In an interview with ETMarkets on the sidelines of Investing Accelerator Summit 2023, Somaiyaa said: “Apart from all the other structural positives that have been spoken about India, this is one thing which is not spoken enough” Edited excerpts:
How should one pick the fund – is 1–year performance a good benchmark to select a fund?
In fact, one-year performance is exactly not the benchmark. In fact, it is a contra-indicator, that is what my analysis kind of tells me.The thought about speaking on why winners rotate comes from the fact that when we track investor behaviour or even if you track fund flows in the industry, what you will find is typically a lot of money ends up going to people who have done very very well in the last 1 year or maybe in the last 3 years period.
At this juncture, if you take the best performing fund of the last three years you put money in there, and then wait till August 2026 to see how it plays out — you will find is that the correlation between ranks for the last three years and the rank for performance in the subsequent three years, the correlation of these two ranks is practically nothing.
There is not only no correlation but sometimes it actually becomes a contra-indicator. So, there are many regulatory disclaimers that all the mutual fund guys put up that past performance is not an indicator of the future. In fact, it is borne out in the data actually.
We have crossed all walls of worries in 2022 and continue to do so in 2023 to hit record highs. What makes us stand out is the GDP rate or India Inc. story.
If you see global markets and if you see especially the US and some of the Western world, you are right that markets seem to be climbing a wall of worry.
But today, my fear is probably that the wall is taller than most people imagine. And there is a lot more climbing yet to be done.
But yes, on your point, I think on a relative basis, definitely India is standing out not only now but it is likely to stand out in the forthcoming few years as well because the prime reason which is not discussed enough is that we are counter cyclical to the western world, especially to US.If you see pre-COVID, they were booming and COVID was just 30-45 days for them and they again went into a zero-interest rate and another fiscal stimulus, monetary stimulus.
If you see US, they have been in a scenario where they have been on a tear as far as economic growth is concerned and now, they have to somehow engineer a soft landing, so to speak, to cool off the economy and to make sure that inflation does not become a persistent long drawn problem for them and does not go out of control.
Whereas if you see India, right from pre-COVID and through COVID, as far as our economic cycle is concerned, we were kind of emerging out of a trough. Even now we are just kind of emerging out of a trough. So, we are counter cyclical to the western world.
I think, apart from all the other structural positives that have been spoken about in India, this is one thing that is not spoken enough.
I think we are not in so much of a trouble because we are counter-cyclical to them as far as economic cycles are concerned.
How are FIIs looking at India’s story? The US Fed has hinted at another possible rate hike.
If you ask me there again, there is a short-term cyclical or a short-term scenario and then there is a slightly longish perspective.
If you meet some of these wealth managers, their investment in India was not at all deliberate, it was like vast parts of it. Say 80-85% of money in India, almost 90% of money in India was incidental.
If you put money in a global emerging market fund, you put money in an Asian equity fund, or a BRICS fund or a global equity fund, and some allocation from that basis MSCI EM Index, some allocation from that would land up in India.
Bulk of the investments were going to China. But, the big change today is that there is at least a sizable number of people who have realized India’s potential.
If we just look at data of the last five years of emerging market performance in dollar terms – it is negative, and India is about 7% to 8% positive in the dollar terms. It is negative is because China, Russia, etc., everything has disappointed.
I think overall, eventually people will realise that this basket approach of investing with BRICS or EMs, etc. in India, may not be working for them. It is probably not a scientifically constructed basket.
You will find that a lot more people are more deliberately and directly looking at India as a single country exposure. I think that is a long story.
If you ask me here and now, you did mention US interest rates. If you look in the here and now, in a here and now I think it is documented somewhere, I think somebody had this famous “that a good emerging market manager buys the currency first.”
So, what is happening is that, look at it this way, in March three or four banks collapsed in the US, there was reason to believe that they will take a pause and maybe eventually, there could be rate cuts.
At that time, if you see the dollar started depreciating and the rupee went to 81-82 kind of range, and we got an avalanche of FII flows. So that is what happens when you get some visibility about our currency stabilising or even showing a minor appreciating bias. But last few days, if you see it, it is the opposite. What has happened there?
Yes, it is the opposite.
The US economic data probably was quite strong. And people thought that forget rate cuts, there is going to be higher for longer, that kind of thing came back again. And then again, the rupee started slipping and the dollar started to strengthen.
You could clearly see that in the last couple of fortnights, last one month, FII flow has kind of little bit it is on the fence kind of thing. So that is the short term, I think something in US, something got to give kind of scenario.
