The Mutual Fund Show: Four Lessons, Aashish Sommaiyaa Says, 2020 Has Taught
India’s equities witnessed the worst selloff in more than a decade in March, triggered by the coronavirus pandemic, but rallied one-way since then to recover all of their losses in November. But, according to Aashish P Sommaiyaa, there’s one similarity between the two months: high redemption pressure in mutual funds.
The data showed exuberance in January and February but a sharp redemption pressure in March (market lows). Again, a similar situation played out when the markets were at their peaks (October and November), the chief executive officer at White Oak Capital Management said in BloombergQuint’s weekly series The Mutual Fund Show.
“After the Covid shock, while macros have turned favourable, economic performance is not as bad as it was feared and liquidity and interest rate conditions are positive, people are still caught up with the shock of March,” he said. So, investors, according to him, shouldn’t get caught up in market behaviour as opposed to actual investment opportunities.
Investors pulled out a net of Rs 12,917.36 crore from equity mutual funds in November, the fifth straight month of outflows from such category and the biggest at least since April 2018 when the Association of Mutual Funds in India began compiling data in the current form. That’s despite the Nifty 50 index gaining 11.3% during the month. The benchmark also crossed the 13,000-mark in November and scaled new lifetime highs.
Investors, Sommaiyaa said, could learn four things from this exceptional year:
Belief and conviction need to be shown in times of lows and not highs
Equity returns are lumpy/non linear
Recent experience has nothing to do with the future potential
Equities are only for optimists
Citing an illustration, he said if someone invested in March 2015, that’s when the Nifty was at the 9,000 level, by February-end 2020, they would have a 12-13% compounded returns on a five-year basis, and around 4% in March this year as Covid-19 jitters shook the markets. But if they had faith and kept investing, then five-year CAGR would have improved to 4-9% in October and further to 12-13% by November, Sommaiyaa explained.
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Ashish, what do you make of this number [net outflows from equity mutual funds] as well as the last two-or three-months’ numbers?
Sommaiyaa: I think that a lot of focus actually goes on the net flow numbers, which just for clarity, are inflows minus outflows or sales minus redemption. Now, I personally find that the net flow numbers can be a bit misleading and we should always look at the inflow separately and the outflow separately. So, in November, there are about Rs 13,000 crore of a net outflow from equity mutual funds and if I were to add the categories, which is balanced and aggressive hybrid, also predominantly equity-oriented funds, in fact, the picture gets worse—it’s about Rs 17,000 crore of net outflow. Now, look at March, the bottom of the market. March was Rs 9,000-crore inflow actually. So, the general assumption is that investors have become very mature because in March, when the market bottomed out we had Rs 9,000 crore of inflow and in November, when the market is making a new peak, we have Rs 17,000 crore of outflow. So, people are kind of buying low and they are selling high. Now that, according to me, is an oversimplification because different set of people are putting money and different set of people are removing the money, that’s the first point. The second point is that in November, we had Rs 34,000 crore of redemptions. In March, we had Rs 25,000 crore of outflow but we had some smart cookie who is doing bottom-fishing. So, we got about Rs 33,000-34,000 crore of inflow. So, what does it tell you? The difference between March and November is that in November, people don’t seem to have much faith in this rally and a lot of people have stopped investing. In March, there was bottom-fishing. That’s the inflow side of the story, but the outflow side of the story is quite crazy because November had Rs 34,000 crores of outflow, the highest. But do you know which was the second-highest outflow? It was March, Rs 25,000 crore. So, I think that there are two readings in this. One, people don’t have much faith as far as this significant upside we are seeing in the last few months and people are quite skeptical about whether this will sustain or not. Second, as a result there is withdrawal and there is not enough influence. That’s what it actually shows you. If you ask me, it is in my past experience—I have seen that whenever there is a big decline, people do get scared. Some people might want to withdraw but they don’t. The moment that first 100 becomes 7 and when 70 becomes 95, 98 or 99, then people really want to bolt for the door. So, these are the things that I’m observing right now.
Could the case also be made for not introspection really but change of strategy or expenses or something like that from the mutual fund side as well? The reason I bring this point up is that if I look at some of the smaller funds which have done well in the recent past at least or the last couple of years or three years or whatever, I somehow see a pattern there where there the AUM and their flows are not getting impacted as much. Maybe it’s a factor of size I don’t know but is there a bit of a pattern that funds which have consistently done well for the last three years and there are a few houses which are doing that and maybe they have the advantage of sizes but their inflows and their AUMs are not getting impacted too much. So, could there be some bit of rethinking about or the approach around how mutual funds would have done well because as much as I agree Ashish that people should not be getting out in rallies because these rallies might actually continue to stay invested for long, it is a fact and for a lot of people, even their SIPs of three years are under the water?
