The Ratan Tata-Cyrus Mistry boardroom battle and the recent Infosys saga has once again brought forth the issue of corporate governance. How important is corporate governance in your evaluation of companies while investing?
It is a critical part of any corporate evaluation. The big trend shift is that institutional investors like mutual funds are now a lot more active in corporate governance related issues. SEBI has played an important role in this shareholder activism by making it mandatory for AMCs to disclose their voting patterns. Given the fact that we have had such public experiences of turmoil within large groups, I think institutions have a big role to play in terms of thinking through the noise and sharing their point of view. That coupled with the emergence of proxy advisory services has put the spotlight on corporate governance in a big way where anybody who is doing something which is not in sync with shareholder interest is being questioned. Such instances are affecting the valuations of companies much more strongly now than in the past.
It is not just corporate governance. It extends to ESG – Environmental, Social and Governance which are becoming more important factors to consider while investing. It is not just about financial outcome but it is about how companies are building their financials.
How do you see the disruption in car market – app based taxi hailing, emergence of self-driving cars and the Indian government’s shifting focus towards promoting electric vehicles (EV) impacting the Indian automobile industry in the days to come?
Passenger car market won’t be affected as much with the trend of electrical vehicles initially. The initial impact will be on two and three wheelers and perhaps buses. Two wheelers, three wheelers and buses are more standardized products and their batteries are swappable. You can introduce lithium batteries or something equivalent if you have the infrastructure. Introducing batteries in cars is more complicated because they have different models. You need proper charging stations which require very large investments and there is no major economic return upfront for companies. So there is a curve and not everybody will be affected at the same time.
We are interested in seeing EV effect on component manufacturers. New players will start emerging in segments like these. There is no doubt that the landscape can be very different ten years down the line.
The aggregators have been helping grow the demand for passenger vehicles. It would be interesting to see if aggregators become the early adopters of electrical vehicles as they can buy standardized products in bulk.
Inflows in equity funds have been consistent and rising to all-time highs. Where are you finding investment opportunities?
Generally, we are looking more up the market cap chain in terms of ideas because this segment is liquid and the valuations are more reasonable in large caps. A majority of the flows earlier were in mid cap products. Now, the inflows are coming in hybrid, balanced, and diversified funds. By default, some of the incremental flows are going in large cap firms.
A few sectors we continue to like are financials, energy and consumer discretionary. We are absorbing some flows in these sectors. Unlike in a bull market when you get all sorts of IPOs entering the market we are now seeing quality IPOs coming out. So we are also deploying money in good quality IPOs.
Some mutual funds will also go public. Would you be investing in AMCs?
Yes, it’s a good business if managed properly. We would be interested in good business with the right management, economics, and scalability. Mutual funds generally come under that category.
The petroleum prices are rising. How do you see its impact on inflation?
The dominant component of the inflation index is food and not petroleum prices. On petroleum, we have to recognize that we have very high excise duty on petroleum products which is part of the government revenue collection system. Oil marketing companies are earning much lower marketing margins than international standards. If they have to reinvest in their businesses and set up new capacities they need to make more on marketing margins. The prices are high but it I don’t think anyone is trying to make supernormal profits. It is because of the taxation system in India. The general sense going forward is that oil prices will remain low. We are not expecting oil to move above the $ 60 range. Incrementally, it looks like heading towards the range of $30-40. So the effect of high petroleum prices on inflation will be fairly muted.
Former RBI governor Raghuram Rajan has stated in media that the government should have tried other alternatives rather than demonetization to root out black money. What are your views? Have companies recovered from the slump following the note ban?
There are lot of mid and small cap companies whose model was based on cash system which have been affected. But that is part of the process of getting people to be more tax compliant. From a long-term perspective, it was a good message to send out. It has been painful, especially for those whose model was based on cash and evasion of taxes. They need to adjust and accommodate to the new system. It has caused a bit of slowdown in some areas. It has also caused genuine pain in some cases. But it is similar to GST transition. Every transition causes some degree of pain. Eventually, the system settles around it and gets back to core business.
The schemes of your fund house were not doing so well. Now, they are back on track. What was your turnaround strategy?
There was a certain phase of the market where some of our investments were not working. We have a slightly higher exposure to mid-caps in our whole mix of products. Till 2013, that segment was underperforming quite strongly. Subsequently, it has outperformed. So we participated a bit in the underperformance and the subsequent outperformance.
Our job is to evaluate companies and build portfolios that perform over the long term. Similarly, schemes need to be evaluated on the basis of their performance over a longer term. It’s not that every time we underperform we change our strategy. As an organization, through the last five years, we have built more depth in the investment team. We have added people at the analyst level. We have upgraded analysts to portfolio managers. We have increased the capability of the team to handle higher bandwidth of products across various market caps. So we have put in place all the ingredients to build the right portfolios over time and performance is a derivative of that.
You have changed your benchmark to Total Returns Index. Tell us more about this move…
We were asked by media why our funds are not benchmarked against Total Returns Index. We reviewed it. It made sense and we went ahead with it. Maybe we did not look at it earlier. To compare true performance, you have to take the dividends that are reinvested into the business. It was a very logical thing to do. At DSPBR, we like to adopt best practices always.
SEBI is reportedly looking at bringing regulations to merge schemes. How do you see this move impacting AMCs? And will it help fund managers because they will have fewer schemes to manage?
As a principle, we have always been frugal in launching funds. It is better to manage fewer funds with longer term track records than it is to have multiple schemes with multiple fund managers. You don’t develop consistent track records across all these schemes. It makes it simpler for investors in terms of choice and analysis.
For AMCs, it makes it a lot easier to focus on fewer products and grow existing funds rather than keep growing through new fund offers. From a pure cost point of view, it makes more sense for AMCs to consolidate schemes. Many new funds were launched by AMCs with very different definitions of what is large cap, small and mid-cap. Now there will be better consistency in comparing the right type of products with similar products. You could pick out from a plethora of funds and there was something always performing well. Now you can see the performance in a much sharper manner.
You could have a wider range of products in AIF and PMS business where you have very specialized type of investors who understand the specifics of products. But in a regular retail product like mutual fund which is meant for retail, it makes sense to have fewer products.
Do you think the TER of equity funds should go down?
Everybody has to earn an economic return on their capital – investors, distributors and AMCs. The minute you kill the economics of one segment you are going to hurt the entire chain. While it is a noble thing to offer low fee products and I agree with that conceptually but you have to offer the right products and price them correctly. It’s akin to buying stocks: when you buy a good stock, you have to pay for high valuations. You can’t commoditize everything and say every company should have a low PE.
Similarly, when you are managing money there is a price which you need to pay. The TERs are quite reasonable for the kind of alpha the industry has generated. We recognize that that the global trend is shifting towards lower fees. But it is mainly in the passive management space.
