Aashish Somaiyaa on the underperformance of large-cap funds

Nov 11, 2021
The CEO at White Oak Capital gives a context to performance and explains why active fund management still has a strong case.

Recently, Aashish Somaiyaa joined White Oak Capital Management as its chief executive officer. At his earlier stint at Motilal Oswal Mutual Fund, he actively promoted passive investing.

We ask him two questions with reference to the above.

White Oak Capital will focus on active fund management. Motilal Oswal put a thrust on passive investing. Has there been a shift in your investing mindset?

The Motilal Oswal group is known for its active stock picking. Around three years ago, in 2018, I begun focusing on index funds.

This had nothing to do with the ability or the lack of it to generate alpha. It is a no-brainer that if active fund managers do not generate alpha, investors and advisers over time would shift money towards passives.

The reason I began to focus on passive was that I honestly felt that it was the best product suited for a DIY investor or a novice.

(DIY, or Do-It-Yourself investor is one who manages his/her own portfolio, also referred to as direct investing).

In the past four years, there has been a significant number of new investors entering the capital markets and investing in equity mutual funds. There was a need to simplify investing. On a lighter note, to buy 300 good stocks, one has 1,200 funds to choose from.

My focus was on simplification for a digital audience, since a lot of them were entering through fintech players. I have always suggested that a first timer buy the Nifty 500 index fund. If one doesn’t know what to buy, just buy the market. And Nifty 500 represents 94-96% of the entire market capitalization. An index fund does not even require you to have a broker or a demat account. It is a very convenient way to enter the capital market.

A recent study by the S&P Dow Jones noted that 86% of actively managed large-cap funds underperformed the BSE 100 in the last one year; 66% if you take a 10-year period. Does this make a case for passive funds?

I agree that the investment latitude of large-cap funds has shrunk considerably, and it will be a headwind when it comes to outperformance. But I am also old enough to realize that life is not black and white, but shades of grey.

The numbers are there to see and there is no arguing with that. But you need to look at the analysis behind the numbers to make sense of it, and to give it context and perspective.

Go as far back as 2000 and 2003. When the economy is in the doldrums, corporate performance narrows down, and market performance and breath within the index itself narrows down quite dramatically. The economy started slowing down in 2019-20. In FY20, GDP growth was around 4%. In FY21, it was significantly negative.

A final word on the active-passive debate: It is way too early in India to conclude that there is no ability for active fund management to generate alpha. Most parts of the economy are not reflected in the market and the indexes do not capture the entire economy.

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ninan joseph
Nov 14 2021 11:34 AM
If one doesn’t know what to buy, just buy the market. And Nifty 500 represents 94-96% of the entire market capitalization.

Why would anyone even a novice invest in Nifty 500, I would have thought it would be Nifty 50 and Nifty Next 50.

Optically the entire market is good, but the weightage that each stock within the Nifty 500 gets is miniscule and it does nothing for wealth creation.
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