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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Investing in unprecedented times

Blog Blog Details
  • September 07, 2018
  • Mr. Aashish Somaiyaa|
  • Chief Executive Officer
Dear Investors and my dear advisor friends;

This time around I am dedicating my writing to the questions that are top of mind today for all investors and industry participants alike. I travel a lot and I meet a lot of investors as well as investors advisors and from my conversations with them I gather the questions that are put forth below. But before I get into detailing the questions and before I put myself into your shoes as well as share my perspective on them, I would like to clarify something.

I presume that you are not interested in managing your own money; maybe thats not your calling because you are driven by something else or you have taken it that you do not have the necessary wherewithal to manage your own money and hence you have entrusted it to managers like Motilal Oswal AMC to manage it and produce results for you. When you entrust money to someone, clearly the key word is “trust” which you need to repose and the manager needs to uphold.
 
Let me first step into your shoes at the time of the decision making process - selecting a portfolio manager for my money first.

If I entrust my money to one of you and you ask me the following question: “Aashish, what would make you trust me as a manager to whom you entrust your money in the equity markets?”

I would answer this question as follows:
1) What is the long term track record and background of the firm?
2) Is this long term track record backed by some kind of process? Is the track record likely to be sustained and given a context, is this track record replicable?
3) Where do the manager and the functionaries of the investment company invest themselves? As a wise man once said, “Don t do as I say, do as I do!!!”
4) What are the prospects of the asset class or the product that I am looking to invest in?
5) Whose advice should I take before investing? The people whose inputs I am taking, what are they basing their opinions on? Hopefully its not social media feeds or a descending sort of some excel file basis 3 months or 12 months NAVs!
6) Does their offering suit my investment goal requirements?

Since I am the one raising these questions, I would like to tell you that Motilal Oswal Group has been into equity research and stock picking in India since 30 years; its founders and the AMC that manages your money, have a total of over ` 2,900 crs invested in the very same investment strategy of Q-G-L-P that you are invested into. Our investment management track record of last 15 years since we first started managing money has always been hinged on the very same Q-G-L-P process and it is not today or yesterday or in the last one year that it has been formulated. The entire track record has been delivered by this very same process and it has been refined with learnings and experiences over time. For the rest, read on…

As you will notice, what happened in the last one year or is the NAV going up and up all the time or has it even gone down in the last few months is NOT a criterion in the stock markets to make or break trust!!! Ideally one must do the above fact check before investing and if not, its never late, one must ask these questions!!! The reason is that if you “entrust” your money to a manager you have to “trust” them! Never remain invested with people whom you do not trust and never direct money to a manager by taking advice of people whom you do not trust. All the same, never invest in equities if all it takes to test your conviction is a 10% decline in your NAV or a few percentage points of underperformance vis-à-vis the index; which by the way has no role to play in you achieving your goals or your desired rate of long term return. Indices are more for us to keep score and ensure we are delivering value to our investors.

Why am I sharing all this? That s because the data of investors behaviour shows clear signs of mistrust according to me. The only relationship we seem to be sharing with our equity investment is that of a fairweather friend; we are long term investors…. only until we get a positive return every year; year on year. Why else would it happen that when returns are looking good and investments are rewarding investors continue to entrust more and more monies to their managers and the moment there is a spate of 6 to 12 down months, the enthusiasm to invest starts receding. Its quite amazing to read about SIPs being discontinued because returns are turning negative. One can understand SIPs being discontinued if successive instalments keep getting deployed at higher and higher levels with rising NAVs thereby denying you the averaging. But, where is the logic of stopping SIPs exactly when the NAVs have stopped moving up or have declined in some cases thereby getting you better averaging of units for your long term wealth creation; isnt this precisely why SIPs are done?

