Morningstar Inc.'s Kunal Kapoor speaks about the importance of diversified portfolios and the need to focus on long- term strategies for investors and asset managers
Eighteen years after he joined the firm as an analyst, Kunal Kapoor took over as the president at Morningstar Inc. in October 2015. He drives product development, innovation, sales and strategy for the independent research and financial securities data analysis firm. As the sixth Morningstar Investor Conference got underway in Mumbai, Kapoor spoke to Mint about the importance of diversified portfolios, and the need to focus on long- term strategies for investors and asset managers. Macroeconomic events, he says, assume less relevance the longer you remain invested. He also spoke about relevance of regulatory changes within the industry, and our regulator’s focus on investor protection. Edited excerpts:
In the current scenario of high liquidity chasing global assets and the higher risk-seeking behaviour among investors, what is the objective that Morningstar seeks to achieve?
We are big believers of diversified long-term portfolios. That may be disappointing to a lot of people who live and die by the next hot idea and the notion that you have to judge whether your investment works over the next month or two. When you build a portfolio with assets like equity, if you can’t hold for at least 3 or 5 years, you probably should not own them. The reality is that the macros will always have some noise, and it’s easy to get distracted. But the notion is that you want to invest and build portfolios, which are appropriate specifically for you. Then you want to own that for a meaningful amount of time to achieve the outcome you set out for.
Another mistake most people make is that they are attracted to the investment after it has done well and sell at the first sign of trouble. Instead of trying to bargain for lower prices, as many do while buying say groceries, investors are more excited about buying a security at a higher price. This is a behaviour bias we have to fight in order to become long-term investors.
In general, equity markets have done pretty well in the last 5 to 8 years. Going forward, markets are probably going to provide steady rather than spectacular returns. You may still do better in equity markets than fixed income. The key is to remain patient and think long term.
What are some of the big risks that global capital markets face today? The US elections, global growth concerns or something else?
From a long-term investor’s perspective, ultimately, if you invest in good businesses directly or through a mutual fund, you tend to be okay regardless of what happens in one election or two. When I look at the environment, the thing that does impact equity meaningfully is interest rate. We have gone through a long period of low interest rate in the US, for now there is a desire for the Federal Reserve to start taking up rates. Historically, rising interest rate markets are a challenge for equities. If rates in the US rise, that can be a situation where money flows out of risk assets.
Our view doesn’t change. In the long term it probably doesn’t matter. In the short run, interest rates can be the most likely source of volatility.
In many markets, regulatory changes are happening and it can have a short-term dampening impact on investments.
In India the capital market regulator has worked on changes to safeguard investor interest. In the context of the separation of pure distribution and advisory businesses: is a change in market structure needed or could the outcome be achieved with more stringent penalties for missellers?
It’s hard to be a regulator. No matter what you do, someone is going to second guess whether you are too early or too late in what you are trying to put in place.
The Indian regulator has actually been a vanguard of investor protection. The intent of what they are trying to do is meaningful. Globally, in some developed markets as well, the trend is similar to what was done here 3 years ago. The intent deserves credit.
If you step back and consider, the other question is about the desired outcome. Certainly, investor protection is part of it. One of the desired outcomes is an environment where people are confident and want to continue investing in mutual funds. Maybe the outcome in terms of the willingness to provide as many services to investors, and of investors to buy mutual funds, has gone down. This suggests there are still ways that investors can be protected and also comfortable investing more.
There are 44 asset managers in the Indian mutual fund industry. Do we need more or higher penetration from exiting firms to broaden the investor base?
Ultimately, the product has to be attractive to investors. For many decades in India, people were investing through Unit Trust (of India or UTI). Slowly, the thought is shifting towards market-linked investments. The thing about UTI was that people didn’t understand the underlying processes and looked more for the annual cheque. As the regulator tweaks the role of asset managers and how advisers interact with the end client, it will have a bigger impact on encouragement of ownership of more mutual funds.
Also, as with all markets, when fees fall the market can widen. Having more asset managers isn’t necessarily the answer here.
Are our mutual fund expense ratios high, compared to global trend in actively managed products?
India is probably ahead when it comes to investor protection, but on fees the Indian asset management industry isn’t yet at the lower end of the scale. Globally, you are seeing more pressure on fees: 2.5-3% fee has room to move lower. Asset management is a business of scale. As the scale grows, it’s hard to justify higher fees. Charging high fees upfront is being short-sighted. The other way to do well is to have lower fees and be able to scale much faster if you are successful. One predictor of performance in the future is fees: lower the fees, better the outcome is likely to be for investors.
Does the volatile external environment driven by events, necessitate you to alter strategy at times or has it reinforced your core strategy of long term investing and bottom up research?
It reinforces the bottom up strategy. If you look at the history of famous investors, it is littered with examples of people who thought they could make short-term bets. They may have been right the first two times, but rarely a third or the fourth time. We as a firm are a big believer in buy and hold. I recall my father buying shares of companies like ITC Ltd when it went public and he has held that stock for more than 40 years. In India, if you consider all the events over the last 40 years, you can make a list of a lot of scary things.
At the end of the day, good companies have a way to persevere. The key is to be a focused, thoughtful and aware investor rather than overreacting. Over time the simple concepts like compounding are what really pay off and if you worry too much about short term events you lose out on value. We are more than ever committed to the way we do things.
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