6 days ago
Dont blindly trust any brand, company to last forever, track new flows to better investing, advises this MF house CEO
ET Bureau As per Shenoy, investors must think about how they are going to spend their money in the long term, and not just fixate on how to build wealth for themselves. There is growing recognition that people need professional asset managers, but many may not have the Rs.50 lakh typically required to access a PMS or an Alternative Investment Fund (AIF). Mutual funds offer easier access to asset classes such as equity, debt, gold, and international stocks. In some way, almost all our investors, even in the PMS space, would have a mutual fund portfolio as well, because it's not easy to use a PMS to access debt markets or overseas markets. We realised we were not able to serve the complete needs of investors, even HNIs. We want to serve customers in a more holistic way.
HNIs and retail investors are similar in the sense that they need diversification, or access to different asset classes. Taxes are more efficient in a mutual fund. Multiple asset classes have now become equal to an extent. Insurance, for instance, enjoyed a huge tax advantage earlier versus mutual funds. That has more or less evened out. Tax exemption on Employees' Provident Fund (EPF) contributions has also been capped to a certain extent, leading to greater parity among different asset classes. People are better off investing through mutual funds than investing on their own. You pay capital gains tax and dividend tax if you invest on your own or through a PMS or AIF. Mutual funds give you a taxation-efficient approach.
Further, in PMS, your ability to get everybody aligned to the same portfolio is very complicated. Some people may enter early, some late; some stocks may have run up by that time. So you have to buy smaller positions in some stocks and larger positions in others. Sometimes you do not want to buy any more of some stock, but you do not want to sell it. So some investors own a stock, but others don't. This is the complexity in PMS, because we are managing individual accounts. In a pooled vehicle like a mutual fund, everybody gets access to the same set of stocks, whether they have five units or 5,000. So that way, it is easier. Plus, you get access to large stocks or large portfolios. Overall, the mutual fund is a more attractive pooled vehicle.
You are known as a data-driven asset manager. Is that how you will differentiate yourself in the MF arena? Quant-based investing is our forte. That's what we excel in and are most comfortable with. That's why our first NFO, Capitalmind Flexicap, is oriented towards people looking at a more quantitative we may have analyst coverage of 30 to 60 companies, our primary reason to buy these stocks will be quant-based. That is how we differentiate ourselves, but it does not mean that this is the only way. There are lots of ways to make money in the of them require value and subjective analysis, which other mutual funds are doing quite well. Since our approach is quant-led, we have less focus on subjectively driven value or growth potential, because our ability to choose a stock is very strongly dependent on what shows up in the numbers— whether we use prices, profitability or growth, those numbers need to show up in the data. For instance, we may not buy a stock when it is a turnaround story. We may buy if the turnaround reflects in the data. That's the kind of fund house we are.
You've been running a successful momentum strategy. Will that define your mutual fund investing style? Yes, what we have figured out is that momentum is one of the strongest factors in the investment zone. Having said that, it does not work in two types of markets— when there is no trend and when there is a strong downtrend. We have other ways to figure out the markets in such in the no-trend phase, we could move to different factors. We may buy into stocks of another factor itself. If the market has a downtrend, then our process will take us into hedging territory. We will still be 65% equity, but we will have hedges to our positions so that we are less exposed to the market and earning yield at that time, because we want to ride out the downtrend and then buy into stocks later.
How has your investing experience shaped your thought process? How have you refined your framework? A lot of times while we talk about things like back-testing, quantitative analysis and all that, the biggest thing we've learned is that you can't always trust the data. 90% of our job is cleaning the data. If you give an experienced woodcutter an axe, he'll spend half an hour sharpening the axe and only 10-15 minutes cutting. Similarly, stock selection forms only 10-15% of our overall time exposure. More time is spent refining the model, working through various scenarios, which we've learned in real life.
