If you want to generate wealth, small and midcaps the only choice: Aashish Somaiyaa

Even before Covid came through, we were going through our own set of economic challenges and as it is the beginning of a new cycle now, we need to see at what pace we emerge from those challenges, says Chief Executive Officer, White Oak Capital Management.

What are the plans at White Oak?
White Oak has been in existence for over three years now and Prashant Khemka, who was the erstwhile CIO for Goldman Sachs for India Equity and their global emerging markets, and the team founded White Oak in the middle of 2017. It is more like the White Oak Group which through its international operations, manages nearly $2 billion for foreigners who are investing into India and this is managed through Singapore, Dublin, London and Mauritius. As far as India is concerned, there is a set of local operations which is more about managing portfolios for high net worth investors through alternate investment funds and portfolio management services.

Over a medium-term frame, like may be in the next year or two, there is an ambition to start retail mutual fund operations in India and that is the broad mandate. But in reality, there is a pretty large 12-member team of investment professionals which manages India equity and with their competence and investing philosophy the idea is to serve more and more investors across the institutional retail and high net worth spectrum.

How are you reading the signs right of the market we are in from the fundamental side?
It is delicately poised because as far as March and April and the earlier part of this financial year was concerned, there was a huge amount of scepticism but at the same time, the economy was going through a complete lockdown because of Covid and may be the market is seeing it as a one-time impact which may be there for three months or six months and eventually we will start to normalise. That is why we saw a deep cut and then we saw some kind of bounce back. Why did I say it is delicately poised is because everybody wants to see the rate at which the rate of emergence from the trough or the rate at which the trajectory is getting developed and for the market to keep doing what it is doing, definitely it needs to keep seeing encouraging data.

It is like a very delicate poise -- how the market movers versus what kind of data we are actually seeing coming out -- and on top of that, there are a few uncertainties related to what is happening in the US and the politics and the elections and those kinds of things.

As far as we are concerned, it is very difficult to time it but if I were to stick my neck out, I would say it is the beginning of a new cycle because even before Covid came through, we were going through our own set of economic challenges and as it is the beginning of a new cycle now, we need to see at what pace we emerge from those challenges

Previously we have seen the emergence or rush of retail investors to the market as signs of near term peak or euphoria. Is that fear justified or is it just coinciding with the rising alarming number of COVID cases globally and lofty valuations in US markets as well and that is why people are scared?
Clearly there are big trends and within that there were smaller trends or smaller occurrences. When I say a big trend, what I meant to say is that habits change with generations. So from that perspective, we have a generation of people out here who understand.

I will just quickly give you an example. If I ask my mother when I say the word interest rate, what number comes to mind, I think my mom is going to say more like 10% or 11% or something. If you ask the same question to 25-30-year-olds, they are going to say something like 4%, 5% or 6% because this very well regarded bank splashes the whole country with 4 and 6.

Clearly today there is an appreciation that to make a return, you will need to take risk. That is the more generational shift, number one. Number two is within that, accessibility and the digitisation were clearly playing a role. So long story short, I would say Covid has kind of speeded up or hastened what was already a long trend. Yes within that, one can understand that some people might have got first time lucky, some might not have had great experiences but all said and done, it has only accelerated the pace across a section of our population getting engaged with capital market activity.

Whether they are coming from broking accounts, whether they are coming through SIPs or some advised portfolios -- whichever way you look at it -- basically it is hastening the process of a cross section of population any which way to get engaged with capital markets because that was the mega trend. But it got accelerated. That is how I would put it.

What did you make of the recent circular from Sebi on multicap funds?
Firstly, irrespective of how the experience of the last two years has been or how potentially next couple of years may be, I have always been a big votary of investing in small and midcaps because of the volatility and because of the risk. I would still put my neck out and say from an investor’s perspective that somebody who wants to generate wealth or make a good return from that perspective, it is a necessary evil. I do not think it is an evil but because of risk and volatility, a lot of people think that it is a space which should be avoided but I would still say it is a necessary evil. That is my broad perspective. I think there is no choice but to invest in small and midcaps. Now how much risk you can tolerate and how much allocation you will put in it is about individual choices and circumstances. We are no one to dictate it.

Coming to the regulator’s perspective, by engaging with the industry participants and the regulator, what I have understood is that the regulator is very keen to ensure that from an investor’s perspective there is standardisation and mutual funds are easy to understand. So the regulator went to great lengths to explain to people that okay this is a large cap fund, 80% of the money should be in top 100 stocks. Then there is a midcap fund and at least 65% of the money should be in stock number 101 to 250 and so on and so forth.

Now within that, there is a multicap category and when you say multicap, it does suggest that it will have money spread across multiple market caps. Now it is only a quirk of the market or it is a situation which is here and now, we all know what happened in the last two to three years with small and midcaps, economy and oil prices and the IL&FS crisis. All those things are not great for small and midcap to function as an environment.

So the point is that there is a reason here and now why these mutual funds ended up having a lot of money in largecaps and from a regulator’s perspective then what is the difference between your large cap fund and your multicap fund, which is 85% in large cap? That is what got the regulator to look at it closely that if you are going to run your multicap fund like a largecap fund today, tomorrow you will run your multicap fund like a smallcap fund also. So what does an investor really understand out of it?

I think the industry is running multicap funds like a flexi cap across the spectrum and the regulatory intent is that multicap is multicap and it should have multiple market caps. That is where they are coming from. Some do believe that we are getting into too much of directing where the money should go. The other side of the story is that well the idea is to simplify and we want people to understand what they are getting into. So the industry has to align and that is the way to go.