Money
A glimpse into Prateek Agrawal’s revamp of Motilal Oswal AMC
Summary
- Agrawal is mixing a new set of ideas into Motilal AMC’s core way of functioning
Motilal Oswal Mutual Fund boasts of some top-performing funds. Its mid-cap fund has consistently delivered impressive returns over the past 10 years. But the fund house itself has been floundering for the last many years, with its growth style of investing taking a brutal beating.
This period also marked the departures of some key people. Fund managers took advantage of the situation and began deploying their own styles. Now, the asset management company (AMC) is setting its house in order.
The fund house hired Prateek Agrawal as executive director to resolve the crisis. Prior to his hiring in October 2022, the AMC witnessed the departures of key fund manager Taher Badshah in 2017 and its chief executive officer (CEO) Aashish Sommaiya in 2020, resulting in a power vacuum at the fund house.
Agrawal, former chief investment officer at ASK Investment Managers, has since been working to fix processes. The results have begun to show; Agrawal was recently promoted to the role of MD and CEO.
Motilal Oswal AMC will continue to adhere to a growth and quality style of investing even if there are periods during which it underperforms, according to the fund house.
The schemes will have concentrated portfolios of 20-30 stocks, even in the mid- and small-cap zone, albeit with some leeway in the small-cap space. It will not create funds with a value style or some other orientation merely to hedge itself during a style rotation. The schemes will complement the rest of the portfolio of a typical investor, the AMC said, adding. It will not try to occupy the entirety or bulk of an investor’s portfolio.
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“We are focusing on doing what we do best for our clients which is high conviction long period earnings growth focused investing across MF and alternatives platforms. Increasingly, our distribution partners are recognizing our high process orientation and the value add we can provide to their clients," said Agrawal.
Fund managers will run schemes within a ‘narrow track’. They will have to build about 65% of the portfolio around a few core themes such as healthcare and ‘China plus one’ that the AMC has identified.
“Look at the index. It mostly has tired old economy companies. Yet insurance and pension money is flowing into it. Motilal Oswal AMC portfolios have higher earnings growth than that even though their valuations are higher," said a person close to the development but did not want to be identified.
Another 25% of the portfolio is left to the fund manager to decide on the stock picks of his choice and the balance 10% will be used to reduce risk.
Agrawal will also allow higher churn—both to trim winners and cut losers (stop losses).
“A stock which has soared in price, taking its weight from 2% to 15% is a happy problem to have. But investors don’t care about past returns. We will trim such positions. Not let them generally exceed 7-8% of the portfolio. Similarly, we will exit positions that are down 20-25% unless there is some compelling reason to keep them. If we don’t trim them, the entire conversation with investors becomes about that one loser stock," he said.
To put this in context, the AMC had been selling stocks like Paytm and Polycab which have seen a sharp decline in the recent past. "Don’t look at 2010-2019 to identify the mid- and small-cap space. Earnings were stagnant more or less in that period. After 2020, they have increased sharply every year," he added.
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From 2008 to 2021, the earnings per share (EPS) of large-cap funds grew consistently at a 5.1% annual rate, while that of mid-caps and small-caps grew at 4.2% and 2.8%, respectively. Unlike large caps, small and mid-caps did not show consecutive annual growth in EPS during this period, the fund house said.
To be sure, this period was marked by significant economic events like the introduction of goods and service tax, the implementation of the real estate regulation and development Act (RERA), demonetization, and the crisis pertaining to non-banking financial companies, leading many companies to reduce debt on their balance sheets.
However, between 2021 and 2024, the EPS growth for large-, mid-, and small-cap stocks increased each year, with the consumer sector being the largest contributor. This period coincided with a trend towards de-globalization and the China-plus-one policy shift, as investors began to diversify their investments in other emerging economies.
This shift was followed with a decline in foreign direct investments in China and a reduction in flights between China and the US, thus providing opportunities for Indian policymakers to support domestic industries. New themes like health, capital goods, defence, and manufacturing emerged, supported by initiatives like Make in India.
This emergence of new themes and faster earnings growth in mid- and small-cap companies is what Agrawal’s strategy takes note of, but with a caveat— excessive valuations. For example, the consumer sector has seen higher EPS growth than the benchmark index but has underperformed due to higher price-to-equity ratios. Motilal Oswal AMC shifted away from consumer stocks in November 2022.
"The most marked change that Motilal Oswal AMC has gone through recently is that their portfolio turnover ratios have gone up, their marketing strategies now highlight their QGLP (quality, growth, longevity, reasonable price) framework approach which were earlier focused on their tagline which said, ‘buy right, sit tight’," said Nirav Karkera, head of research at Fisdom, a leading fintech platform for wealth management.
“For a long time, Motilal Oswal AMC was famously known to stick to age-old stock bets and high conviction ideas. They were not receptive about new age stocks but of late their portfolios are taking positions in new age companies," he added.
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"I think there was a bit of a vacuum when Badshah left them, and they didn't have a key investment figure on board. The QGLP philosophy and 'buy right sit tight' weren't really working, if you see the performance of the flexi-cap fund. There was also a confusion of narrative—were they advocating active or passive funds? I do see signs of a revival—but in investment, remember that all things are cyclical," said Dhirendra Kumar, CEO, Value Research, a leading provider of investment research in India. Will the change of guard and strategy turn around the AMC’s fortunes? This is something only time will tell.
