‘Successful fund managers will set up own AMCs’

The mutual fund(MF) industry has witnessed a spate of exits of star fund managers. The trend will continue, says SUNIL SINGHANIA, who quit Reliance Mutual Fund to set up Abakkus Asset Manager. In an interview to Samie Modak during CFA Society's third India wealth management conference, he says running a hedge fund allows more flexibility to manage money for sophisticated investors. Edited excerpts:

We have seen big MF names quit the industry at a time when growth has been robust. Are there better opportunities in the alternative investment fund (AIF) space?

The asset management industry has seen rapid growth in India. However, my view is that this growth is visible for longer periods, and can only get stronger from here. As is the case globally, successful portfolio managers will eventually set up their own asset management companies (AMCs). The AIF structure offers the manager the flexibility to manage money for sophisticated and smart investors in an efficient manner. For alpha generation, AIF offers a good avenue.

The benchmark indices have done very well this year. But the broader markets have fared badly. Does this trend make investing challenging?

This is a cycle, which is seen every few years. From August 2017 to January 2018, the mid-and small-cap companies were in a state of euphoria. Prices and valuations of stocks went berserk. The current challenges in the segment reflect this over-valuation. Of course, additional margins and MF reclassification had an impact. However, my view is that mid- and small-caps should stabilise from the

Passive funds are under the limelight as majority of the actively managed funds have failed to beat benchmarks. Do you think this trend will continue? The sizes of some of the MF schemes have become too large. In the current scenario, any scheme over ~150 billion of asset will have big challenges to outperform. With enhanced regulations, the fund managers must hold on to the stocks that the fund name denotes. However, the Indian fund management industry has, over the past many years, beaten the benchmark, and this trend should continue.

Do you believe the MF industry is in a structural uptrend? Or are we near the peak of this cycle?

Currently, the MF industry in India is just 12 per cent of GDP as compared to plus 50 per cent seen in developed markets. Hence, the industry is just at its infancy in India, and has a long way to go. Another way to look at this is that mutual funds today have close to only 20 million unique investors in a population base of 1.3 billion. This shows the level of under-penetration.

What are the challenges in the bottom-up stock picking approach, especially if you have to pick from beyond the top 500?

The biggest challenge in bottom-up stock picking in mid- and small-cap lies in the handling of the volatility. On a small base of operations, these companies don't have a smooth earnings trajectory, and even small variations get magnified. Also, owing to technology now there is an overload of information, which can be distracting and the time to react on any event has shortened, forcing the fund manager to always be on his toes. However, my view is to use the volatility as your friend, rather than get scared by it.

Do you think the near-term returns could be tepid given the sharp run-up? How will near-term uncertaintieselections, trade wars and Fed tightening-play on the market?

As always, it is difficult to predict how near-term market will move. With 25% of equity owned by foreign investors, it is but natural that any global moves will have some impact on Indian equities. Globally, investors don't like uncertainty and the forthcoming elections, too, will have its share in the near term. However, as it has been historically seen, over the medium to long-term, Indian equities have managed to overcome the nearterm hiccups and have delivered superior returns. I expect this trend to continue.

Will foreign flows continue to remain lacklustre?

I am expecting earnings growth to pick up in India, and this should see foreign investor interest coming back to the country. Also, an important point to note here is that while equity inflows have been low, India is seeing record FDI inflows. India stands out as one of the best-performing equity markets in the world in 2018. Also, it is least insulated from the happenings in the world, including trade tariffs.

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