ThinkStock PhotosNavneet Munot, CIO, SBI MF, says the only challenge for mutual fund investors now is how do you know which fund will generate alpha, because the pool of alpha is going to shrink. And he did give a broad answer in this interview with Nikunj Dalmia of ETNOW. Edited excerpts:
It has been a brilliant decade for you. Ten years ago, SBI AMC was less than $10 billion, and today it is almost Rs 1 lakh crore.
Yes, it was $5 billion or so 10 years ago, and today if we add PMS assets that we manage for our pension funds, etc, it is more than $100 billion. It has been a phenomenal journey for us.
When you are moving towards a $5 trillion economy, is a $100 billion asset manager too big? I am not sure about that. There is a long way to go for our industry. We are still very small in India. Our market capitalisation will keep growing. The number of new businesses that will come for listing on the exchanges will also keep increasing. But the trend globally is different, as the number of stocks in NYC have come down in last 10 or 20 years. But in India, there are a large number of businesses which are yet to come to the public market. The overall universe is unlikely to shrink. In the past couple of years, the overall investible universe, quality companies that have done well, have not been many. But I am sure that period is likely to change when growth becomes more broadbased, more dispersed. And there will be opportunities in several other sectors.
The overarching theme which SBI AMC was able to ride on was consumption. You bought into retail banks. You bought into retail-dominated franchises. You bought into pure consumption and FMCG names and India went on a binge. Interest rates were low. Crude prices were low. Asset prices, real estate and gold, were also low, which means consumer was able to consume much more. Aspirations increased because internet and connectivity expanded. Some of these factors may not be at play in the next decade. What happens to your consumer-focused investment philosophy now?
The thought was not that consumption would do well and that is not why we bought those stocks. The thought was that there are three ways of generating alpha in an equity fund: You do market timing, you do sector allocation or you do bottom-up stock selection. Our focus has been on bottom-up stock selection.
The sectoral calls are also largely derivatives of what you like on a bottom-up basis, and then from a risk overlay perspective, you need to have certain controls on that. We do not focus much on market timing. We do not think that is our job, it is the job of the adviser.
Now in using bottom-up stock selection, some of the stocks turned out to be from the consumption space, or maybe from the retail lending space. But they were driven by a philosophy -- that you buy the right business, run by the right management and buy it at the right valuation. And for that, you look at a comparative advantage, return ratios, capital allocation, quality of management and, of course, valuation. And this approach has been rewarded well by the market, and a lot of this alpha got generated because we tried to avoid mistakes. The error of omission, I think, is okay, but the error of commission is something that hurts you badly. So, trying to avoid lots of mishaps in the last several years has helped us, apart from identifying several of these companies at an early stage and staying with them through the cycle.
Let us talk about the business growth for your AMC — $5 billion becoming $100 billion — that is an example in itself. But a large part of your growth has also come because you are managing money for pension schemes. You are also managing index funds. In last 10 years, because the world has got connected and interest rates have come down, passive investing has made a comeback. In the US, there is evidence that shows the best of funds are struggling to meet their benchmarks. Could that happen in India in the next 10 years?
It is similar to what I talk about various managements: how you reinvent yourself. We have invested heavily in ETFs much ahead of time. We are investing heavily in ESG. We are also investing in our macro research and alternative data, because all of those are important if you have an aspiration to become a large asset manager.
In terms of generating alpha, what we have seen globally in last 10 years is that active managers have been struggling, a large amount of money is shifting to passive fund managers, because the index itself has delivered so well. All other active managers have not been doing well. Value has been underperforming, but momentum has been doing very well and that is how we have been moving from a pure fundamental fund house to a more quantamental fund house. So your fundamental research overlaid with quantitative research helps to identify several of these trends simultaneously. Also, alpha comes from the information edge, analytical edge and behavioural edge. The alternative data is for the information edge. You use various tools and processes and different kinds of ways for analysing that data.
