Interview

'Good names from high-growth themes like defence, renewable energy are part of our portfolio'

Prateek Agrawal, CEO and MD, Motilal Oswal AMC details the fund house's evolving strategy

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The newly-minted MD and CEO of Motilal Oswal Asset Management Company (AMC), Prateek Agrawal, was an engineer in his first avatar. But the enticing world of equity markets had other plans for him.

Immediately after completing his bachelor of engineering in electronics, Agrawal took up an MBA in finance. He would spend his pre-internet (1993-94) college days preparing sectoral reports by gathering data and information from magazines and newspapers. The goal was to demonstrate his interest in the field to potential recruiters. And boy, did the plan pay off! He landed his first job at SBI Capital, picking the equity research division over the more sought-after capital market division. Not only that, he would soon establish a research team at SBI Capital Markets.

Having been a crucial part of Motilal Oswal AMC since October 2022, Agrawal and his team are now introducing transformative changes to their investing processes after he took over the helm as CEO over two months ago.

Below are edited excerpts of an interview where Agrawal talks in detail the changes to the fund house's strategy and his investing philosophy.

You were instrumental in setting up the research team at SBI Capital Markets back in 1994. Those were the pre-internet days, the early days of NSE and electronic trading, dematerialisation and FIIs in India. How has equity research evolved since then?

Over time, there have been significant changes in equity research. In the past, conducting research on a single company was a significant undertaking. There were only a few domestic brokerage houses and I must say that SBI Capital was among the first brokerage houses to bring out printed reports.

Also, we were the first fund house to publish research reports on sectors such as auto and steel with all companies included. At that time, people relied solely on the P/E (price-to-earnings) ratio to evaluate companies. But now, times have changed and people understand that there are other ways to evaluate businesses such as DCFs (discounted cash flows), P/B (price-to-book), etc. Therefore, these parameters have certainly changed over time. There was no internet back then, so information was scarce. Annual reports were thinner, and investors wanted more transparency.

However, now, the bulkiness of yearly reports can easily overwhelm an analyst. In those days, we would include foreign comparisons in every report we wrote. We always knew that the Indian markets had a great growth story in the future. However, the P/Es of our businesses were significantly lower than those of businesses overseas. If we compare a company from India with one from the US in the same sector, our P/Es would be substantially lower. But now, that's no longer the case. I would say that our P/Es are considerably higher than those of the US companies, so the wheel has turned full circle.

How would you describe yourself as an investor? What types of stocks or market situations excite you?

We are growth investors, and today, you can see stocks with the high EPS (earnings per share) growth across our portfolios usually are leading to a high EPS growth for the portfolio itself. The difference in earnings growth of the portfolio and of the index should manifest into alpha for our investors, corrected for valuations, fees and our mistakes. We have high conviction in our portfolios, and generally positions are over 2 per cent and less than 7.5 per cent. We try to provide sustained performance by including all of the high-growth themes in the marketplace. So, today, if themes such as renewable or defence are working, we ensure that the good names among these themes are present in our portfolio. Tomorrow, when some other theme works, since we have most of the themes included, that part of the portfolio may do well.

As a team, we must first identify areas where the growth quotient surpasses the index. As a house, we adhere to the 'QGLP' philosophy, which emphasises the quality of the business and management, growth in earnings, longevity as the business's economic moat and price as our approach to buying good companies at a reasonable price. We have endeavoured to transform the philosophy into a process and apply it to portfolios, beginning with the concept of longevity. The process is team-based; after deciding on themes, managers select names with the highest sustainable growth and valuations that align with their understanding.

It's been around two months since you became MD and CEO at Motilal Oswal Mutual Fund. What changes are you implementing in the equity portfolios?

The CIO, not me, must make the changes to the portfolios. As discussed earlier, we have set up many processes, and I think the team has taken those processes to heart. At work, you will see profit booking and the stop-loss process. We have trimmed several well-performing positions in the last few months. Concentration at fund levels is decreasing, and the funds generally have included all themes in the portfolios. We believe in these processes for our portfolio strategies.

When Motilal Oswal Mutual Fund started in 2010, the focus was on passive funds. Later, the strategy shifted to include active funds. How do you see the fund house's strategy evolving in the future - more towards active, passive or a blend of both?

We are an equity-focused fund house. In equity, we want to do everything, from alternatives to high-growth products in mutual funds. While we currently lack thematic funds, we plan to introduce them in the upcoming months.

We are amongst the leading AMCs in the passive products space, with over Rs 25,000 crore in assets. We have successful products in our portfolio, such as the Nasdaq fund. The plan is to include all products in mutual funds, PMS (portfolio management services) and AIFs (alternative investment funds). Even in terms of aligning interests, this is one fund house that invests its own money, either in mutual funds or in the alternative space. Presently, the promoters have invested around Rs 6,848 crore (as on May 31) of house money in our products. So, at Motilal Oswal AMC, I can proudly say, the alignment of house interest with the small unit holders is as complete as possible.

Looking back, it's been almost two years since you moved from ASK Investment Managers to Motilal Oswal AMC. Now, as its CEO, you've been making some notable changes. Focusing on the Motilal Oswal Flexi Cap Fund, AMC's flagship fund, could you share the changes you implemented to enhance its performance?

The last year has been good for us. All the funds have significantly improved in terms of performance. We have seen improved performance in Flexicap, Midcap, ELSS and large & midcap funds. So, as I told you, the reason for our outperformance is that we were present across all the themes that have worked in the market. We enhanced the theme, collaborated with the fund managers and increased the growth quotient of the portfolios.

Apart from that, we have closely monitored the liquidity levels. So, with the size of our funds, we have very liquid portfolios. One example is that we don't have more than 7-8 per cent allocation to stocks with a market cap of less than Rs 10,000 in most of our funds. Thus, only 2-3 per cent of the Flexi Cap Fund stocks have a market cap of less than Rs 10,000 crore. Additionally, having zero allocation to large-cap IT stocks, where the growth quotient is less than the index, has helped. We didn't include any larger-cap banks in our portfolios, as their growth quotient is now tending to align more closely with the index vs earlier. We don't include any assets in our portfolios anticipating lower earnings growth than the index, as we aim to generate alpha for investors.

With all your experience, what's the most surprising market trend or event you've seen, and how has it shaped your investment approach or philosophy?

A lot has happened over time. But I remember a conversation with the head of research at Lehman Brothers in Mumbai, who had come in from New York. It took place a few days before the 2008-09 crisis started in the US. After the meeting, we discussed the outlook and other topics. He stated that he believes if valuations are good the markets will find their level. After the crisis, valuations manifested themselves again. So, I think that in the end, it comes down to the numbers and valuations.

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