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Photo: iStock

Investors cannot rely on external ratings alone for short-term investments

Several small-sized fund houses, though they have grown in an absolute basis, remain small in terms of market share. BOI AXA Investment Managers Ltd is one of them. We asked its chief investment officer Alok Singh how serious the fund house is and what's its future in the 23 trillion mutual fund industry

Nifty is at an all-time high, but the gains so far this year have come from very few stocks. As per a Mint story dated 24 July 2018, 55% of Nifty’s market capitalisation increase between 23 March (when Nifty touched this year’s low) up to 20 July, came from three stocks by market cap; 39% of Nifty’s market cap increase came from the next seven stocks by market cap. But equity funds en- masse underperformed in the past year. How do you reconcile these two factors?

First of all, whenever the market takes a turn, usually there has to be a leadership that has to come from the segment or stocks that had done well. All of last year when mid-cap and small-cap gave returns of 50%, large-caps were not participating at all. Now when the markets started turning because of positive (earnings) results, then there was a sudden change in allocation and a lot of capital was pulled out of these (small- and mid-caps). So there was a reallocation which happened and subsequently, results by other corporates were also on the stronger side. So that is how the market behaves—somebody takes a leadership and if there is a participation going forward, the rise sustains and if there isn’t, then it fizzles out. So right now there is wide participation and it is slowly becoming broad-based.

But what is the explanation for the leadership being this skewed?

You are looking at a very small time series. Investing is for a far longer period. So yes, for that short period, such disproportionate gains may appear but that is not what is going to sustain. Right now (shares of) Tata Consultancy Services and Hindustan Unilever moved because they showed a fantastic result. So when the results were better than what the street expected, there was a chase for ownership and a follow-up happened. Large-caps were beaten down last year, but people are drawing valuation comfort from them this year. And if it continues to be broad-based, then mid-caps will participate too. So right now you may see some divergence but in the long term, this divergence will seem very small.

Is there a risk for fund managers to pick outside these top 6-7 stocks? If you pick these stocks, you end the risk of buying stocks at high valuations. But if you pick stocks outside this basket, you could underperform for no one could say how long.

See, one of the major reasons for underperformance of active funds is non-allocation or lower allocation to these, and that’s how the catch-up happens. There are many mid-cap stocks that haven’t fallen, all this while. Generalising active stocks is not right, you have to look at the management and decide accordingly.

HDFC AMC has just finished its IPO run. Reliance Nippon AMC was the first AMC to get listed. Is this the beginning of a new trend?

HDFC needed to raise capital for its other businesses. But this may not be the need for other fund houses. The purpose of an IPO is to raise funds or to provide an exit route to early investors or promoters. Or it could be to get a fair valuation. So IPOs for others will be on a case-to-case basis. Globally, even Franklin Templeton and Fidelity are unlisted. So they don’t necessarily need to go public. Shareholders will know the reason better, because unlike other businesses, AMCs don’t have huge capital requirement.

Would a small AMC like BOI-AXA look to get listed at some point?

I am not the right person to answer this, it is the shareholders’ call. As a business, unlike a bank, an AMC does not need that much capital. But they may want some investors to pull out, or have valuation concerns. Yes, they can definitely list, but there is no regulatory requirement.

BOI AXA’s market share has not grown and is less than 0.50%. This is despite having a large state-owned bank as one of its sponsors. Is it serious about its existence and future?

You need to look at the time period of its existence. The joint venture happened in 2012. We manage around 6,000 crore, and this was 150 crore before the joint venture. So you can calculate the growth rate we have witnessed compared to others. So while we have been in business for 5-6 years, you can’t compare us to those who have been there for 20-30 years.

But they are still your competitors.

See, we do have growth aspirations, but this is something the shareholders want to be satisfied with. Globally, if you see not every AMC is a trillion-dollar AMC. And frankly speaking I am not the right person to talk to you about business decisions.

Your equity funds’ performance has been good off late, but over a long period of time, it has been quite volatile.

Equity funds are going to be volatile, anyone who doesn’t like volatility should not be in equity funds, liquid funds are the place for them. If you are in equity, you have to be in for 4-5 years. That is when this volatility will get smoothened out. We are looking to generate alpha (returns over benchmark returns), not smoothen volatility. The fund will be as per the mandate.

Your debt funds have historically taken credit risks. BOI AXA ultra short-term fund and BOI AXA short-term income plan have invested regularly in AA-rated and A-rated instruments in the past. Why?

Two of my four debt funds are AAA rated, what credit risk are you talking about? If I am running the fund as per the mandate how can you say I am taking extra risk? The AA-rating does not say credit risk.

But A-rated instruments are considered risky. Isn’t that too much risk considering that these products are meant for short to very short-term investments?

Rating agencies never give short-term ratings correctly. Ratings have no meaning and Sebi has said for a long time that investors cannot rely on external ratings alone to make an investment. They have to do their own assessment.

Is their clarity on the credit risk that comes with these schemes in your communication?

Of course, I disclose my portfolio every month, with all the risks. These ratings are not the sole basis of making an investment. You have to see the underlying (assets) too.

Which do you expect to be the sectors of the future?

See we have gone from engineering to IT to banks as leading sectors. Today I expect new businesses such as infrastructure to emerge. India has such a huge infrastructure need, how can you have only L&T? There have to be bigger companies. And infra is not something whose need changes with the government; it is constantly needed. Defence could be a big space because our defence needs are huge. Even services sector should be big. Right now only IT services are big. But the next leaders should emerge from infrastructure.

In the next 12-14 months, what will you be watching out for?

In terms of stocks, I will be looking only at how business is changing and whether earnings momentum will continue. Economy-wise, inflation is very important. And the two things that feed into inflation—food prices coming out of monsoon and global crude prices. We need to be watchful because RBI will react to these things.

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