Mutual fund is a prescription product and not an OTC product

BFSI Industry Interview
On: Feb 13, 2014 | From: Aashish Somaiyaa
BFSI Industry Interview in Advisorkhoj - Mutual fund is a prescription product and not an OTC product

Aashish Somaiyaa is the Chief Executive Officer & Managing Director of Motilal Oswal Asset Management. Mr. Somaiyaa brings with him rich and varied experience - with more than 13 years in sales and distribution, channel management, product development and institutional sales from Prudential AMC and a brief stint at project management with Bharti AXA Investment Managers.

His last assignment was with Prudential AMC, as Senior VP & Head - Retail Business where he was responsible for sales, distribution and product development of Mutual Fund, PMS and Real Estate offerings through retail distribution, banking and private wealth management channels across India and UAE.

Mr. Somaiyaa holds a Bachelor of Engineering in Polymer Science and a Masters in Management Studies in Finance from NMIMS, Mumbai.

Advisorkhoj congratulates you for launching Motilal Oswal MOSt Focused Midcap 30 Fund. Can you please explain the rationale for launching a Midcap fund and also why it is restricted to 30 companies only when the Midcap universe is so big?

Motilal Oswal Group's 26 years of experience in Equity Markets, 18 years of presenting Wealth Creation Studies and providing SOLID RESEARCH SOLID ADVICE has resulted in a belief that money is converted into wealth by buying high quality stocks and riding their entire growth cycle. This belief makes Motilal Oswal Asset Management uniquely positioned to provide expertise in the Midcap segment where identifying emerging companies that scale to enduring growth companies is a key competence.

Motilal Oswal AMC is aiming to gain recognition as a specialist equity house. We believe our forte lies only in equity management and within equity also we have a proprietary investment philosophy which we popularise under the slogan of Buy Right : Sit Tight. To elaborate our investment philosophy can be explained as below:

  • Quality Growth and Longevity: A value based investment philosophy for picking stocks that signify Q=G-L:

    • Q denoting quality of business and management

    • G denoting growth of earnings and sustained RoE

    • L denoting longevity of competitive advantage or economic moat of the business

    We are a value based investment house. But value to us does not necessarily mean buying only cheap stocks – value to us also means buying companies whose earnings longevity and earnings growth are not rightly priced by the market. We like to buy a good business for a fair price rather than buying a fair business for a good price.

  • Buy and Hold: We are strictly buy and hold investors and believe that picking the right business needs skills. And hold onto these businesses to enable our investors to benefit from the entire growth cycle.

  • Focus: Our portfolios are high conviction portfolios with 15 to 25 stocks being our ideal number. We believe in adequate diversification but over diversification results in diluting returns for our investors and adding market risk.

Since we have only one investment philosophy unlike other AMCs which practice various styles under the same roof, we will also end up having only 3 equity funds – large cap, mid cap and a multi-cap. Usually there are multiple funds because AMCs have different styles being practiced. We believe that instead of selling whatever the market is willing to buy, we should only offer what we are good at. Our approach is competency led and not market share led.

What is the fund marketing tagline “Buy Right, Sit Tight” means?

Buy right means buying the right company at the appropriate price. This is a part of our selection philosophy which means that the company should fall within our QGL criteria – Quality Companies, With High Growth and Longevity. Sit Tight is the buy and hold investment management philosophy. Individual companies will provide good returns over longer periods – going with market sentiment or short term euphoria is counterproductive. If you see my response to the previous question you will note that point no 1 pertains to BUY RIGHT and point numbers 2 and 3 pertain to SIT TIGHT. BUY RIGHT: SIT TIGHT is just a simplification of our investment philosophy.

It is an open ended equity fund which will identify ‘emerging wealth creators’. Therefore, don’t you think it would have been better to keep it close ended? As the theme is for long term and return could be very high compared to diversified large cap funds in long term.

Closed ended funds have become a fad recently not entirely for the reasons of providing higher returns and hence less said the better. These are tactical in nature. With closed ended funds there is a concept of “sudden death”. The money has to be not only deployed at the levels and valuations when received, but on maturity on a given day the fund needs to be liquidated and paid out. The maturity date or the period of maturity may not necessarily be the right time for liquidation. Secondly, there is no such evidence to show from the past records that closed ended funds reward investors better.