I get worried when I get communication from investors and advisors asking about a 10% decline in the last few weeks or months or a few percentage points lag behind the benchmark index. When we fill application forms and cut a cheque or click the “Invest Now” button on our friendly app, we are all long term investors. In open audiences with 100s of business men sitting there when I ask them how many days will it take you to increase the pro?t margin of your business by 5% without cutting volumes or if I asked salaried individuals how many days or months will it take you to earn a 20% raise they tell me answers ranging anywhere from 1 year to 3 years!!! Equity investing is about investing in someone else s business so as to get a share of ownership which entitles us to a share of earnings. How can we expect that share prices and NAVs, reflecting this change in earnings value materialised through human efforts of entrepreneurs, managers and businessmen like you and me would move in a straight line month on month and year on year?

Lastly before I get into the common questions that I have recently come across, let me share an example. If you are on whatspp, facebook or even on your email, you must have surely received this message which says that in 1980 if someone had bought Rs 10,000 worth of Wipro, the value of that holding would be a few 100s of crores as of today. Similar examples abound about buying Infosys or HDFC Bank in the 90s or about buying Eicher or Bajaj Finance post 2010. The question that begs answering is; are the investors who benefited from this wealth creation to be credited for their stock picking? Is it only stock picking? No! These are popular names and within the first few years of their journey they did become popular as wealth creators. If there is 10% credit to be given to stock picking I daresay 90% of the credit is for “not fixing what aint broken”. As long as underlying businesses kept growing and these investors did not get drawn into reacting to last one years share price movement or trailing PEs and forward PEs or into forecasting elections; they were able to create wealth for themselves, their families and possibly even the next generation of inheritors.

Recently I read a report written by an analyst where he made a 10 year profit forecast of D Mart owner Avenue Supermarts. (Disclaimer: Neither me nor Motilal Oswal AMC own this stock in any of our portfolios. This is not a recommendation, this is an example quoted basis publicly available information such as this link here; with the intention of bringing out some messages on long term wealth creation: http://bit.ly/2Mg7tXH) There were many interesting discussions across media and the analyst invited fair amount of criticism and ridicule especially on social media. That makes me wonder what would the reaction have been if in 1995 an analyst came with a similar 10 year earnings growth projection of 2005 for HDFC Bank or if an analyst came out with a 10 year earnings growth projection from 2008 till 2018 for say Page Industries? Ridicule? Criticism? I am sure!!! The problem here is twofold:

1. When one makes a 10 year projection of earnings of companies, of course the company and the sector in which it is, needs to grow and of course the management quality has to be top notch for execution to play out. Lot of people may not want to believe this or stake any investment on this possibility. Its a di?erent thing that they very same people are comfortable staking their investments on change in Government policies, Parliamentary processes, attitudes of promoters, US Fed policy on interest rates, steel prices in China and what not!
2. At the same time, however great the opportunity for the sector and the company may be, however sure one may be of the execution quality, what is the point in writing 10 year wealth creation reports even if they are screaming “multi-bagger” written all over them; for an audience whose time horizon is anyway not beyond what happened in the last 1 year or what kind of clouds loom over the next year.

No one can actually forecast at the starting point about 10 years or 15 years of a company s growth or its execution capabilities; this is laden with uncertainties along the way, but the key learning to take away from above examples is that as long as companies are executing along a path and showing reasonable progress, investors should remain invested. Ups and downs of equity markets are not necessarily impacting the functioning of the underlying businesses; the market is just sharing its perception of what is the value of what is being delivered and is likely to be delivered. And this perception changes over and over again multiple times, sometimes at very short intervals and sometimes for totally unrelated developments.

Alongside our own `2,900 crs we are managing your money. And our ability to hold great companies and create wealth for all stakeholders depends on your ability to control impulsive reactions to “avoid fixing what aint broke”. Wealth is created not by stock picking only but having picked stocks its created by ensuring that “if it aint broken, dont fix it” and the definition of broken is not share prices going down. The definition of “ain t broken” relates to India s economic growth and the growth in earnings of companies that we own in our portfolios. Surely, there will be some companies which may not execute as hypothesised and there could be leads and lags, but wealth creation is all about staying with the right investments, weeding wrong ones once in a while and riding the entire growth journey of those right ones bought. It is widely documented that the returns on the investments over a period of time are not the returns that the investor actually fetches, the reason is because after all the ups and down the investment may eventually fructify but impulsive behaviours and fickle investor psychology forces them to bail out at the first hint of volatility.

