Good Investors Are Made During Bear Market, Asset Allocation First Casualty Of Bull Market: Ganesh Mohan, CEO, Bajaj Finserv Asset Management Ltd

Very true. Around July last year was when we launched our first funds, and it was actually the biggest question. There were already 40AMCs in the market. We were the 41st at that time. And the question was always - how will you differentiate? Of course, the brand was there, a very strong one. But question is that this is a business of investments and for us, we had to find our core differentiator in a reasonably crowded marketplace.

So that's what we are really focused on. In fact, our investment team had joined us almost a year and a half before we launched our first products. And we started from the very basics to say that what can be, since you're designing a fund house from scratch, what could be sources of alpha going forward, which can sustain outperformance over a period of time?

So, we combine all three sources of alpha, and there are fundamentally only three ways you can generate alpha in this business. One is either you have an information edge, which means you have better quality information ahead of the crowd. Right, the second is you have quantitative edge, which is your tools and models to analyse that information are better than the cloud. Or third, you have a behavioural edge, which is with the same information, with the same kind of tools, can you make better decisions and can you behave better with your decisions over a period of time?

So these are the three broad sources of alpha, and we combine them into what we call in-cube information, quantitative and behavioural edge.

And behavioural edge for us became one of the more important elements of differentiators, because information edge now is aplenty. Everybody has access to the same information.

Frankly, with quantitative edge, to some extent, there's an opportunity to differentiate a little bit. But given how technology is progressing, how AI and machine learning, and all of these are progressing, my hypothesis is that in the next three to five years models will also become more or less commoditized.

So what it boils down to then is the behavioural edge, which really becomes a core to generating alpha. So for us, it is actually a very important aspect that both my CIO and I worked quite a large amount of our time in global markets and we were actually seeing the behavioural edge become very critical in the investment field.

Yes, there are two aspects actually to this. The first is the market itself that operates a little bit like a pendulum, oscillating between greed and fear, over and under reaction. So, can we identify, using our tools, which area the market is in at any point of time and use that to create opportunities for ourselves? That's part one.
Second is for our own team as well. Right, and they're also comprised of human beings.
At the end of the day, how do we identify opportunities to minimise their own biases on investment decision making?

Through the processes, tools, templates, checklists, nudges - there are many, many sources through which you can bring this into your investment process to minimise impact of bias on decision making. Right now it's very simple, but it's actually a very powerful concept.

And in economics, all of us would have studied in our first class itself a couple of assumptions that they would have asked you to make. One is that all human beings are perfectly rational. Second, markets are perfectly efficient. But you know that both are not perfectly true.

Human beings - I would not say are irrational, but they certainly are swayed by emotions, sentiment, narrative trends. These do play a role, you cannot deny that. And the market also, at the end of the day, is what? It's a collection of human beings like you and me who are expressing their vote on a company or a security with a price. That's the market at the end of the day.

So if you ignore the human aspect behind this, actually, you're missing something very important. So that's something we decided to bring in at the philosophy level itself.

And we said, as a fund house, we will stand for this. Behavioural edge is a very important source of generating alpha and we will be pioneers in terms of how we establish that in our investment process in a scientific manner. That's at a philosophy level.

Our philosophy is, at one level, people don't consume philosophies, so ultimately they will consume our products. As a manufacturer, I'm known by my products. So that became the next order of differentiation.

How can we actually differentiate at a product level? Here it gets more complicated because, again, there are very standardised swim lanes for products. You have large cap, mid cap, small cap. The categories are very clearly defined by Sebi. The companies are very clearly defined.

So there's not very much that you can do and you have one scheme that you can have in each of these categories and so on, so forth. So the rules are pretty clear, but you can still differentiate on your investing strategies. So what we did is we actually looked at it from each individual fund that we bring. Any active fund must have a reason to outperform its underlying index or the benchmark.

Otherwise why should I launch an active fund? Investors are better off taking the passive. It's already got a set of new stocks with certain allocations. If I'm bringing something active, there has to be something extra that it is delivering, which passive cannot do.

So that's what our research went into. What is that passive cannot do? We found that there are two big things that passive actually cannot do. First is passive cannot look into the future. It only looks at the past. So companies come into the index after performing and companies that are in the index but are underperforming will continue to stay in the index till they exit. And index has to invest in those. So if you can have a way in which you can start thinking about what are the companies that are likely to outperform in the future, then you have a reason to outperform the underlying passive. Which is how we came up with the Mega Trends investing strategy.

