Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
 
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MOSt Focused Dynamic Equity - Direct Plan – Annually Dividend - 12.0577MOSt Focused Dynamic Equity - Direct Plan – Quarterly Dividend - 12.1441MOSt Focused Dynamic Equity - Regular Plan – Annually Dividend - 11.8648MOSt Focused Dynamic Equity - Regular Plan – Quarterly Dividend - 11.9218MOSt Focused 25 Fund- Direct Plan (D) - 19.9042MOSt Focused 25 Fund- Direct Plan (G) - 23.6535MOSt Focused 25 Fund-(D) - 18.5348MOSt Focused 25 Fund-(G) - 22.1333MOSt Focused Long Term (D) - 17.7719MOSt Focused Long Term (G) - 18.4005MOSt Focused Long Term- Direct Plan(D) - 18.558MOSt Focused Long Term- Direct Plan(G) - 19.1937MOSt Focused Midcap 30- Direct Plan(D) - 25.0224MOSt Focused Midcap 30- Direct Plan(G) - 28.4678MOSt Focused Midcap 30(D) - 23.7621MOSt Focused Midcap 30(G) - 27.111MOSt Focused Multicap 35- Direct Plan(D) - 28.2914MOSt Focused Multicap 35- Direct Plan(G) - 28.6402MOSt Focused Multicap 35(D) - 27.2712MOSt Focused Multicap 35(G) - 27.6188MOSt Ultra Short Term Bond Fund-Direct Plan-Fortnightly Dividend Option - 10.0048MOSt Ultra Short Term Bond Fund-Direct Plan-Monthly Dividend Option - 10.0199MOSt Ultra Short Term Bond Fund-Direct Plan-Quarterly Dividend Option - 10.0407MOSt Ultra Short Term Bond Fund-Direct Plan-Weekly Dividend Option - 10.0075MOSt Ultra Short Term Bond Fund-Regular Plan-Fortnightly Dividend Option - 10.0023MOSt Ultra Short Term Bond Fund-Direct Plan- Growth - 13.5785MOSt Ultra Short Term Bond Fund-Direct Plan-Daily Dividend Option - 10.0008MOSt Ultra Short Term Bond Fund-Regular Plan- Growth - 13.2471MOSt Ultra Short Term Bond Fund-Regular Plan-Daily Dividend Option - 10.0109MOSt Ultra Short Term Bond Fund-Regular Plan-Monthly Dividend Payout - 10.0191MOSt Ultra Short Term Bond Fund-Regular Plan-Quarterly Dividend Payout - 10.0488MOSt Ultra Short Term Bond Fund-Regular Plan-Weekly Dividend Option - 10.0072Motilal Oswal Most Focused Dyn Eq Fund (G) - 12.1348Motilal Oswal Most Focused Dynamic Equity Fund-Dir (Div-A) - 12.3283

If you buy the market, you cannot beat the market

Blogs Blog Details

Mr. Aashish Somaiyaa

Managing Director and CEO

Dear Investors and my dear advisor friends,

When it comes to the big bad world of equity investing, a huge amount of research is done; and rightly so; on which companies to buy, when to buy them, when to sell them so on and so forth. Countless research is available on what to buy but surprisingly, there’s none on how much to buy!!! Intuitively, one knows that with the same portfolio constituents, different allocations can create totally different outcomes (demonstrated below). While it is obvious, it still must be noted that the possible allocation to each stock is absolutely linked to the total number of stocks in the portfolio. Higher the number of stocks, the higher the likelihood of having quite a few sub-optimal allocations followed by a long tail of “nothing” allocations. An average mutual fund scheme has anywhere between 50 to 100 stocks. Barring very few exceptions, at inception fund managers do not set out to create portfolios with 50-70-100 stocks but portfolios move that way over time. There are multiple reasons for this, such as - initiating a position but failing to build it, investing in new issues and not getting enough allotment, idea gone bad, hence don’t want to sell at a loss, I am actually on my way out, not enough liquidity, just initiated so lets test the waters and see results for couple of quarters, there’s just too much money need to add more ideas, there are just too many ideas and don’t want to shoot down any, can’t blame me for other holdings doing far better leading to relative depreciation, need representation of all sectors, can’t go away from the index or broad market, let’s get some teamwork going, picked a theme top down buying mix of companies in it; so on and so forth the list is endless but what about the potential outcomes? Let’s take a look at the table below:-

Source: “Focused Investing” 21st Wealth Creation Study by Mr. Raamdeo Agrawal. www.motilaloswal.com

Just like fund managers agonize over stocks, mutual fund investors and their wealth advisors, spend time on evaluating which schemes are doing well, which ones are not, where to invest next etc. Similarly, there is a lot of discussions on which fund to buy, not sure if there is any research or discussion on how much to buy! Total return generated on the investment is an outcome not only of how the constituents play out but equal role will be played by how judiciously the allocation is made. To sum up, the number of stocks and their allocation in a fund will impact the fund performance and the number of funds in an investors’ allocation with % allocation to each fund will further impact the returns that the investor fetches – the latter needless to say compounds dilution already baked into the former! While there are proponents of diversification on reducing risk, and rightly so, but there is never enough attention paid to diversification reducing returns and the fact that diversification is an optimization game and not a maximization game! Maximizing reduction of risk can pretty much make your alpha zero.

My 18 years in the mutual fund industry, dealing with numerous wealth advisors and personal meetings with thousands of investors (especially the rich and affluent) tells me that on an average any “judicious, serious, experienced and tenured” investor has at least 7-10 equity schemes of various types from multiple fund houses. Instigated chiefly by the need for diversification….as they say it’s a must! So diversify we will. Or as the popular e-commerce portal advertises, “aur dikhao”, give me choice or sometimes “driven” by “kitna degi”? Be that as it may, back of the envelope calculations tell me that with average 40-60 and sometimes 70 to 100 stocks per equity MF portfolios, these well-diversified investor portfolios have anywhere between 400 to 600 scrips in their portfolio. Lot of stocks held by managers could be common across schemes and de-duplication could bring it down to about 250-300.

