Interview - Swarup Mohanty

❝In this growing world of transparency, active fund managers will have to find new skills for alpha generation and the job would get tougher. This has been a worldwide phenomenon and I don’t see India to be any different.❞



- Swarup Mohanty, CEO, Mirae Asset Global Investments India 

The GDP growth projections seem to be less than 5 per cent in FY20. So, how do you look at it from an investor’s perspective and what is the impact that it will have on equity mutual funds?

The GDP growth is clearly a reflection of the on-going slowdown in the pockets of economy. At the macro level, we believe the key monitorables – interest rates, oil price and currency are quite conducive to aid economic recovery. Also, with multiple policy actions by the government coupled with better monsoons, we expect normalcy in the economy sooner than later.

Markets are again at their all-time highs. So, how do you look at the performance of equity mutual funds in coming years and will this rally last? In my experience, markets are slave of earnings and equity as an asset class have generally done well over the longer period. With current consensus estimates indicating ~20% Nifty Index earnings CAGR over the next two years, we believe markets with 1 year forward P/E of ~17x are trading at reasonable valuations. While there could be volatility in the near term, we have a constructive view over the medium term.

You have been one of those fund houses who have been consistently performing well. So, what is the investment philosophy that is supporting such a performance?

Thanks for your generous comments. We use bottom up approach in portfolio construction. Our investment philosophy is to buy quality businesses, run by competent management at a reasonable price and hold them for an extended time period.

There are various categories where you have yet to launch a fund. Say for instance, in equity you don’t have any small cap fund. So, would you be exploring these categories in near future?

At a fundamental product development level, we, at Mirae Asset, believe that we would only launch and develop products which we can manage. From that perspective, many categories of funds do not find favour with us and the small cap category is one of them. At this moment, we have a well differentiated product offering from our side and we have a long way to go in building strong track record each one of them. So, we would like to concentrate on that process at this moment of time from an active fund management perspective.

What are your thoughts on passive investments and is passive investment the future?

Investing is a process of allocation and I do believe the time for allocating to passives has a very strong case already. If you look at the last three years data, 61% of Active Large Cap Funds and 48% of Mid and Small Cap funds have underperformed their respective indices.

In this growing world of transparency, active fund managers will have to find new skills for alpha generation and the job would get tougher. This has been a worldwide phenomenon and I don’t see India to be any different. The good thing is that we are still some time away from a complete swing. These are the right times to start allocating to both sides and start understanding the intricacies of passive investing.

Passive investing should not be looked at as only a cost differentiator. The fact that the underlying index is not exactly passive is something which investors have to keep in mind. Each index goes through its own changes and stocks keep changing if they do not meet the required parameters. I do believe that, going forward, we would see enough innovation in the product line in India.

"The GDP growth is clearly a reflection of the on-going slowdown in the pockets of economy. At the macro level, we believe the key monitorables – interest rates, oil price and currency are quite conducive to aid economic recovery."

Is the tweak in the FEMA (Foreign Exchange Management Act) going to affect you? If yes, then how is it going to impact your growth?

We do believe that the respective authorities and regulators are working towards the proposal for dropping Mutual Fund from the definition of “investment vehicle” in the circular. We are awaiting clarification from them on this.

Recently the AMFI BCG Vision document was released which shows the vision of 100 lakh crore AUM by 2025. So, what are your thoughts on this? Is this number achievable?

The way we always look at this fiduciary business is that the numbers are an outcome of product performance and investor experience. The fact remains that mutual funds are still extremely underpenetrated in the country. So, there is scope to grow, and achieve much more than just number. In this era of increased communication and ease of transaction due to internet penetration, reaching investors is no longer an issue. The key lies in the ability of the industry to build strong products and it is only when investors start gaining good experiences that the numbers start growing exponentially.

There was a drop-in number of ARN renewals as well as new ARN registrations. So, is this hinting more towards a major change in trend in the mutual fund distribution space?

The mutual fund distribution landscape is changing. They are now divided into two parts - the MFDs and the RIAs. While in the near term we have seen some reduction in the number of renewals and registrations of ARNs, there is a visible increase in the number of RIA licences. There is no doubt that the change in remuneration to trail brokerage would have led to many distributors going back to the drawing board on revenue projections. This is a substantial change for many in the market. We are in that transition phase. We believe that the trail form of remuneration is the right way as it takes away the possible bias in advising, which was possible with upfront brokerages. Going forward, the growth in NAV or the performance of the fund will be the key factor for growth in remuneration for a distributor.