For example, a look at the importance of forensic accounting over last one-two years. It is so important today when you are looking at an annual report. The way you analyse things from a macro perspective and a bottom-up perspective and how you look at global trends is important. As for the behavioural edge, the market will always make some mistakes. If you try to avoid those mistakes as a fund manager or as a team, then that creates a differentiation. If you keep investing to create an information edge, analytical edge and a behavioural edge, people will be able to generate alpha.
The only challenge for investors is how do you know which fund will generate the alpha, because the pool of alpha is going to shrink. Institutionalisation of markets and democratisation of information have led to shrinkage of alpha at an aggregate level. You have to constantly reinvent and invest. I am sure there would be several funds which will deliver that alpha, but if you are not able to identify that manager, it is better to stay with an ETF and that is where we are also investing quite a bit.
How does one choose them? Because SBI AMC has a consumption opportunity fund, an ETF, an ESG fund, a smallcap fund and a focus fund. Rs 15,000-20,000-25,000 is what the normal ticket size of an SIP in India is. You may look back after 10 years and say look my schemes have managed to beat the index, but what if the schemes I have chosen do not beat the index?
Of course, some of these have been outliers, but the experience would have been pretty decent even in some of the other funds. For that investor, I would say, he should choose something like a multicap fund, which is managed by our analyst team. We do not take market timing call, or large sectoral bets there, and it is a completely bottom-up portfolio of 40-50 stocks chosen by our analyst team. And you play across largecap, multicap, midcap, smallcap and try to identify businesses from a bottom-up perspective. They do not have to take a sectoral call or a thematic call.
What about the reverse? So if you bought IT or TMT, let’s say in 1995 to 2000, and you hit a home run. They were the best compounders and in 2000 before the bubble busted, it appeared that this trend will continue for another decade. What has worked in this decade? Do you think the current trend will not replicate itself because of earnings or purely because of disruption?
Disruptions have always been there. Some of the companies that were part of Sensex or were among the top 100 companies in the early 90s do not even exist now. And look at 2007, several companies that were in the Nifty top 50 are in NCLT today.
So, the focus must be on identifying the right people, right management who can build those businesses. There are so many digital disruptions, technological disruptions, disruptions created by the ease of doing business, disruptions in logistics. There will be a new set of winners and you try to identify that winner rather than taking a large sector bet.
I am going to take Nifty a decade back --financials were about 26-27% of the weightage, now they account for 40%. I am not including insurance here, because insurance is not part of Nifty.
It is yet to come.
Exactly. Ten years from now, what could be the face of Nifty?
Several businesses are not there in Nifty. This is an interesting debate which we have in our office every single day. You are yet to see several of the insurance companies, asset management companies come into Nifty. The weightage for financials is already reaching 40%. Can it be 50, 60, 70%, because you look at S&P500, it is just 13-14%? The US is like a financialised economy, because the technology companies have got a much larger share today. Some 15-20 years back, there was a period where oil and gas was a very large part of Nifty. In the ’90s, TMT and consumer companies were more in number. Whether it will be different 10 years later? I think it will be.
It is always difficult to predict what Nifty could look like. Would there not be many companies from the services sector, which is so large in India? Would there not be a healthcare company, I am not talking about pharma? I think there could be.
Would there not be a few companies from real estate, which is such a large sector, and is likely to get organised? There could be. Would there not be many companies from the digital space? With the kind of data revolution that is under way, some of the financials that are in Nifty today are also because of investment in digital technology.
What will now be part of Nifty because Nifty is only 50 stocks? Somebody has to get out for someone to get in.
In Nifty, companies are moving in and out of the same space. Even if a sector is the same, a lot depends on individual companies. There could be a few things which may not be part of Nifty few years later.
What is your aspiration now? You cannot grow at the rate at which you have grown last decade?
Why not?
Because we are looking at $5 billion?
I keep thinking if our IT industry can serve Fortune 500 companies, then why cannot our asset management industry do that? If there is support from policymakers and all of us keep on investing, then why should we not have that aspiration? Investing is same everywhere in the world.
So, the big picture for the AMC business is looking strong?
Navneet Munot: Yes, but the AMC business has a lot of disruptions like any other business. Margins would be under pressure. You had a bond ETF at the fee that you are aware. We are running our ETFs at 7 bps or even lower. So, there is going to be pressure on margins. You have to re-invent your business continuously. You have to continuously find ways to deliver alpha. If you do not do that, people are not going to pay your fees. It is the writing on the wall.
