AMC Speak

A great product to complement mutual funds

Akhil Chaturvedi, Sr VP & Head - Sales & Distribution, Motilal Oswal AMC

29th October 2015

In a nutshell

Direct equity investors account for 15% of market cap, while mutual fund investors account for less than 5%.

Direct equity investors often underperform markets, as human emotions of greed and fear get the better of rational decision making

There is an opportunity for distributors to help clients who wish to retain a direct equity portfolio, to optimize this portion of their portfolio with professional help from competent portfolio managers with robust track records.

Akhil takes you through why you must consider PMS as a complementary product to mutual funds, and shares MotilalOswal's expertise and pedigree in this arena.

Why PMS?

Before understanding why one should invest in Equity - PMS (Portfolio Management Services), it is important to be comfortable with the asset class itself. If you see the graph below:

Investing in Sensex alone has multiplied over 100 times in 30 years (1984-2014) at just 17% CAGR.

Now, have a look at some of the 100 bagger stocks in last 20 years:

Source: 19th Annual Wealth Creation Study. Date: 15-Dec-2014

So, above are the 47 stocks which have given 100x returns where the 47th stock 'Asian Paints' has grown 106x and the 1st stock is Infosys which has grown 2900x.

Disclaimer: The Stocks mentioned above are used to explain the concept and is for illustration purpose only and should not be used for development or implementation of an investment strategy. It should not be construed as investment advice to any party. The stocks may or may not be part of our portfolio/strategy/ schemes. Past performance may or may not be sustained in future.

What the above table signifies is by investing in equities for long period of time gives you the experience of 'Magic of Compounding'.Of course what is important is what you own in equities.

Data suggests that investors generally prefer to buy stocks directly on news to speculate and do not believe in professional assistance in picking well researched high quality stocks for long term through PMS or Mutual Fund route. Total equity mutual fund assets are about 3.72LCrs (approx. 3.72% of total market cap) but ownership of direct equities by retail investors is close to 16L Crs (approx. 16% of total market cap).

Source: ICRA. Date: 30th September 2015

It is very interesting to see the break-up of shareholding in direct equities:

Sensex BSE 30... What do we own?

Sensex BSE 500... What do we own?

One can easily figure out that as you move towards quality, retail shareholding falls down (i.e. 10% in BSE 30 against 12% in BSE 500)

At Motilal Oswal Asset Management Company, we have been running PMS business since 2003 (i.e. over 13 years) and most of the business we source are through stock transfer cases. Our actual client is not Mutual Fund investor which is about 4.5% of the market but the direct equity investor which is 15% of the market cap and thus we experience following behavior:

Amateurs book profits; professional cut losses

Amateurs avoid losses; professional let profits run

Few generalizations

1. A typical portfolio is likely to have 30-50 or more stocks.

2. 80% of the portfolio value comes from the top 5 stocks and then there is a long tail of losing ideas which account of as low as 0.5% to 2% of the portfolio value.

3. Tail doesn't contribute anything of material value to the portfolio performance but the quantum is not immaterial.

4. Most individual investors have bought some brilliant stocks but then sold them very early at 20, 30 or 40% gain. And then the stock has gone on to be a multi-bagger!

5. We love ideas - We find businesses boring.

6. They hold on to loss making ideas in the hope that someday a princess will kiss the frog and turn it into a prince but they keep booking profits on the kings in their portfolios.

7. They book profits and hold onto losses

The highlighted figures represented in the picture above are opportunities for PMS. Clients need help on cleaning up their portfolio of junk stocks and replace them with high quality stocks which then supposed to be held on for long term.

Other benefits from PMS investments and specific to Motilal Oswal Portfolio Management Service are:

1. Feeling ownership of stocks in own Demat

2. Transparency in charges, expenses and portfolio actions

3. Portfolio not being impacted with other behavior of other investors - Non Pool based investment

4. Flexibility

5. Consistent track record of 13 years

6. Low churn

7. Concentrated and high conviction portfolios

8. Widely accepted and distributed product - High brand recall

We follow our unique investment philosophy 'Buy Right; Sit Tight' - What do we mean by this?Simple as it sounds!You have to first buy right and then sit tight and not do the opposite.

So think about it, with growing competition, regulatory challenges and margin pressure in 'Mutual Fund' space, it is important to consider alternate investments in forms of PMS & AIFs and there is a definite market for all products, one just needs the will and conviction…

Thank You.

Akhil Chaturvedi

Disclaimer:

The above graphs are used to explain the concept and are for illustration purpose only and should not be used for development or implementation of an investment strategy. Past performance may or may not be sustained in future. Investments in Securities are subject to market and other risks and there is no assurance or guarantee that the objectives of any of the portfolio/strategies/schemes will be achieved.

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