While large funds in India remain small in the overall market context and, therefore, do not have to hug the index, steering a jumbo-sized fund does pose many challenges for the fund manager, which could show up over time in its performance numbers. Here is the second story of the series.
Even if a fund manager believes that a universe of 300 or 400 stocks is an ample hunting ground, each fund's style and investment mandate can further shrink that list. A fund that adheres to a 'growth' or 'quality' style, for instance, will have to further filter that 400-stock universe for companies with consistent earnings growth, high return on equity, positive cash flows or other filters that are baked into investment mandate. A fund with a dividend-yield mandate will have to perforce look for stocks that offer higher yield than the market. Clearly defining fund mandates, therefore, can further reduce the shortlist of investment-worthy stocks available to the fund manager.
Asserts Aashish Somaiyaa, CEO OF Motilal Oswal AMC, "SEBI is now engaged in an effort to clearly define scheme mandates. Had funds clearly defined their mandates and positioning a few years ago, I believe that some funds could not have become so large. My view is that size is inversely proportional to performance. If you run a go-anywhere do-anything fund, yes, size is less of a constraint. But if you clearly specify what your fund can and cannot do, then that automatically decides capacity. At Motilal Oswal, we clearly state that we are a high-quality, high-growth fund. So we have a sense of what size we can handle."
Given that Motilal Oswal's Multicap 35 Fund has grown to over Rs 8,600 crore in short order, Aashish says the AMC is conducting a monthly review of its capacity. "We have a precedent. In our PMS, we closed the Next Trillion Dollar Strategy in January. We also have serious skin in the game in our mutual funds (the sponsors are heavily invested in Motilal Oswal funds) and if we allow the fund sizes to expand without check, our own assets will also suffer on performance."
He also adds that the AMC's belief in a concentrated strategy, where each of the funds own no more than 25 or 35 stocks in the portfolio for optimum diversification, also sets hard limits on capacity.
Skimming through the jumbo funds across the large-cap and multi-cap categories, we find that many of them do seem to operate on a go-anywhere mandate. HDFC AMC, which manages large funds across categories, has for long refused to box itself into a 'growth' or 'value' style and adopts a flexible style across funds. Again, Franklin Templeton and Aditya Birla Sun Life prefer a blended growth-at-a-reasonable-price mandate, without leaning too far in favour of both growth or value.
In the case of ICICI Prudential Value Discovery, which has seen skyrocketing assets, the fund manager made the point (in a recent interview) that size hadn't been a big impediment because the fund believes in making contrarian bets that go against the market tide. For a large fund, building positions in out-of-favour stocks proves easier than doing so in the in-favour ones. However, the fund has moved from pure value-style investing to a growth-at-a-reasonable-price approach in recent years.