Coming back to the questions:
1) Why is the bullishness of the index not reflecting in our portfolios? In the last one year the index has given double digit returns and we are either near zero or low single digits or even negative!
2) Why is the Sensex and Nifty at all-time highs while my portfolio is going nowhere? Should we move money into index funds or large cap funds?
3) Nifty is nearly at 12,000 – an all-time high – is it time to redeem?
4) What about elections?

Let me begin by addressing the question on alpha and funds lagging the index. If we want to understand the underperformance of the last few months or one year we need to step back to “where it all started”! The current bull phase especially significantly higher inflows into equities - mutual funds, PMS, AIFs etc. started in 2014 post the general election verdict. So where it all started in May 2014, the Nifty level was 7500. A year later it peaked in September 2015 somewhere around 8950. Around this time the RBI s asset quality review, Chinese devaluation and resultant crash in commodity prices and oil at $28 resulted in a complete meltdown in markets. By January 2016 we were at 6700 on the Nifty. The markets began an upward grind all over again and we arrived back at 8950 again in September 2016. But then demonetisation was announced and we found ourselves at 7700 by the end of December 2016, early 2017. This clearly shows that while there were intermittent spurts in the markets, they were repeatedly followed by earnings disappointments and sharp corrections. For the years 2015 and 2016 in this so-called “bull run” the markets went nowhere, Nifty moved in a tight range of about 1500 points. What kind of returns and outperformance did the funds generate in this time frame? Lets see below:


The above details are provided for explaining current market scenario and its impact on our schemes. For statutory details on performance of our schemes kindly refer the factsheet available on our website : http://bit.ly/2CEPqLD 

Data clearly shows that for the 2 years when the underlying indices did not return anything the outperformances or alpha were 7.35%, 5.75%, 17.71% and 23.21% over the corresponding benchmark index as demonstrated above; irrespective of what happened in the indices or what kind of strategy we managed, large, mid or small cap. Where did this outperformance come from? And why has it dwindled in the last 1 year?

In the previous 3 years the index components of PSU Banks, large companies like Reliance Industries, Commodities and Metals, IT, Telecom, Pharma, Real Estate all were in a fundamentally weak spot and on the other hand whatever we had held basis strong fundamentals like private sectors banks, insurance companies, NBFCs, consumer discretionary and staples, autos, oil marketing companies, select capital goods rewarded us. In the last few months, without much significant change in actual fundamental performance there has been a relative value rotation in the markets with money moving to “perceived cheaper” segments of the markets even though changes in fundamentals of the laggards named above is still spotty. That eventually makes those stocks expensive and with the huge upmove in the index its not like owning these is also enabling outperformance. On the other hand, whatever we own in our portfolios continues to lead on a fundamental basis and will continue rewarding us in future.
 
