Maximum wealth can be created by owning midcaps in long term: Motilal Oswal

Categorisation of schemes is a step in the right direction, the market cap definition could have been a bit more liberal, says Aashish Somaiyaa, MD and chief executive officer of Motilal Oswal AMC

Maximum wealth can be created by owning midcaps and staying invested for at least five years, says Aashish Somaiyaa, managing director and chief executive officer of Motilal Oswal AMC. In an interview with Ashley Coutinho, he says that while categorisation of schemes is a step in the right direction, the market cap definition could have been a bit more liberal. Edited excerpts:
 
What is your outlook for the market in the year ahead? 

The worst is behind us. There are always pockets of over and undervaluation, but we are in a much more comfortable space than we were in the last 12-24 months. With the political developments and changes at the central bank, I believe that discernible economic expansion or growth is on its way. How long this expansion can sustain will depend on macroeconomic conditions in the context of a turbulent global landscape.

What is your view on mid and smallcaps as investment bets?
I am not a fan of smallcap investing because I don’t think the story of the princess and the frog applies to equity investing; there’s a good chance you will end up committing to a frog. We generally invest in companies over half to a 1 billion dollar range by market cap. This is a comfortable range to identify a few future largecaps in every portfolio we manage. I believe that maximum wealth is created by owning midcaps and staying committed for at least five years because in India the biggest brands and lot of emerging sectors are still with midcap companies. Our wealth creation study shows that in any five-year time frame, about 10 per cent of companies ranked between 101 and 300 by market capitalisation go on to enter the top 100 club. But investors and advisors alike repeatedly offload midcap stocks when the market sees a fall because this segment is naturally more volatile.

What bearing will the general elections have on the market?

Elections always bring more volatility but being right for six or nine months has nothing to do with creating wealth over the long term. I am saying six-nine months because past experiences suggest that how the market reacts before, on or after the day of election results, has nothing to do with how the market behaves three-four years after that date. It is best that we cast our vote without fail and remain invested all through.

Mutual funds have seen sizeable inflows this year. What changes do you foresee for the industry as it grows in size?

Over the years, mutual funds have put in efforts to expand reach and bring in more people into the financial savings fold by promoting SIPs. We are bound to see multifold scale in the next decade. In the near term, we will have adjustment issues with significantly lower fees chargeable to investors and lower remuneration for AMCs and distributors. This is already reflected in slowing flows and may continue for some time. Some participants might find the industry economics getting unattractive but they would be well advised to remember that the industry is getting more attractive for the investors.

When Amtek Auto and IL&FS went through troubled times, a lot of fund managers were caught off guard. Do you think it is time for the industry to step up due diligence in assessing the quality of debt papers?

On the whole, the mutual fund industry has done well over two-three decades in managing fixed income. Quoting from a few examples reflects a lack of appreciation for the longer term track record of the industry. At the same time, I feel that a lot of discussion on mutual funds are possible purely because they are transparent and all information is available in public domain. One can never say that fund houses have done enough and they must surely not depend on rating agencies. Strengthening competencies has to be an ongoing process.

Sebi has reduced total expense ratios for mutual fund schemes. What is the impact of this move?

This will ensure “auditability” and control of payouts made to distributors. It will further ensure that the impact of commission payouts on sales is minimised. If commissions across funds fall in a narrow range, it aligns the interest of AMCs and distributors with investors.
 
Capital market regulator recently introduced norms for categorisation of schemes. Do you think this is a step in the right direction?

I am in favour of standardisation of definitions and categorisation to the extent that it levels the playing field. But I do feel that market cap definitions could have been a bit more liberal. For instance, 80 per cent of the portfolio in stock 1-100 for a largecap fund is quite prohibitive. Further, we could end up having capacity constraints in certain categories if the aim is to generate alpha and yet adhere to the categorisation norms.