Sommaiyaa: So, I think one is at the industry level, on your first part of the question. I think the industry level is what needs to be really thought about. I mean, I’m part of the industry we all need to think about this, or need to introspect like you mentioned whether what the real understanding is vis-à-vis SIPs because actually if you really ask me, when this February, March, April May, June’s entire phase kind of played out, if you’re an SIP investor, then you should have been happy because that’s the whole concept. SIP works really badly for you if the market keeps going up, you’re consistently averaging up, then what’s the use of doing an SIP. But SIP is supposed to work fabulously exactly when a 2020 kind of scenario plays out. If that has not encouraged or enthused people to commit more, then I think clearly what are we communicating about SIP, how is it supposed to work, what exactly is it supposed to do, when does it benefit investors? I think later that is something to be thought about.
On your second question related to not so much about large funds or small funds—at least in my perspective, I would say that anybody whose performance has not been very volatile, let us say for example if you’re top quartile, in falling markets you don’t fall as much, well yes then in rising markets, you may not rise as much also but somewhere I think investors are kind of communicating that it’s not about the highest return but it’s about as has low volatility as possible. Second, I think is also about being true to label. Like for example, one of the categories which I have mentioned to you in the past and which I’ve tracked quite loosely is balanced advantage funds and hybrid equity funds. These funds were actually supposed to have lower volatility and they were supposed to actually shield investors from a negative return but if you look at it on a per capita basis or size of an AUM-relative basis, the category which has the highest outflows is this whole balanced advantage and hybrid equity and dynamic kind of category. The reason being that is in certain cases, they have done as badly as equity-oriented funds. So, it’s two things. I think one is about volatility of performance and second is about certain expectations being belied. I think that’s where the issue is. It’s not all about small and mid-cap and stuff, it’s also about true to label, some expectations getting belied and at the same time volatility.
Let’s see if an average investor comes out of this smarter because maybe people learn from other people’s experiences and all those who have gotten out in the presumption that they haven’t gone to equity markets directly, and therefore may have a left out feeling come May or June next year…
Sommaiyaa: That’s actually the fear. Equity returns are non-linear and lumpy. In stock markets in equities, at least in my understanding, if you stayed put for say three years and in those three years you don’t make any return and when your capital comes back, you want to bolt for the door. So, what it means that you’ve lived through the worst and just before a good phase starts, you’ve kind of given up.
I hear some stories of people having removed the money from the mutual funds and got into direct stock investing and good luck to them. I hope they can do well but if they haven’t done, if they see the neighbour doing well or the friend doing well, because he was invested, that might be a case of sour grapes.
Sommaiyaa: So, there’s a fear which is, for example in April 2020 your three-year return, five-year return was abysmal or negative or your SIP didn’t look like it was performing. So, in April or May this year, you make a conclusion that mutual fund didn’t do well for me and then you go and buy some stock and now in November, you’re drawing a conclusion and you’re really going to put up scale with luck. That’s the whole point.
One thing that I think everybody would be happy about Ashish—individual investors and fund managers alike or at least the ones who have these PSU names within them is this. I wouldn’t say sudden change but a slow change in the fortunes of the PSU stocks arguably because the policies of the government seem to have changed a little bit in the way they are approaching the divestments and the fundraising in these PSUs. Now there in past has been complaints by a bunch of fund guys that something has to be done to arrest the slide of the PSUs. What’s your sense now and therefore, do you have any opinions on people who would be invested in PSU funds or CPSEETFs etc. Do you have any thoughts there?
Sommaiyaa: I think, whether it was Mr. Jain or one of the highly respected investors, I think it was Mr. Jain who made that comment. Now, if it’s right out there in the open, that you are a seller, I mean, it’s the worst position to be in, right? I mean, who in his right mind, who is a seller goes around announcing that in the next one year, two years, three years at all points in time I’m going to be a seller of this stock? I mean, that’s not going to augur well for the stock price at all. So there has to be some smartness about how the disinvestment happens really and I’m saying this purely as a ticket of a taxpayer if you will because we have no exposure to PSU stocks, no vested interest of that sort but it’s a simple submission that like I think Mr. Jain commented in one of the media articles that your selling plan should not be out there in the open and there has to be a better way to conduct this purely so that the best prices are realised on those sales. That’s very, very simple. The second important point is that no you would like to sell an asset when it’s in the best possible condition. So, let us say some kind of sell down happening from SUUTI, maybe that makes sense because they have certain good assets and there has been price recovery. So, I think the strategy really needs to be rethought is how I would actually put it.