Unless and until the US does not engineer a slowdown, we will have these kabhi haan kabhi naa kind of moments as far as FII flows are concerned.
Macros have a direct impact on fund performance (external factors). Does it really impact alpha creation?
Yes, so you are right, actually, if you see in the beginning of the conversation, we were discussing why the winners of the past do not sustain their leadership and why some other winner emerges.
I think that is a function of the fact that if you see the best manifestation of our stock market, the widest representative sample of the stock market is BSE 500.
And the fact is that in the BSE 500 you have defensive and cyclical domestic and exports, large, mid and small, rate sensitive and non-rate sensitive and you have PSUs and private.
The index is everything, and winners rotate purely because most fund managers have a preferred set of companies. It is not like they are all evaluating 500, 600 or 1000 companies. It is not like they are experts in every sector.
It is not like they believe in every possible way of investing. Everybody has their own recipe. It appears that fund managers prefer to operate in certain pockets of the market, which they believe will deliver outperformance for them.
But market is market, like we know even a clock which is not functioning will show you the right time twice in a day. So, there is nothing in the market which will never work.
What happens is that when macros change, the style in favour in the market or the sectors or the market cap buckets in favour in the market, when macros change, what is preferred in the market that also changes.
Macros have a big role in tailwinding or headwinding of fund performance. I think key learning is that we should run broad balanced portfolios, which are amenable to performance in all market conditions in all macros because you cannot forecast macros.
What is the evolving trend you have seen in the PMS industry, especially after COVID?
Mutual funds have been the mainstay for most investors over the last few decade or decade-and-a-half. I mean, earlier, if you take 80s and 90s, it was more about direct equity investing.
Over the years, people have realised that they need some professional service providers. Mutual funds have been the mainstay for the longest point in time.
But from the regulatory perspective, if you see and rightly so, as mutual funds have gained wide acceptance and now there are millions and millions of investors in mutual funds.
The regulator has started to make mutual funds may be easier to understand, so they are more standardised, more straitjacketed and more retail friendly.
If we take PMSes then a lot of the schemes run very narrow mandates. Here the regulation offers a bit more latitude as compared to mutual funds.
Generally, when people have very narrow or very aggressive strategies, it is better run in a PMS. And, it is not necessarily that all PMSes will do better than mutual funds. Within that also, there will be good performers and not so good performers.
The point is that given the investment latitude and given the flexibility, sometimes people do anticipate that a PMS has at least the ability to outperform a mutual fund.
The other important thing is that if you see PMSes, like say for example, we have an offering where we charge a fee only on the alpha that we produce over the benchmark, so there is no fixed fee, the variable is also not linked to any hurdle.
I think that latitude is a lot more in PMS, where the investment can be made.
Rs 15,000 cr of domestic money moving into equity markets every month – how are you looking at this? And, where is the trend headed?
I think if you take in absolute volume terms and compare it with last 5 years, last 10 years, last 15 years, again there is a structural and a cyclical element.
In absolute volume terms, we are seeing that the SIP flows, the total flows compared to 5, 10, 15 years they are on the rise and they are set to rise because investing in capital markets either through broking accounts which is direct equity or through mutual funds or in any format across the board capital market industry is tailwinded.
Capital market adaption is tailwinded and digitisation and the service that media partners like all of you provide, you give more information, more transparency, your ecosystem plus the digital ecosystem all of that put together has democratised the whole space.
I think it is only going to go up. But within that, within that one cannot deny that there are dynamics of investor behaviour and what is the recency effect of recent past performance so that brings a cyclical element because if you see 2021, 2021 when Nifty made a high at 18,500 and you suddenly saw a spurt in small and midcap and massive teji.
In 2021, at the highest point, I saw gross equity flows into mutual fund industry at more like 60,000-65,000 crores. And if you take 20,000-25,000 crore redemption which was the order of the day back then, we were left with net flows ranging 40,000 to 45,000 crores in a given month, this was 2021.
Now, today, if you see the point in time we are talking, around these times we are seeing gross inflows have come to more like 35,000 crores. Redemption still persists at about 20,000-25,000 crores.
So, the net inflow has declined to more like sometimes 5000, sometimes 8000, sometimes 10000 kind of numbers. So, over long periods of time if you take absolute numbers, 15,000 crores SIP, 40,000-50,000 crores gross inflow, crores of new folios and SIP accounts so the absolute numbers are staggering and they are set to only rise in the next few years.
But in between always market experience, recent performance, all these things will make some headwinds and tailwinds intermittently.
(Disclaimer: ETMarkets was invited to the Investing Accelerator Summit 2023. Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