One of our beliefs is that price sentiment is a very important driver of returns; sometimes even more important than earnings growth itself. We gauge perception using prices, market information that allows us to get confidence about a stock. Second, we don't try to predict, we respond. It is easier to do that. So when you have surprises, you don't have to worry that you are wrong in your prediction and then make a change. You don't have to predict at all. At some point, if things change, you change. We don't have any problem churning stocks. One thing I've realised is that the best companies can falter. You can't trust that a brand or a company will last forever. So if a company is great today, things may change. You must track news flow carefully and gauge promoter hunger. Promoters who are hungry will typically drive their companies faster up the curve. But some of them may actually have corporate governance issues. So you have to be very careful of corporate governance as a concept. We have included this in some of the discretionary elements in our flexi-cap fund. Recent years have seen a lot of chatter around underperformance in active funds. What are your thoughts? We have observed that active tends to beat passive. Also, passive itself underperforms the index by a considerable degree. If you compare the corresponding active funds to the best of the passive funds, you find that the outperformance ratios of active funds becomes even higher. Often it's just 30-40 basis points that makes the active fund outperform the passive fund, but underperform the can only execute according to the index, whereas the fund manager has many levers. I can use derivatives to get into or out of a stock as an active fund manager. Passive fund is also not allowed to migrate away from the index, even if the companies underlying it are bad or have shown bad corporate governance. There is no choice in that matter. We can actively change those positions if bad things happen. Lastly, our fee structures are very low. Direct funds are charging between 0.5-1.1%. So active management is here to stay. I think there is a lot of outperformance potential in active. Your first offering, a flexi-cap fund, comes into a space currently filled with look-alike offerings running a distinct large-cap bias. How will you position it? Our approach is quantitative in nature, which is a little oddity among flexi-cap funds, because they tend to be more discretion-led than quantitative. Also, we recognise that the flexi-cap strategy actually allows for flexibility, which means it allows us to change our mind, our strategy. It allows international diversification also. The flexi-cap mandate has the most potential to diversify. That's why I feel it is useful for other part of the equation is using technology and execution excellence, whether it is building better execution frameworks for stocks, that means we can get them at a lower price than otherwise, or by simply using the positional attributes better. So we will hedge in downtrending markets, we may write covered calls in up-trending markets, etc. We may be able to exploit a different factor over a period of time. Will you prefer operating within niche categories or have a wider bouquet of offerings? We may not offer a lot of funds, but we do want to cover the bigger categories within equity, debt and hybrid. We may not have all of large-cap, mid-cap, solution-oriented, value, momentum, and others. But we will have a few more in the equity categories. If RBI opens the limits, we may look at international stocks, both within existing funds, and for a new category of funds. We will have a few offerings in the debt and hybrid categories as well. How are you reading the current market scenario? From a long-term perspective, India has a great story, whether it is infrastructure, new inventions, manufacturing or domestic consumption. This is the point at which we start moving away from the essentials, which is food, shelter, clothing, into discretionary items like travel, tourism, hospitality, and so on. So this is a time when the push is likely to happen. More people are also keen on spending and enjoying themselves. That is a concept we have called 'win-at-life', which suggests that you should not worry about your long-term investments if they are in the right place. Beyond what you are saving for your goals, you should be able to spend. And that spending is what will make you happy. Investors must also think about how they are going to spend their money in the long term, and not just fixate on how to build wealth for themselves. What themes and sectors are you favouring? Since the flexi-cap strategy is quantitative, it figures out what to buy—whether it is momentum, value or any other. By and large, we find that all the sectors that are India-facing are poised for long term growth. They are likely to come into all momentum portfolios. In PMS, we used to see companies come into the momentum portfolio first, and then the favourable news flows would come through. Many of these sectors like defence and manufacturing continue to be favourable but we will buy those only if our algorithm suggests so. RAPID FIRE Q. What's an investment tip you'd give your younger self?Invest in equity instead of insurance.
Q. What's the biggest lesson the market has taught you? Don't predict. Respond. And have patience.
is your personal asset allocation right now? I'm still 75% equity but most of the debt is for my son's education.
recent book you would recommend?
Moneyball by Michael Lewis. Old one, but has the philosophy of winning through data!