Mega Trends are, we call it in a very simple way, trends, technology, regulatory changes, economic shifts, nature or environment driven changes, D for demographic and S for social changes. If any of these are in your favour, that company is likely to grow faster versus if the trend is against you, then it's very hard to hard to grow.

We actually do have passive funds. So I saw the question. And so we have three ETFs that we've already launched. We have a Nifty50 ETF, we have a Bank Nifty ETF, we have a Liquid ETF as well.

Now we believe that there are certain investors for who passive is probably the right answer. So we will have solutions for those as well. But if we are bringing an active fund, for us, it's really important that we have very clearly differentiated structures for our active funds. So we will have very good low cost passives as well and very differentiated actives in our portfolio.

Broadly, not very much, I think the next couple of years for us will be an expansion phase. So we're filling out our product. Okay. At this point we have three equity, we have three hybrid, we have four debt funds, and we have three passive funds.

And in fact, later this week we'll be launching an NFO which will be on the consumption Mega Trend. So that will be sectoral or thematic but it's basically on the consumption theme. Then we will have another one which will be on the health and wellness theme and ELSS is also lined up and a few others as well in the next few months. So we will be expanding.

So it's a very interesting question. I mean, why are we launching these specific thematic funds? We could do a multi cap, we could do small cap and mid cap. Those are still not there. So the way we think about this is also a little different. Our flexicap is one which focuses on the mega trends. It talks about all the mega trends. And within that, if you're seeing specific opportunities, where we see that in for even longer time period, there is a very clear set of mega trends that are going to play out. We carve those out into a separate thematic or an industry sectoral kind of fund as well. So this is the mothership, but you'll have smaller tubs in a sense that will keep getting formed and those will be our thematic funds. What we are seeing is a very interesting story play out on the consumption side. So India, as it moves past the $2,500 GDP per capita point, at that point, something very interesting happens on consumption.


So as we move from $2500 to $5000, that's a doubling of GDP roughly. Now, shift happens from basic consumption from the roti-kapara-makan to much more the discretionary spends. People start consuming more and aspirational, more premium, so better, more wellness kind of products for health which are ayurvedic, organic. Those become much more important and they also start consuming easier which means quick commerce, financing of consumption. All of these start seeing a big boom.

So we see a disproportionate growth opportunity that comes up in the consumption space. So that's something that we are looking to launch as well. What currently the market is giving us is also a great entry point. I think a lot of the very good quality names have collected probably by about 10-12 per cent as well. So it's a really good opportunity, I would say for investors to start building their consumption basket. And it's a very broad area. I mean you can think of consumption from homes to cars to foods to services, restaurants.

There's a huge variety. It actually in a sense goes well beyond the sector or even a theme.  It's quite a big area that we are looking to build a fund on.

I would say that any investor who is immediately perturbed when the market corrects by 8 to 10 per cent is actually not the right equity investor. Equity by its nature is one which will be a little volatile. It's not a one way street. It definitely will have correction phases which actually are very healthy. If you're not able to be comfortable with an 8 to 10 per cent correction, you should actually not be in equity very, very frankly. I would just put that out there. Second, I would say these corrections actually form great entry points for serious investors. So, what we are actually seeing is a lot of investors are now looking at these as good opportunities in a healthy market. That's a healthy correction which gives you a great opportunity to get in some of the investors. You may have booked some profits over the last few years and have been looking to park it in arbitrage. Or liquid funds and keep money a little bit on the sidelines.It is great time to again get into the market. I think what the markets have done over the last two, three years is probably inflated expectations of people. People have gotten used to 30- 40 per cent returns, which is actually unrealistic.

Very much so. For us, some of the best ways of investing are actually longer term investing, regular investing. So things like SIPs are actually a very, very good way in which people can build portfolio, create wealth for themselves. And people who've done that over a longer time period have actually seen the benefits of that as well.

Now SIP in a growing market is not a great proposition. If the market is only going this way you might as well do a lump sum at the beginning and get the benefit. But it's when market corrects that you actually see the big benefit of SIP because then you get the rupee cost average.