We are stock pickers; which means we make fundamental hypothesis on earnings of companies and choose some stocks over the others. Every decision we make is about selecting some and by exclusion, deselecting many others. Our performance comes from the stocks we own and if someone else selects the stocks that we deselect they are set to gain from the performance of those stocks. But today we are in a market context where in 2017 the entire MidCap index was up 49%, the BSE Small Cap was up by 57%. They have corrected a bit since February 2018 but the large cap index i.e. Nifty is up over 55% from the 7700 level it hit post demonetisation. In this scenario, the question that begs an answer is what selection or deselections are we talking of and which choices are actually doing better than indices? Some are doing relatively better and some are relatively worse and barring an exception or two practically every managed product is behind the underlying benchmark index. The reason is that when the whole market heads up by numbers like 40-50-60%, stock selection doesnt work. Let s take an example – if you are travelling from Chandigarh to Delhi or Ahmedabad to Mumbai by Shatabdi Express and the train is running at a speed of say 130 km/h. If you are mandated to arrive in Mumbai faster than the train even though you are a passenger sitting in the train, how would you accomplish such a mandate? If its a passenger train or any train slower than a Shatabdi, you can surely look for alternatives and come to Mumbai faster. But if you are on a Shatabdi or on a flight, the chances of you doing better reduce greatly. Similarly stock picking works when the markets are around averages or trending up or trending down or volatile or range bound. But if the whole market goes up by numbers like 40-50-60% then it is di?cult for the ones tasked with “selecting” stocks; especially when it is widely known that there are a handful of stocks driving especially the Nifty movement making it even riskier to try and outperform. The good news is this doesnt happen often. In my 19 years following markets I have seen this for probably the first time where in any time frame all indices run up 40-50-60%. Hopefully a lot of what I am saying you may have come across in the newspapers, I am reproducing a few clippings which clearly talk about how the index movement has not reflected in portfolios.
Source: Economic Times dated August 29, 2018
Click on the link to view : http://bit.ly/2x0MFyI
 
Source: Financial Express dated Aug 21, 2018
Click on the link to view : http://bit.ly/2oTGqs7

Source: Mint dated July 24, 2018
Click on the link to view : http://bit.ly/2Nx5H9A

A lot of investors I meet, on seeing this index movement also think that now we are all time highs. Should we exit our equity investments? Well, if we are lagging the index, we didn’t go up with the index, so obviously we will not fall in line with the index. Our portfolio betas are in the range of 0.7 to 0.9. Beta is an indicator of correlation of the portfolio movement with its underlying index – a beta of 1.2 means that with every 1% rise or fall in benchmark index the portfolio would rise or fall by 1.2% respectively. No point seeing the index and forming opinions about either the performance or the decision or withdrawing ones investments or booking pro?ts, which were never extracted in the first place.

In fact I would say that we have been lucky over the last one year. With full bene?t of hindsight if someone were to conclude that last year s markets were expensive, that means one feared a significant correction. Instead what we now have is a relatively better transition – a time correction. In the last one year across portfolios that we manage the growth in earnings of underlying companies on weighted average basis by portfolio ranges between 15% to 30% while the growth in NAVs are in the range of practically zero to low single digits. On the other hand the Nifty ex PSU Banks and few other loss making companies has an earnings growth of about 15% with a huge run up in the index levels. This means that even while we were underperforming, the index has gotten much more expensive while our portfolios have become more valuable by remaining at same price even while increasing the value of underlying earnings. To put it simply if ` 100 NAV declines to ` 75 that s a 25% correction and on the other hand if ` 100 NAV representing ` 4 of earnings per share remains at ` 100 while the earnings per share rises to ` 5, that also is a 25% correction, albeit a much better experience than it could have been in the former case. Alternatively, say that a packet of 100g of biscuits costs ` 100. If the prices are reduced by ` 10, that s a 10% discount. Instead, if the grammage is increased to 110g with the same price, that s also a 10% discount. In the first case the price falls, in the second case the value has risen despite the price remaining same. This is exactly what has happened to your portfolios with us. Given this scenario and the narrow move of the markets, we are convinced you and we are better of holding onto fundamentally sound companies without adding to our risks and getting carried away with the market behaviour.

Lastly, there is no need to redeem or get concerned about your investments, they haven t rocketed as much as the index has with a narrow concentration, in fact as explained before our portfolios have gained in value even at same prices and eventually this value will reflect in the price. We did not get our returns because of index going up and we are not going to lose them because the index falls.

And a last word on elections, I urge you to read again what I had written to you a few weeks back. Reproducing the link herewith:

Yours Sincerely,
Aashish P. Somaiyaa
(CEO – Motilal Oswal AMC)

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