Is there a risk of a global shock? We do not know, but if that happens, will this fairytale collapse?
There is a risk from trade war, polarisation, deglobalisation, cyber security — all of them are known. But you do not know where the unknowns will come from. If capitalism has to do well, we have to bring a sense of purpose very deep into business. We need to have that strong sense of purpose embedded into our business model, if we want capitalism to thrive and create more prosperity for a large number of people — that to me is a big risk. If we do not address climate change, if we do not address in quality, if we do not address this pompous populism, there could be some other risk which are difficult to visualise today.
Look at Hong Kong, look at what is happening in Extinction Rebellion, the Yellow Vest movement in Paris, look at several of these markets. Across the world, they are saying something and I think we have to ensure that for capitalism and liberal democracies to thrive, we address that and that is where I think the role of investors is underestimated several times. But we invest in businesses and if we drive businesses towards the right cause and right purpose and I think we can make a huge impact on society.
Is ESG the theme to watch out for in next 10 years?
It is a big bet for us.
How can one invest in ESG?
So, one is of course we have a focus fund and on the PMS side, for the last several years, we have been running a fund, which is very socially responsible. But as a house, all investors worry about is how much alpha we will generate.
If the market has to deliver 15 per cent, if corporate profits have to grow at 15 per cent, you have to do the right things that society will allow you to make that much profit. We have seen what happened with mining or infra companies. We have seen with several of the other sectors that if we do not do the right things and if investors do not drive the corporate behaviour in the right direction, then there is a risk to market return or economic return itself.
The business community, media and all stakeholders have to work together on how do we increase the beta of the market. Of course, alpha is the second thing.
It has been a brilliant decade for you. Ten years ago, SBI AMC was less than $10 billion, and today it is almost Rs 1 lakh crore.
Yes, it was $5 billion or so 10 years ago, and today if we add PMS assets that we manage for our pension funds, etc, it is more than $100 billion. It has been a phenomenal journey for us.
You have a large size and scale now. With that kind of a scale, generating alpha could that be the biggest challenge, because after this economic crisis, only a few companies are growing and those companies are either trading at a disproportionate premium or are owned disproportionately by investors like you.
When you are moving towards a $5 trillion economy, is a $100 billion asset manager too big? I am not sure about that. There is a long way to go for our industry. We are still very small in India. Our market capitalisation will keep growing. The number of new businesses that will come for listing on the exchanges will also keep increasing. But the trend globally is different, as the number of stocks in NYC have come down in last 10 or 20 years. But in India, there are a large number of businesses which are yet to come to the public market. The overall universe is unlikely to shrink. In the past couple of years, the overall investible universe, quality companies that have done well, have not been many. But I am sure that period is likely to change when growth becomes more broadbased, more dispersed. And there will be opportunities in several other sectors.
The overarching theme which SBI AMC was able to ride on was consumption. You bought into retail banks. You bought into retail-dominated franchises. You bought into pure consumption and FMCG names and India went on a binge. Interest rates were low. Crude prices were low. Asset prices, real estate and gold, were also low, which means consumer was able to consume much more. Aspirations increased because internet and connectivity expanded. Some of these factors may not be at play in the next decade. What happens to your consumer-focused investment philosophy now?
The thought was not that consumption would do well and that is not why we bought those stocks. The thought was that there are three ways of generating alpha in an equity fund: You do market timing, you do sector allocation or you do bottom-up stock selection. Our focus has been on bottom-up stock selection.
The sectoral calls are also largely derivatives of what you like on a bottom-up basis, and then from a risk overlay perspective, you need to have certain controls on that. We do not focus much on market timing. We do not think that is our job, it is the job of the adviser.
