Aashish P Somaiyaa, CEO, Motilal Oswal AMC speaks his mind on SEBI’s new rules, the fund expense debate and scheme performance in an email interaction.
Motilal Oswal AMC has managed scorching growth over the last three years, doubling its AUM every year. How are you augmenting your fund management team to deal with this growth?
The growth in AUM is an outcome of being a differentiated and focused participant in a transformative growth phase and at the same time excellent delivery from our investment teams, especially our ELSS, Dynamic and MultiCap Funds managed by Gautam Sinha Roy. We have witnessed similar growth in our alternates and PMS strategies. In the last one year we have recast the physical space in which our investment teams operate and bolstered research and fund management capability. As we speak, we now have 4 portfolio managers in our MF team, 4 portfolio managers in alternates and a research team that is 7 members strong. A couple of years back, this would have been under 10 people.
LTCG tax on MFs has opened up a tax arbitrage between MFs and ULIPs. Will investors switch loyalty?
Tax is an outcome on an outcome. To that extent I don’t think incidence of a 10% tax on long term gains will make investors move over to ULIPs. There are inherent advantages of superiority of investment performance, transparency, and lower cost in the first few years, which is about as long as people remain invested.
What is striking about this ULIP versus MF debate is actually how similar they are in terms of risk profiles and potential outcomes, and yet how the industries and their regulators present them unbelievably differently.
SEBI wants MFs to practice true labeling, categorise distinctively with standardised investment universe, provide 100 per cent portfolio transparency monthly, avoid names with adjectives or implied promises, declare NAVs and expenses on websites every day, disclose employee compensation etc. The standard risk disclaimer is “Mutual Fund investments are subject to market risks” which to some people sounds like, “buddy, unless you are really lucky or anaesthetised for a long time you will surely lose money”.
But IRDA allows the same investment to be marketed with lower transparency, assured returns in some structures, opaque expense debits reducing units, instead of NAV, names like Accelerator, Enhanced Equity, Growth Plus, Life Equity, True Wealth and similar adjectives, extremities and promises. The standard risk disclaimer is “Insurance is the subject matter of solicitation” which pretty much sounds like “this has nothing to do with markets, don’t you worry”. The unfair tax differential has only stepped into the middle of an already controversial dispensation.
Motilal Oswal AMC has positioned itself as an equity specialist. It also likes to have just four or five products in equities. Given that SEBI’s new rules allow each AMC to run only one scheme per category, will these limits not restrict the total assets you can manage?
The AMC is 100% in favour of these regulations. The end game of investment management should be investment performance and not AUM size which is at best an outcome of performance. Our regulator and our industry have their heart in the right place. I don’t think it will restrict size but it will bring in a discipline of fund capacity and pricing.
The new regulation means innovation has to be genuine, compelling propositions that will add value to clients’ portfolios. Whenever AMCs launch new funds they should be asked, “but, why can’t you buy these ideas in your existing funds, there are investors there too, what about them?”
Motilal Oswal AMC’s fund performances on the multi-cap and large-cap categories are quite good but the mid-cap scheme is lagging the category and benchmark on a three- and one-year basis. Can you explain why?
There is no excuse for the underperformance. We are cognizant of the situation, our own proprietary funds are on the line, as we sink and sail with our investors. We have been reviewing the portfolio and changes that are necessitated are made. In some cases, we would prefer to hold and ride out this phase because with our investing approach there are phases of underperformance, caused by time corrections. In 2014-16 quality and growth outperformed. In a market where broader earnings growth was zero, we created a portfolio with weighted average earnings growth in excess of 20 per cent. We got high outperformance from 2014-16. While earnings trajectory sustained in the latest quarter as well as nine months of this year, portfolio earnings growth is high double digits; this basket of stocks is witnessing a time correction. Coupled with this, one also has to see what the underlying index is doing. Everything that is contrarian, deep value, cyclical or distressed ran up in 2017 with the entire midcap index up about 40 per cent. When your style is out of favour, and the index runs up 40 per cent, you don’t end up looking good.
Lastly, I would like to draw attention to a recent addendum. Our midcap fund had an approved universe of investing at least 75 per cent in stocks number 101 to 200 by market cap. That became a significant constraint over time. Now, with SEBI’s new rules, we will be able to invest from 101 to 250 and that too only up to 65 per cent, with significant lee-way for the balance 35 per cent. This should impact performance positively and enable right comparison as we go along in addition to the facts explained above.
There’s a view that SEBI has been micro-managing, in providing a specific list of 100 large-cap stocks and 150 mid-cap stocks that MFs can invest in. Will this lead to too many schemes chasing a limited set of stocks?
What is being discussed is that the regulator got into defining the universe. But what is not being discussed is that the regulator has been sufficiently liberal in formulating the scheme composition. So yes, midcap is defined as stock number 101 to 250 by market cap, and there may be some heart burn there, but what is missed is that a mid-cap fund has to have only 65 per cent in that basket and the other 35 per cent can be anywhere. The regulator has brought about level playing field for the industry and enabled right comparisons for investors and advisors. I can equally argue that barring large cap funds, from here-on every fund will pretty much be some kind of multicap fund. There is too much latitude in scheme composition!
SEBI has been asking AMCs to reduce their expense ratios and has slashed the extra total expense ratio (TER) for B15 cities. How will this impact the industry and your schemes?
In my estimate the slashing of 20 basis points costs on closed ended funds and ELSS funds, plus the re-classification from B15 to B30 from April 1, 2018 will reduce 15 basis points on the expense ratios of equity funds, which is not a small number. I think when discussing TERs, we miss the fact that India is globally very competitive on fund TERs despite much higher operating costs and early days of scaling the industry. Our reported TERs include 18 per cent GST on management fees, 15-30 basis points for B15, 2 bps for investment awareness and unending regulatory changes entailing compliance costs. Publishing newspaper ads and mandatory communication on regulatory disclosures costs the industry tens of crores of rupees a year. Financial inclusion and retail reach is a national imperative but ensuring all of this while cutting costs is only to unfairly burden AMCs.