Aashish Somaiyaa, CEO – White Oak Capital, said that he is cautious on markets right now, and a little surprised with the enthusiasm and the sustained rise in the markets.
Somaiyaa has over 20 years of experience in business strategy and management, process-driven sales and distribution, product development, and marketing of investment offerings. Prior to joining White Oak Capital, Aashish served for nearly 8 years as Managing Director and CEO of Motilal Oswal Asset Management Company.
In a podcast, D-Street Talk with Moneycontrol’s Kshitij Anand, Somaiyaa said that within small and midcap space what we own is the leadership of any sector or sub-sector of the industry.
Edited excerpts:
Q) Most of your PMS funds are from multicap category and they have given more than 50% return on a 1-year basis (PMSBazaar.com data showed). The last one has been crucial with respect to decision-making as we were in the middle of a pandemic. What was your strategy?
A) At White Oak we certainly don’t take any macro or any top-down kind of bets. The idea is to remain fully invested at any point in time, in sectors and segments, where we think that there is relative value or what we call a price-value gap.
But, definitely, we desist from taking any kind of top-down call. We think that macros are something that we really cannot forecast, and we believe that it is more like a coin flip — sometimes right, sometimes wrong.
In the last 7-8 years macros have increasingly become complex and why they cannot be forecasted. The best way is to do your own bottom-up work, form your own hypothesis about how companies will deliver in terms of free cash flow over and above their cost of capital.
We are always looking for companies that will deliver to our expectation basis, our own valuation framework, and our investing philosophy. I think that is what we have continued to execute even in the last one, one and a half year.
Q) Did COVID-19 impacted the PMS industry or with rise in markets you also saw a rise in inquires and more people/investors willing to invest?
A) We all operate in the performing asset class i.e. equity which is where the growth orientation really is. If we see the last 15-20 years in India, the interest rates have been deregulated.
We are no longer living in an era where risk-free, as well as tax-free, people could make 9% 10% 11% kind of returns.
Back when I started my career in 1998-1999, the RBI used to issue bonds on behalf of the Government of India, which were called Relief Bonds, and they used to fetch 11% tax-free and of course, risk-free.
So, back then, investing in equity was not really required, and if you ask me, now we all are very clear that equity is the way to go, and if we want to participate in the growth and beat inflation – equity is the space.
Clearly, people can invest directly or via mutual funds, or PMS et cetera. I remember the entire equity mutual fund industry was about 175,000 crores in 2012 and PMS as an industry was less than 10,000 crores and AIFs pretty much did not exist, but fast forward to today, equity mutual fund industries probably about 14-15 lakh crores. You can say it has scaled almost eight times eight nine times.
But look at the PMS industry, from less than 10,000 crores it is now, I think somewhere near Rs 2 lakh crores. If I just look at equity-related AIFs, my sense is that it has crossed about a lakh crores from zero.
The alternate space, which is PMS and AIF has actually scaled faster. So, equity as an asset class itself has gained traction. But, within that PMS and AIF seem to have gained or grown at a faster clip as compared to the mainstay of mutual funds.
Q) Market at record highs — what does that make you? More bullish or cautious given the fact that the economy is still not out of the woods?
A) I am cautious right now, and I can’t say overwhelmed, but a little surprised with the enthusiasm and the sustained rise in the markets.
After falling in 2020, we saw a recovery in the economy. We saw a recovery in the second half of 2020, and we were back to 12,500 in November.
In 2021, for BSE-500, the index is up another 16% 17% up as we speak.
I’m cautious because if you see last year, the market was down in the dumps, and then there was a fast recovery, because the economy surprised on the positive in a span of four or five months, and we got the vaccine and the activity from the central banks was quite unprecedented.
Companies also regained pre COVID volumes. We saw that volumes came back to pre-COVID levels, but margins expanded.
If you see March to December, December over September, September over June, successively every quarter the results have been fantastic.
But as we speak now, unfortunately, we have been thrown back into another trough, with the second wave, and we know that the lockdowns in the second wave are as bad as last year.
And the economic disruption might be possible of a comparable magnitude as well. So the market seems to be celebrating what happened last year.
The market is celebrating vaccination, the market is celebrating central bank actions, the market is celebrating everything. But, the market is probably not factoring, or at least I don’t know, what is the impact of the second wave? Let me put it that way.The market is supreme as it is the sum total opinion of millions of smart people. I’m a bit surprised with the continued or sustained optimism in absence of any information or data about how companies are faring right now.
That we will know only over the next two results seasons, so when June quarter results come in July and August, and September end quarter results come in October and November, only then we will know what is the extent of disruption.
Q) Your view on the small & midcaps? What should be the strategy of investors while picking stocks in this space?
A) See, I have always been a big votary of investing in small and midcaps. And I have no reason to believe that small and midcaps companies or their management’s are in any way inferior to largecaps.
The way to look at it is that in our country, there are certain segments or sub-segments or sectors of the market, which are yet underdeveloped or under-penetrated. Hence, some of these leaders are also small and midcap companies.
At White Oak at any point in time, half of our portfolio is multicap, and at any point in time, half of our portfolio is roughly in small and midcap.
But, the way we look at it is that even within the small and mid-cap, what we own is the leadership of any sector or sub-sector of the industry.
I’m a bit cautious about the market that pretty much applies to everything. I’m not trying to just give a negative view or something, I just feel that there is the reason all these things are probabilistic.
Q) How are FIIs looking at India? Did we saw some outflows last month?
A) We do get some opportunities to interact with global investors investing into India, because at White Oak, within the group, we have an Investment Management license in Singapore, and in fact, we manage over 3 billion for global investors investing in India.
So, what we have seen is that, over the last year, there is a sustained increase in interest at least, to look at India as more like a single country or a strategic exposure.
So while yes like you pointed out, there have been some intermittent bouts of selling or negative flows. But if you ask me directionally, there is a lot of positive interest. And I can say that it is significantly higher than what it was said a couple of years back.
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