Now tell me, “kitna degi”? What return do you think these portfolios are generating?
Answer key for the seriously interested reader:- BSE 200 accounts for roughly 80-85% of our total market capitalization and Nifty 500 about 90-95%!

To get a better understanding, we performed a little experiment. We took the top 10 mutual fund schemes by AuM (using AuM as a surrogate for popularity and likelihood of ownership by most investors) and made an equal weighted portfolio. The total number of stocks an investor is exposed to by investing in these funds is 598. On de-duplication, the precise number of unique stocks is 247. When this portfolio of funds is held over a period of time and returns are checked as of April 30th, 2017 one finds that the alpha has got pretty much “diversified out” along with the risk! Baby… bath water…sounds familiar? It is worth noting that in recent times there is sharp decline in alpha and while there is slightly higher alpha over a relatively narrow index like BSE 200, the alpha is much lower for broader diversified market index like Nifty 500. It just goes to prove the point that if you own 250-300 odd stocks and compete with an index of 200 or 500 stocks, the chances of outperformance is marginalized. So much for engaging active managers to offer you well researched portfolios and for your own research on which funds to pick! Let me clarify, this is not a comment on the underlying funds or investors’ efforts in selecting funds. Each one of them on their own may not have done badly at all, the better ones would have had superior alpha but one has spread themselves too thin whereas by being a little more discerning one could have increased the outperformance. What applies to investors’ allocations in MFs, in some measure applies to underlying funds and their stock allocations too! That’s the first order issue further compounded by number of funds. This is probably one more reasons why in the US where investors and advisors alike have seen product proliferation much longer than us; finally ETFs may be gaining popularity.

 

1 Month

3 Months

6 Months

1 Year

3 Years

5 Years

Return on EW investor portfolio of largest 10 diversified equity schemes

2.94

11.36

9.18

26.40

21.38

19.52

Nifty 500

2.74

11.32

9.50

24.68

16.07

14.48

S&P BSE 200

2.28

10.32

8.61

22.92

14.97

13.83








Alpha over Nifty 500 Index

0.20

0.04

-0.32

1.72

5.31

5.04

Alpha over S&P BSE 200

0.66

1.04

0.57

3.48

6.41

5.69

Data as on 30th April 2017. Figures less than and up to 1 year are absolute and greater than 1 year are compounded annualized.

In order to beat the market convincingly, one has to focus. Hence it is advisable for an investor to build a focused portfolio of focused or at least not too widely diversified funds. This is also relevant in the interest of transparency of performance, ability to keep a check on the performance attribution and pure administrative convenience!

For fund managers as well as investors, beating the market convincingly is the single most important outcome; otherwise there is always the option of buying the index. Owning 7-8-10 widely diversified equity funds is a very expensive way of trying to beat the market by pretty much owning most of it. With this kind of diversification investors will end up getting index plus or minus few percentage points at best.

Time for a disclaimer :– One is often asked, whether focused funds are better or diversified funds are better – what gives better returns! Well, depends what you “focus” on!!! One can have a diversified portfolio of 50 stocks, all turning winners (against the laws of probability) and one can have a highly focused portfolio of PSU Banks and Telecom companies in the current market context! This explains why some focused funds do not do as well despite being “focused” and investors tend to stay away from them. One can never say focused is better or diversified is better – one just needs to know the implications of what one is practicing and how it must be practiced. Also as fund management companies and advisors, while devising our products we need to be mindful of how the end consumer is going to use them. If you know that consumers practice “aur dikhao” then it makes sense for us to be focused in the quest for adding value or improving outcomes for our clients.

Focus as a strategy in general must go with the following:
• Index agnostic bottom up fundamental research driven stock picking – as Mr. Buffet puts it, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
• A sense of number of stocks – financial theory suggests anything over 20 odd stocks doesn’t reduce risk – 15-20 ideas is good enough
• A sense of investing universe from which one intends to pick stocks, the universe needs to be distilled and focused in the first place
• A sense of size or capacity of the fund that can be managed with focused portfolio allocations

If one is a focused investor but doesn’t control these parameters and there is interplay amongst them, it is difficult to remain focused or produce right outcomes for investors. At the same time investors while selecting funds must remain focused on a limited number of funds lest they end up diversifying the very alpha for which the whole exercise of picking funds is being done. And always remember the paradox of choice” – providers will always offer a plethora of choices in the belief that choice a consumer right and choice increase the sales of products or the market share of the provider. It is widely documented that too much of choice results in sub-optimal outcomes for the buyer and reduces satisfaction as well as happiness with the purchase.

And finally always remember:- "If you buy the market, you cannot beat the market”.

Happy Investing,

Sincerely yours

Aashish P Somaiyaa

Managing Director and CEO

Disclaimer

Views and opinions contained herein are for information purposes only and should not be construed as investment advice/ recommendation to any party or solicitation to buy, sale or hold any security or to adopt any investment strategy. It does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The recipient should exercise due caution and/ or seek professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. None of the Sponsor, the Investment Manager, the Trustee, their respective directors, employees, affiliates or representatives shall be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material.

The information herein alone is not sufficient and should not be used for the development or implementation of an investment strategy and shall not constitute as an investment advice. MOAMC shall not be liable for any direct or indirect loss arising from the use of any information contained in this document. Readers shall be fully responsible for any decision taken on the basis of this document. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. 

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