just saying that it’s very rare that 35-40 percent of the market value gets wiped out. There is imperfect information. We will have all the information in the next few weeks. So it’s not every time that you get a 35-40 percent discount. So start slow, start adding, and then see how it goes. Don’t compromise your liquidity. Don’t jump in headlong. But usually, like it is said, that every past correction looks like a missed opportunity, except the one which you’re living through right now.