Our job is to ensure we buy emerging wealth creators based on the investment philosophy we have highlighted and hold them through the entire growth cycle. This can not be tied into or defined in a tight time frame of 3 years. And if we were to tie it into a time frame of 3 years, the investors would get returns but they would be sub-optimal and result in premature selling of good companies just because a maturity date has come up.

Ideally, we should give our investors the exit options which would allow them to take a call on their individual return objectives. A closed ended fund does not allow this flexibility for this fund objective.

What exactly do you mean by ‘emerging wealth creators’? Will you try to identify them within a certain market cap or just look for great business models or disruptive business ideas?

Our QGL investment philosophy tries to do exactly that: quality of earnings and management should be great, company should have current growth and expected sustenance of growth and should have an economic moat (competitive advantage) for the long term. When we say emerging wealth creators one of the filter is to look for companies that have crossed 15% RoE for the first time. If a company breaks into the 15%+ RoE league for the first time and then we have reasons to believe that it will sustain, it is a good candidate for consideration as emerging wealth creator.

You already have a Midcap Fund ‘MOSt Shares Midcap 100 (ETF)’. How the new fund is going to be different from it? There could be duplication in terms of the company selection, example – some of 30 ‘emerging wealth creators’ could already be in the portfolio of the existing midcap fund?

M100 is a passive CNX Mid Cap index based exchange traded fund. The ETF is for those investors who are looking at a market access product without any fund manager risk.

On the other hand with MOSt Focused MidCap 30 the investors can look at a very focused portfolio of about 20 companies that have passed our QGL test with a higher risk return expectation. The fund seeks to identify a small number of emerging wealth creators which we expect to become enduring wealth creators.

Motilal Oswal (MOSL) is famous for its research and wealth creation studies – do you share the same research or does the AMC have a separate research team?

Needless to say the thought leadership and the DNA definitely comes from over 27 years of pedigree of Motilal Oswal Securities Ltd. That’s our sponsor company and we are proud that they have been living; breathing equities since 1987. Our expertise has definitely come from the DNA of the group and key investment people have spent long years with the MOSL group. Further, we are fortunate to have the stewardship of our Chairman Mr. Raamdeo Agarwal who guides the investment philosophy of MOAMC.

Having said so, MOSL and MOAMC are distinct companies. Our equity management team is our in house team and MOSL is one of the many brokers with whom we do business in the secondary market. Other than MOSL, many other leading research driven brokers are servicing our equity management team.

Why should an Investor consider this scheme? Can you give us three quick points?

  • Motilal Oswal AMC has very strong equity management credentials tracing its DNA back to 1987; one of the oldest research based equity houses.

  • We have a strong well defined tried and tested investment philosophy in BUY RIGHT: SIT TIGHT, that’s our mantra of wealth creation. This has been tested since 2003 in our managed accounts business so we are not new as far as investing style is concerned

  • Being a research based house our expertise does lie in picking emerging mid cap ideas as wealth creators and currently mid caps are available cheap. While people are concerned about multiple issues like economics and politics all said and done we need just 15 good companies to create wealth for our investors.

Even though MOSL is a big brand in Equity research and broking, the AMC business is yet to catch up. As you are a veteran of this industry, therefore, we would like to know what are your plans for making it to the say top ten league?

Let me clarify that we are not interested in the top ten league in general and let me state humbly it is not even possible for us to be in the top ten league. This is because our expertise lies only in equity management and we are a very competency driven organization as a whole rather than being market share driven. I am quite confident we can get into the top ten league in our chosen area of operation like we are amongst the top players in the equity PMS business with large AUM and over 11 years track record.

Not only a veteran, you have a great understanding of the retail side of the AMC distribution business. Therefore, are you planning to create a massive retail footprint through an army of Mutual Funds distributors or want to be selective in choosing your distributor partners?

My belief is that mutual fund is a prescription product and not an OTC product. Hence it has to fit into a client’s portfolio only by a distributor or advisor or financial planner just the way medicines are taken under the advice of the doctor and pharmacist. At Motilal Oswal AMC, we follow well articulated, well defined and stated investment philosophy and hence it clearly gives us edge within the industry. We would like to remain focused on our core job and strength area of fund management instead focussing on building sales and distribution network. We would prefer to be a pure manufacturer who is a wholesaler and reach out to various geographies through well established platforms. We would love to work with like- minded financial advisors who believes in “buy right - sit tight “ for wealth creation of customers.