So what we actually see is people need to have gone through a cycle to truly appreciate what it means to be an equity investor. Good investors are not made during bull markets, they're actually made during bear markets. But they test you, they really test your patience, your ability to stay invested. Make sure you're doing your asset allocation. Asset allocation is the first casualty of a bull market. Everybody starts putting all their money towards wherever the returns are. You see a lot of people putting 100 into small cap funds and things like that.

So, return chasing actually is the worst thing that you can do in equity. We tell people when you're investing in a direct equity stock, you research the stock, you understand the management, you understand the fundamentals, you understand the business. Without that, you would not ideally invest in a stock or even if you do, then your conviction is not really high. You should apply the same principles to mutual fund as well. Understand the fund, understand what it is trying to do.

How is it investing, how is it different? Only then will you have conviction on the fund that you have invested in. So treat it just like a pure direct equity investment.

I mean, theoretically it sounds good, but how is it really being implemented?So, I'll give you a couple of examples and that will give you a sense of how we look at this. So typically if you look at, let's say a typical AMC, if a fund manager basically opens a position in a certain stock and he's, let's say, taken a position in a company XYZ recently and the company comes up with a profit volume, the immediate reaction of the fund manager will be to say find maybe 10 different reasons why the company will still do well. Because he's just recently put his neck out there and said this is a company I should be building a position in. Exports will grow, domestic markets will do well. There'll be a bounce back here. Rural will pick up, whatever it may be. Now what we is we actually have the entire investment team.Before we take a position in a stock, we actually have them do what we call a pre mortem. The pre mortem, what it basically does is it says today we are in November 2024. Let's fast forward to November 2026. The company has failed miserably. The stock has not done well, it's dropped 60 per cent. What could be the reasons? Another scenario company has done excellently, right? The stock is three times the current price. What could be the possible reasons? Now you have a bull and a bear case scenario, but done by the investment team themselves. Now let's say the company comes up with a profit warning in the next quarter itself.The fund manager actually then will come to you and say, sir, I told you that these are the risks. Let's hit the stop loss and exit this. You incentivize the right kind of behaviour. So we have pre mortem, we set pre commitments and we have a set of screeners as well which are run more on the behavioural side.Behavioural finance is known a lot for telling you that there is an issue with behaviour, but not giving you an answer. What we've tried to do is actually try to put in place as much of the science as possible behind it so that we freeze as many of the things as possible.

Through the process of having checklists, by having nudges. So a checklist is like a memory engine for us, right? All the mistakes that we've made make it into our checklist. So over a period of time that gives us a better and better view. Let's say last time I lost some money on a PSU stock and because of XYZ reason, those make it into our checklist. So next time I'm investing in something like that, I check again for these three things. So a lot of these things, what it really trying to do is you standardise and simplify the process.

You know, they say it's easy to walk on water as long as you made it into ice. So that's what we're trying to do. We're trying to freeze as much of the difficult part so that it becomes easier for us to. To make that journey.

It's a very, very important question, something we get asked. I've been asked that question at least 13 times last year, each time I launched a new fund. And it's a very pertinent question, particularly at the time of an nfo.

Yeah, and it's perfectly right. Because a lot of times the question always is, unless there is something that is unique, there's no reason for someone to come in and invest. So that's what we have actually focused on with every single one of our funds. What we've tried to do is bring something that is unique, different, hopefully better than what the rest of the industry is doing because without that, there is no reason for someone to come and invest with me. They might as well say that I'll wait three, five years, see your track record and then invest. The only reason why someone should invest is because I'm offering them something that is different. It is from a standard, a good brand that we are bringing to the market and it is being brought by people who have done this before.

Very interesting category you've picked up because it's one of the toughest categories to create. 100 stocks - everybody knows these stocks. Very well researched information. Arbitrage is not there virtually so our biggest challenge, in fact if you asked me one year back, I would have said we will not launch a large cap fund because it wasn't clear to us how could we generate alpha. So we said we'll do a passive fund instead till our investment team cracked the code on this. And here what we found is the only way that you can actually generate alpha is by having high active share, which means you're not just tracking the benchmark.

