You must have read the latest note by Akash Prakash, which is based on your previous boss Raamdeo Agrawal’s recent presentation on flows. Raamdeo has made a presentation to a clutch of investors which is the talk of the town on how meaningful and sustainable domestic flows has the potential to become over the next decade or so. Are you seeing signs that now it is not about retail investors trying to time the market and gradually cyclicality is moving out of it?
Yes, I definitely read that interesting piece by Mr Akash Prakash. Frankly speaking, a lot of that note or a lot of that data, I would assume, is more structural, more long-term in nature and lays out certain forecasts about how retail liquidity will shape up, how it has shaped up not only in the last three to five years but how that is likely to persist over the next say decade or so.
I frankly do not have very many doubts about the structural element at all. But coming to your point about cyclicality, let us look at what is happening right now vis-à-vis how things have shaped up in the last two years and I would like to point out to you with some data that in investor behaviour, investor psychology, the cyclical element still persists.
I have no quarrel with the structural part of it at all. But the cyclical element still persists and here is some data that I would like to get your attention on. If you take in the last couple of years, the highest flows which we saw materialise in the equity mutual fund industry were at the fag end of 2021. Even if I remove EPFO and Nifty ETFs, etc, and just take equity funds and hybrid funds, in certain months at the end of 2021, I probably saw Rs 60,000-65,000 crore of gross inflows and Rs 20,000 to 25,000 crore of redemption, which left us with nearly Rs 40,000 crore. In a particular month, I even remember seeing Rs 45,000 crore of net inflows into equity and hybrid mutual funds in the fag end of 2021.
Compared to that, let us see where we are today. I am sure you must have noticed that in one of the recent months, we have been seeing an average of Rs 35,000 crore gross equity flows and because it is clients’ money, for a variety of reasons they will remove it. So the redemption seems to be in the vicinity of Rs 25,000 crore per month and that leaves us with net inflows sometimes of Rs 5,000-7,000-8,000 crore.
So, what has happened is maximum money came in 2021 and then there was a lull in 2022, a massive sector rotation, a couple of deep corruptions along the way. In the last three months’ rally, people have broken even and got some fixed income plus some kind of return on their investments which they made in 2021. The sharp rally in the last three months has also meant that even long-term investors are suddenly seeing a bump up of 3-4-5% in their CAGRs. With that, you can clearly see two things. One, you can see right now that the flows have been kind of flagging off and the net flow is nowhere compared to where it was a year or two back. Second, you are seeing the typical behaviour in the last three, four, five months because small cap, midcap, microcap has gone up, whatever remaining flow, while the net flow is anaemic, but whatever inflow is coming, a good part of it is going into smallcap kind of products. So, what I am trying to tell you is that there is no doubt on the structural part of this whole assessment, but I believe the cyclicality which is engendered by market behaviour and the typical investor reaction to the recent past is not quickly going away in any manner.What kind of flows are you witnessing in your own AMC? You must be travelling across the country.
Yes, honestly speaking, we are not really yet a benchmark or a yardstick because we are, say, Rs 4,300 crore in our equity mutual funds and if I look at the White Oak Group, then we have a PMS and AIF which is, say, more like Rs 13,000 crore. But specifically on the mutual fund because we are barely 1% of the monthly flow or something, we are still very tiny.
So, I cannot say that we are making very good progress, but I really cannot say that we are the yardstick. I think the way to assess the market would be the broader numbers which I just shared with you and there I am seeing a lot of investor psychology and recency bias playing out. One thing which I can see that is very encouraging for our firm clearly is that in the last one year, we put all our basic products in place. We are in 50 locations across the country. We have already about 1,75,000 unique plans with nearly Rs 110 crore per month coming in through SIPs and STPs, a kind of granular flows.
We are doing our bit in terms of participating, reaching out to retail investors and participating in a broader arena and not just metros, but across 50 different locations. It is an encouraging start for us. But given that we are still a very tiny proportion of the overall market and we are just spreading our brand, it is early days for me to comment. The larger scenario is what I just described to you a couple of minutes back.
Is valuations not an issue? What is the feedback you get from your team? Flows are so strong. You cannot take a cash call as AMC. None of them do. But markets have run up quite a lot, especially midcap and smallcaps. Does that become an issue because two of your peers, Tata and Nippon, have stopped receiving lump sum in the smallcap schemes?
At our end also, nothing to do with the last three months of a rally, etc, etc, and anecdotally, if you see SME IPOs, if you see retail subscription to the main board IPOs, if you look at the bulk of whatever net flow is there, a good part of it is going into smallcaps. Those are the signs which tell us that there is some amount of froth in valuation. Some exuberance also points to that and in the last three-four months, suddenly the smallcap and micro cap index have shot up a lot. So, sharp movement in a short time that actually tells you a lot.
At our end, while we do not have huge corpuses, one differentiated or one strategic decision we have taken at White Oak is that we launched our midcap mutual fund in August last year. The day the NFO got over, we released an addendum and we kind of made a decision that we will only take money in a systematic fashion and we do not want lumpy money coming in at any one unique point in time.
For example, we have announced our multi-cap fund which is being launched and multi-cap as a category again tends to be 50-60-70% small and midcap. So, we are not going around timing the market. When we get regulatory approval, we get the product out and we start building our portfolios and our track record. But there also, eventually the intention is that we should take money systematically rather than taking money lumpy. Because when products have narrow domains like midcap, smallcap, sectoral or thematic, when you are operating in any narrow domain of the market, money which comes in lump sum and money which comes on the back of recent performance is prone to giving a not so great experience to investors and we want to protect our brand name and we want to protect investors’ experience of investing.
So, wherever we have narrow mandates like midcap, mid and smallcap, multi cap which is 60-70 mid and small cap, we try to make sure that we avoid lump sum money, especially when we think anecdotal evidence points to toppish behaviour and take it in a systematic fashion over a period of time because ultimately we want long-term investors and people who invest systematically will have a good experience and they are more likely to be long-term investors than the typical lump sum big flow coming in.
What is your house call right now on the markets? Your overweights and underweights?
We are fully invested. We think that people who come to us have made their mind up to invest in equity and from that point onwards, our risk is not equity risk, our risk is risk of underperformance. So, we will not take cash really speaking and at all points in time, we are fully invested. But with due respect to your question, no house call really, but if you really ask me, my sense is that I have to always think probabilistically.
I ask a simple question – where we are? We know what is the scenario in US, we know what is the scenario with further rate hikes and inflationary pressures, we know the domestic scenario, we know run up to general election and so many state elections will come up, etc, etc, and I already told you that last three months situations have taken turn from the Goldilocks kind of scenario, which was there three-four months.
If I ask myself that at 19,200-19,300 what is the probability I will see 10% up which is 21,000 and what is the probability that I will see 10% down, then I would have to admit that today the probability of downside seems to be slightly higher than the probability of a continued uptrend and there are some issues that we need to watch out for, that is how I would put it.
So, wherever I have been travelling, I have been telling people not to get overexcited, maybe stagger your money and if you have made a lot more return than what you really thought or if your asset allocation has got skewed towards small and midcaps or got skewed towards any one asset class, then please review it. These are the kind of messages that we are sharing. If you ask me 18-24 months down the line, 2025, etc, I would be very positive. But along the way, if we got a correction and if I got an opportunity to add more, I would be even more happy because the next six to nine months seems a bit uncertain but 2-3 years seems to be very, very positive.