Currently, how many Mutual fund distributors are enrolled with you and what is the active percentage?

We are building up our network for last 6 months. We have just built our sales team who are present across 13 locations in the country. Our sales team has about 20 people across these locations. We have a wholesaling approach where we have senior people with average 10 years work experience and they possess equity expertise. Our products are carried by a selected number of IFAs who we have started reaching out to as also well respected platforms such as NJ India, MOSL, iFast, IIFL, Barclays, ICICI Securities, DBS Bank, etc. Most of them have been active with us in our various product segment starting from our PMS Business.

The franchisee model of MOSL broking business has been one of the biggest successful models as far as creating a broking footprint across the nation through selective partners are concerned. How do these partners help or contribute to the AMC business?

Franchisees are part of MOSL as a platform which is one of our largest distributors. Already over 15% of our business in equity funds is coming through B15 locations as a result of strong presence of MOSL’s franchisee partners. The largest 10 franchisees of MOSL are located in B15 towns.

Every AMC has one ‘flagship’ fund. In your case which is your flagship fund?

We have only one investment philosophy and we will have a total of three equity funds riding on this philosophy. MOSt Focused 25 which is LargeCap, MOSt Focused MidCap 30 which is MidCap and we have MOSt Focused MultiCap 35 which is subject to regulatory approvals. Keeping this in mind, you will note that there is no concept of flagship applicable to us because we have a very tight product offering.

Penetration of Mutual funds beyond few top cities has not been significant despite Industry being there for last 20 years! How you are going to explain this unique concept in cities where people are still struggling to understand even the plain vanilla ‘diversified equity funds’?

It is unfortunate that we have been chasing returns while deciding to invest in MF instead of knowing that how will MF manages my funds. We are working very closely with various platforms who have retail reach and educate people to invest with “ wealth creation view “ by doing “ buy right and sit tight “. Our products are not complicated in any manner, in fact our way of working is the very old fashioned way of equity investing as propagated by the likes of Benjamin Graham, Warren Buffet, Charlie Munger and Philip Fischer etc. We believe in buying good quality stocks and sitting on them. We don’t do anything fancy when it comes to active equity management.

Penetration of financial services business in India is abysmally low. Some figures show it is lower than 10%. What, in your opinion is lacking here, what are the root causes?

It is too early in the day to evaluate these things in India. As recently as 1999 a RBI Relief Bond was going at 12% tax free, risk free!. How does one explain to this generation of people that they need to put their capital to risk for generating returns? Habits change with generations. We just need to keep doing what we are doing consistently and in the interest of the end investor.

What Motilal Oswal as an AMC is doing in terms of taking ‘Investment Awareness programs’ to the masses?

I have seen a lot of investor awareness getting into the areas of investor education. Awareness is different from education. Doctors ensure that patients are aware, they don’t educate them. Similarly we need to make our investors aware of the following concepts:

  • Interest rates will only compensate for inflation; for growing money you need higher returns and you need to take calculated risks through equity investing

  • Financial Planning and Asset Allocation

  • Basics of how mutual funds work on an operating basis.

Have you adopted some districts? Focusing on any particular zone or state for developing the markets?

Yes we have adopted two districts in Gujarat and one in Maharashtra. We haven’t made much progress since our team is getting into place but basically we have adopted areas where our sponsor has a strong franchisee presence. You will see us embarking on awareness programs on the areas identified above.

What are you plans for ‘empowering’ and ‘financial educating’ the advisors?

As mentioned above I firmly believe that mutual funds are prescription products and not meant for ‘Over the counter sale’ unless the investor is highly qualified. Hence keeping in mind this philosophy we do a lot of activities to empower and educate advisors. Advisors need education, investors need only awareness. Just like doctors need education and patients need only awareness! Some of the activities that we do are as under:

  • Participation in all leading conferences with an educative agenda like asset allocation, ETFs, equity investing etc

  • Wealth Creation Studies

  • Value Investing Forum

  • ETF Conclaves

  • Training programs with leading trainers like Mr Amit Trivedi, Mr Hitesh Mali, Mr Vijay Venkatram, Mr Harish Rao and Mr Debashis Basu.