What happens in most large cap funds is you have only about 100 stocks of which maybe 10, 15 you will not touch for different reasons – governance - whatever reasons. So, 85 stocks are really available to you. You're creating a portfolio of 50-55 stocks. You're closet indexing. What we came up with is a very differentiated approach where we said we'll create active share by actually having a highly concentrated large cap fund. So we have 25 to 30 stock stocks maximum. That way you have high conviction calls on these stocks and you create active share which can be north of 55-60 per cent as well.

I would say that in the large cap space we actually see some significant opportunities. See these are firstly leaders in their categories. They all have done very, very well for themselves. That's why they've come to the top of the pack. Second, what we're seeing is there's a significant opportunity for large caps to do well in the coming years for two, three reasons. One is their valuations I would say are relatively comfortable compared to mid and small cap. Second, you'd have seen that in the last two years and even till the recent month, FIs have actually been pulling out of the market.

Right now at some point of time - whether it's after the elections, maybe a couple of months after that, as a rate cuts start happening in the us they will start coming back to India. That will create a significant tailwind for the large cap space particularly. Plus what we are seeing is the capex cycle in India has been historically government driven. That cannot continue forever. So private sector will have to get into the capex cycle at some point. If that has to happen, that will again be through the large cap names predominantly because the 100 top companies control about 70 per cent of sales, profits, GDP, whatever you want to call it.

So if India has to grow towards a $5 trillion economy to becoming the top three countries in the world, these companies have to contribute. They will be the ones that will be the leaders in this. So those are three reasons why we clearly see a very strong story on the large cap space. And within that, the more you are focused on the names that can win in this sector, then you have a chance.

That's correct.

Yes. So it's certainly very interesting times I would say in the markets currently. While of course I would say large caps have gotten a lot more attention. Recently, when we launched the large cap category, a lot of questions were asked to us, money is flowing so much into mid and small cap, but you're bringing a large cap fund. In fact the whole industry when we launched the fund though the last six months on average have been collecting about 650 crores net sales. So it's compared to let's say 3,000 to 4,000 crores in the mid and small section. So it was a very counterintuitive sort of launch.

But for us we were very, very clear. I mean this is what is right for the investors. So every fund that you will see from us, whether it is flexicap with a mega trend approach, large and mid cap, we got a moat investing approach, large cap with a concentration portfolio, a balanced advantage fund where we had a fundamental model as well as a sentiment indicator and a multi asset fund where we had a growth and dividend payout as two distinct factors that we brought into the fund. Every single fund you will see two things from us.

One, that it's a very differentiated fund with a differentiated investing strategy and second, that we are bringing something that is unique to the market right now and it's the right thing for the investors at that point of time. The third thing that we are also trying to do is differentiate on technology. Finserve generally is known for its technology and how we use technology to build businesses. Same thing that we're doing in the AMC as well probably three examples that I'll talk about which will give you a sense of how we're using technology as well. So the first is when we empanelled our distributors, which is about a year and a half back, the process at that point was largely a paper process. People had to sign a cheque and give a blank cheque. It would take two days for it to be filled and all that. We basically created a process on WhatsApp where people could empan with us in 30 seconds. So a distributor just had to give his mobile number, PAN on the WhatsApp process. He could get panel, confirm his bank account, etc.

And 30 seconds, he could get empanelled. By the time we launched, we had 25,000 distributors already empanelled.

North of 40,000 - it was the first sort of perception of us as well. But we didn't stop just with that. Today WhatsApp is a full fledged transaction platform for us. So you can do lump sum, SIP, you can do redemptions, SWPs, whatever have you, you can call up product information on that, you can create a QR code for yourself as a distributor if you wish, and send that out either as a generic QR or a scheme specific QR. It's a feature that a lot of our distribution partners are finding very attractive. You just create a QR, customer scans and invests, your ARN code is automatically preferred. So these are ways in which technology really helps them be more efficient because now they can do business from anywhere at any time.Another is something that we launched recently called Empower, which is for employees of corporates. So let's say a lot of our distribution partners have relationships with companies, could be small companies, mid sized companies, but for their employees, HR basically then offers this as a benefit where the employee selects the scheme and the amount that he would like to invest even before the money hits his salary account. So it's a way of making that investing decision before you spend. For most people, what happens is you end up spending and then by the end of the month you don't have anything left to invest. But the more you are systematic and disciplined about it, the more you have a better chance of building a good corpus.So that's, that's again something that we're launching. We're bringing to our distribution partners to companies so that's something to expand the business for them.