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Now in using bottom-up stock selection, some of the stocks turned out to be from the consumption space, or maybe from the retail lending space. But they were driven by a philosophy -- that you buy the right business, run by the right management and buy it at the right valuation. And for that, you look at a comparative advantage, return ratios, capital allocation, quality of management and, of course, valuation. And this approach has been rewarded well by the market, and a lot of this alpha got generated because we tried to avoid mistakes. The error of omission, I think, is okay, but the error of commission is something that hurts you badly. So, trying to avoid lots of mishaps in the last several years has helped us, apart from identifying several of these companies at an early stage and staying with them through the cycle.
Let us talk about the business growth for your AMC — $5 billion becoming $100 billion — that is an example in itself. But a large part of your growth has also come because you are managing money for pension schemes. You are also managing index funds. In last 10 years, because the world has got connected and interest rates have come down, passive investing has made a comeback. In the US, there is evidence that shows the best of funds are struggling to meet their benchmarks. Could that happen in India in the next 10 years?
It is similar to what I talk about various managements: how you reinvent yourself. We have invested heavily in ETFs much ahead of time. We are investing heavily in ESG. We are also investing in our macro research and alternative data, because all of those are important if you have an aspiration to become a large asset manager.
In terms of generating alpha, what we have seen globally in last 10 years is that active managers have been struggling, a large amount of money is shifting to passive fund managers, because the index itself has delivered so well. All other active managers have not been doing well. Value has been underperforming, but momentum has been doing very well and that is how we have been moving from a pure fundamental fund house to a more quantamental fund house. So your fundamental research overlaid with quantitative research helps to identify several of these trends simultaneously. Also, alpha comes from the information edge, analytical edge and behavioural edge. The alternative data is for the information edge. You use various tools and processes and different kinds of ways for analysing that data.
For example, a look at the importance of forensic accounting over last one-two years. It is so important today when you are looking at an annual report. The way you analyse things from a macro perspective and a bottom-up perspective and how you look at global trends is important. As for the behavioural edge, the market will always make some mistakes. If you try to avoid those mistakes as a fund manager or as a team, then that creates a differentiation. If you keep investing to create an information edge, analytical edge and a behavioural edge, people will be able to generate alpha.
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The only challenge for investors is how do you know which fund will generate the alpha, because the pool of alpha is going to shrink. Institutionalisation of markets and democratisation of information have led to shrinkage of alpha at an aggregate level. You have to constantly reinvent and invest. I am sure there would be several funds which will deliver that alpha, but if you are not able to identify that manager, it is better to stay with an ETF and that is where we are also investing quite a bit.
"If the market has to deliver 15 per cent, if corporate profits have to grow at 15 per cent, you have to do the right things that society will allow you to make that much profit."
How does one choose them? Because SBI AMC has a consumption opportunity fund, an ETF, an ESG fund, a smallcap fund and a focus fund. Rs 15,000-20,000-25,000 is what the normal ticket size of an SIP in India is. You may look back after 10 years and say look my schemes have managed to beat the index, but what if the schemes I have chosen do not beat the index?
Of course, some of these have been outliers, but the experience would have been pretty decent even in some of the other funds. For that investor, I would say, he should choose something like a multicap fund, which is managed by our analyst team. We do not take market timing call, or large sectoral bets there, and it is a completely bottom-up portfolio of 40-50 stocks chosen by our analyst team. And you play across largecap, multicap, midcap, smallcap and try to identify businesses from a bottom-up perspective. They do not have to take a sectoral call or a thematic call.
What about the reverse? So if you bought IT or TMT, let’s say in 1995 to 2000, and you hit a home run. They were the best compounders and in 2000 before the bubble busted, it appeared that this trend will continue for another decade. What has worked in this decade? Do you think the current trend will not replicate itself because of earnings or purely because of disruption?
Disruptions have always been there. Some of the companies that were part of Sensex or were among the top 100 companies in the early 90s do not even exist now. And look at 2007, several companies that were in the Nifty top 50 are in NCLT today.
In a market like India, where you have a large consumption opportunity, there is a huge runway ahead for investments. And India has a lot of opportunities even on the export side or the outsourcing, though we have not done well at an aggregate level over the last 10 years. But given the talented pool of people that we have, the educated pool of people, there are lots of opportunities even on that side.
