Valuations have moderated and provide fa avorable risk-reward for long-term investors, says Swarup Mohanty, CEO, Mirae Asset Management. In an interview with Ashley Coutinho, Mohanty says liquidity in the bond markets, earnings trend over the next few quarters and political news flow in run-up to state and central government elections will be factors to watch out for. Edited excerpts:
Mutual funds have seen sizeable inflows this year, buoyed by systematic investment plans of over Rs 50-70 billion every month. What changes do you foresee for the industry as it grows in size?
We are seeing a distinct change in the behaviour from both distributors as well as investors. The conviction levels required for the equity asset class is beginning to fall into place. With this change the, onus of managing the fiduciary role of the asset managers grows tremendously. The asset managers will be compelled to deliver on their products as investor experience takes center stage from here. The true role of mutual funds is to build strong products and the role of the advisor or distributor is to ascertain the fitment of such products in an investor’s portfolio through a process of risk profiling and asset allocation based on the investors’ goals. We see that happening now. There could be a shift to goal based investing in India. At Mirae Asset, we are excited by all these prospects and are enhancing our infrastructure from fund management to investor service in order to deliver superior products and service to our investors.
When companies such as Amtek Auto and IL&FS went through troubled times, a lot of fund managers were caught off-guard. Do you think fund houses could do more in terms of improving their due diligence?
Sebi has been asking fund houses to take ownership of the credit of the papers they own. In this dynamic world, risk and credit assessment is a continuous process. One can never say or feel that one has done enough in this area. Credit assessment has to be always done at the level of paranoia. The recent downgrades have just increased the responsibility of every credit analyst in the industry. I do believe that the industry is working overtime in this area and there is a definite urgency to improve the process.
Sebi has reduced total expense ratios for mutual fund schemes and said that scheme related expenses including commission paid to distributors will have to be paid from the scheme only within the regulatory limits and not from the books of the Asset Management Companies (AMC), its associate, sponsor, trustee or any other entity through any route. What is the overall impact of this move?
Cost debates, changes and improvements are part of every industry and the MF industry is no different. We take pride in the transparency our products bring to our investors and the new SEBI change in the process of distributor commission payment is a step in that direction. There is now complete disclosure of commission in the industry. Money always comes with its fair share of suspicion. This move puts all this to rest. I do believe this will now bring further respect to the product. Investors will know that their distributors will constantly work hard to live up to the value they bring to them. The change in direct TERs will also give rise to a viable advisory business. Our industry has adapted to changes in the past and we have the acumen to develop a stronger business model that will benefit investors.
The Indian capital market regulator recently introduced norms for categorisation of schemes. Will this impact alpha generation when seen together with the recent introduction of total returns index (TRI)?
Since inception, we at Mirae Asset have always stood for one product per category, and feel vindicated by our stand after Sebi’s new categorisation norms were issued. There were no major changes (except for Mirae Asset Emerging Bluechip Fund which had to move to the large and midcap category) carried out in our product classification, with all products continuing the same investment process. We believe that the Sebi classification provides level playing field to all AMC players. The process will provide ease of making investment decisions for partners and investors with all funds bucketed within the same investment guidelines. We do believe there are enough alpha generation opportunities in India, and the introduction of TRI will not impact alpha generation. However, there are some challenges in large-cap alpha generation, where low-cost products like ETFs are providing a suitable investment opportunity.
Mirae Asset MF has assets of about Rs 200 billion. The number 10 AMC has more than four times the assets you have. What are your plans for the coming year?
At Mirae Asset we value ourselves by the quality of products we bring to our investors. Good products lead to good investor experience and that eventually results in growth in AUM. We have been building our business with this philosophy. Our products have started gaining recognition in the market and have been growing on a consistent basis. Our SIP book now stands at Rs 2.6 billion per month and that forms the backbone of our equity AUM. Our debt AUM has been rising consistently as well. We are looking to broaden our offerings as an asset manager in India. This year we added real estate to our capabilities through the AIF route. We intend to launch our first ETF this month. We also see potential in the equity savings product and intend to launch it this month. At the end of this year we would have funds in equity, debt, hybrid, real estate and ETF, making us a far more diversified AMC than we were last year. We would continue this process next year and launch products only if we feel we have the capability of managing them effectively.
Indian equities have corrected more than 13 per cent in the last two months. What is your outlook for the market for the year ahead?
Indian markets have faced a perfect storm over the last few months, driven by a slew of global and domestic factors. A strong dollar and rising US interest have put pressure on all emerging markets, thereby impacting their currency, and flows in equities. These factors have led to risk aversion by FIIs for the emerging markets, including India. Domestic factors relate to the deterioration in macro-economic variables owing to India’s vulnerability to rising oil, and anxiety related to politics. Other factors to watch out for are liquidity in the bond markets, earnings trend over the next few quarters and political news flow in the run-up to state and central government elections.
What is your view on mid and small-caps as investment bets?
In our view, the best investment is made when there are temporary uncertainties – that create low expectations, and result in low stock prices. The starting valuation is among the most important factor while investing, and it’s only during low valuation (arising from uncertainties), future returns can be decent. Valuations have moderated and provide favorable risk-reward for the long term. Investments should be made based on one’s asset allocation and one’s individual risk profile. While we believe that a larger portion (say 70 per cent) should be allocated to the multi-cap funds, we are equally positive on mid-caps post the correction.
Some of the money coming into mutual funds is believed to be structural in nature. The recent correction, however, has already seen some pullback in terms of lumpsum investment by both retail and wealthy investors. Do you see a reversal in mutual fund flows in the coming months?
As mentioned earlier, we are seeing a distinct change in the behaviour from both distributors as well as investors. The conviction levels required for equities is beginning to fall into place and the industry has not seen SIP stoppages, which is hugely positive.