Do you reckon some of it has been done in which is why maybe the holders of such funds or the managers of such funds will not be as worried a lot, the last few months are slightly different?
Sommaiyaa: There seems to be because that whole on tap CPSE ETF kind of thing I think that surely was doing harm and in all of those issuances what was happening was, you could clearly see that the corpus just dwindled so people were scraping the dividend and then immediately all the stock was being released in the market. I think there seems to be somebody thinking out there and that’s not happening anymore so that’s a really good thing to happen. The second point is that I think the timing and when is it liquidated and how it’s liquidated. I think all of those things need to be reworked. So, I think there seems to be some improvement or rethinking which seems to be evident. The second important point is also the fact that somewhere I think the economy seems to be turning a corner. I used to think like this in 2019-end also and Covid clearly put pay to those efforts and thought processes, but I do believe that and it always happens with very low interest rates and very high liquidity plus benign macros. So, if the economy is kind of beginning a new cycle then it augurs well for some of these enterprises, is how I will put it.
The final piece of the conversation today and that is about how 2020 has taught more lessons than any other year at least until 2008 or maybe more than 2008 too. What stood out for you, both as from a perspective of mutual fund manager of sorts. I mean, one who is in the industry on the other side and as well as a mutual fund investor?
Sommaiyaa: So, for me what I consider is a great part of my job. Sometimes it’s the most difficult part of my job but sometimes it’s also the most educative part of my job is obviously interacting with investors. I personally have been interacting with a lot of investors over the number of years and 2020 from that perspective has been a reasonably tough year because Nifty at 7,600 suddenly appears out of nowhere, then I think logic and rationality and logical explanations don’t seem to kind of always work out. So, that’s where things become difficult. I can tell you in terms of learnings, a few experiences. For example, I’ll share more like a case study with you. This is an example or a case study of one client I interacted with but I suspect that it happens with a lot of people. So, there was somebody who invested somewhere in 2015 March. So, if you remember 2015 March was 9,000 on the Nifty and February end of this year when five years were over, the investor had a return of about 12.5-13% compounded. So, 4-5% CAGR ahead of the Nifty 500 TRI index, 12-13% compounded on a five-year basis. Now, when this person spoke to me at the end of March, obviously he had forgotten what was happening in January-February etc. but at the end of March, he was quite shaken up because the five-year CAGR was 4%. So, his obvious grievance was what is long term and what is this five year? It’s complete nonsense. It just doesn’t work; I should have kept my money in the bank. So, what I did was I pulled out statements of various dates, and I explained to him that look you finished five years in February. In February, you were at about 12% compounded. In March, it didn’t matter what you’re holding, everything was just kind of collapsing. So, I just explained to him that in February, you are at 12% compounded return and in end of March, there is a 35-40% decline. So, if there is a 35-40% decline, it means that your five-year CAGR declines by 7-8%. So, his five-year CAGR looked like 3.5- 4% at that point in time. He was really upset with his investment. So, through over the number of months, I had to kind of handhold and ensure that there is no quest for a redemption because there was this belief that I should redeem this, it just doesn’t work, might as well put money in the bank, etc. That’s when people start to lose faith. Look one of my learnings which I always tell investors is, you don’t need to demonstrate faith when Nifty is 12,500. You need to demonstrate faith in this concept of equity investing when Nifty 7,500. Faith and belief is required at that time. When money is doubled, everybody has faith and belief, it doesn’t matter really. So, now, I tell you the travesty. This person has withdrawn in the end of October. So, at the end of October, the five-year return had improved from 4-9.5%. Do you know the sad part? If the person had waited till the end of November, the five-year CAGR would have been more like 12-13% compounded. So, two or three learnings in this. One is, faith and belief are needed at the bottom of the market and not at the top of the market. Second is all these greed and fear and Warren Buffett statements that people pin on their soft boards in the offices—they are relevant when Nifty hits 7,500 and not when it hits 13,000. The most important thing is that equity returns are non-linear, and they can be lumpy. So, if you told somebody in March, that look don’t panic, you will make this up because just like you can fall 30-40%, there can also be a point where you can gain 30-40%. But people are not able to visualise that how can that happen, but I think it does happen that’s what 2020 has shown and equity returns can be non-linear. So, I think we just need to stay put.