So, the focus must be on identifying the right people, right management who can build those businesses. There are so many digital disruptions, technological disruptions, disruptions created by the ease of doing business, disruptions in logistics. There will be a new set of winners and you try to identify that winner rather than taking a large sector bet.
I am going to take Nifty a decade back --financials were about 26-27% of the weightage, now they account for 40%. I am not including insurance here, because insurance is not part of Nifty.
It is yet to come.
Exactly. Ten years from now, what could be the face of Nifty?
Several businesses are not there in Nifty. This is an interesting debate which we have in our office every single day. You are yet to see several of the insurance companies, asset management companies come into Nifty. The weightage for financials is already reaching 40%. Can it be 50, 60, 70%, because you look at S&P500, it is just 13-14%? The US is like a financialised economy, because the technology companies have got a much larger share today. Some 15-20 years back, there was a period where oil and gas was a very large part of Nifty. In the ’90s, TMT and consumer companies were more in number. Whether it will be different 10 years later? I think it will be.
It is always difficult to predict what Nifty could look like. Would there not be many companies from the services sector, which is so large in India? Would there not be a healthcare company, I am not talking about pharma? I think there could be.
Would there not be a few companies from real estate, which is such a large sector, and is likely to get organised? There could be. Would there not be many companies from the digital space? With the kind of data revolution that is under way, some of the financials that are in Nifty today are also because of investment in digital technology.
What will now be part of Nifty because Nifty is only 50 stocks? Somebody has to get out for someone to get in.
In Nifty, companies are moving in and out of the same space. Even if a sector is the same, a lot depends on individual companies. There could be a few things which may not be part of Nifty few years later.
What is your aspiration now? You cannot grow at the rate at which you have grown last decade?
Why not?
Because we are looking at $5 billion?
I keep thinking if our IT industry can serve Fortune 500 companies, then why cannot our asset management industry do that? If there is support from policymakers and all of us keep on investing, then why should we not have that aspiration? Investing is same everywhere in the world.
So, the big picture for the AMC business is looking strong?
Navneet Munot: Yes, but the AMC business has a lot of disruptions like any other business. Margins would be under pressure. You had a bond ETF at the fee that you are aware. We are running our ETFs at 7 bps or even lower. So, there is going to be pressure on margins. You have to re-invent your business continuously. You have to continuously find ways to deliver alpha. If you do not do that, people are not going to pay your fees. It is the writing on the wall.
Is there a risk of a global shock? We do not know, but if that happens, will this fairytale collapse?
There is a risk from trade war, polarisation, deglobalisation, cyber security — all of them are known. But you do not know where the unknowns will come from. If capitalism has to do well, we have to bring a sense of purpose very deep into business. We need to have that strong sense of purpose embedded into our business model, if we want capitalism to thrive and create more prosperity for a large number of people — that to me is a big risk. If we do not address climate change, if we do not address in quality, if we do not address this pompous populism, there could be some other risk which are difficult to visualise today.
Look at Hong Kong, look at what is happening in Extinction Rebellion, the Yellow Vest movement in Paris, look at several of these markets. Across the world, they are saying something and I think we have to ensure that for capitalism and liberal democracies to thrive, we address that and that is where I think the role of investors is underestimated several times. But we invest in businesses and if we drive businesses towards the right cause and right purpose and I think we can make a huge impact on society.
Is ESG the theme to watch out for in next 10 years?
It is a big bet for us.
How can one invest in ESG?
So, one is of course we have a focus fund and on the PMS side, for the last several years, we have been running a fund, which is very socially responsible. But as a house, all investors worry about is how much alpha we will generate.
If the market has to deliver 15 per cent, if corporate profits have to grow at 15 per cent, you have to do the right things that society will allow you to make that much profit. We have seen what happened with mining or infra companies. We have seen with several of the other sectors that if we do not do the right things and if investors do not drive the corporate behaviour in the right direction, then there is a risk to market return or economic return itself.
The business community, media and all stakeholders have to work together on how do we increase the beta of the market. Of course, alpha is the second thing.
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( Originally published on Jan 04, 2020 )
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...moreDownload The Economic Times News App to get Daily Market Updates & Live Business News.
Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.
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