Motilal Oswal AMC CEO Prateek Agrawal explains why he is avoiding large banks, IT and FMCG stocks
“We have very little exposure to large banks, IT, commodities, internal combustion engine vehicles and FMCG,” said Prateek Agrawal, managing director and chief executive officer of Motilal Oswal Asset Management Company in a chat with ET Markets. The fund house believes sectors with sustained earnings growth can outperform the broader market over time.
Edited excerpts from a chat:
Given that Motilal is present on both sides, active as well as passive, how do you balance these two ends as a fund house? What is the need for having so many passive funds?
Prateek Agrawal: We believe in both. Globally, passive has a great future, and it also addresses a problem in how clients behave. Investors want a fund that looks different from what they already own. When they hold several diversified, long-only funds, however, they can end up effectively owning almost every name in the market. If someone picks ten different “best” managers, the aggregate portfolio can end up looking like the index — while the investor pays active management fees. If they are lucky, they match the index; realistically, they should expect to trail it.
On the active side, we see ourselves as a solution to that problem. Investors should ask for alpha. If markets follow earnings growth over time, pockets of the market offering higher growth than the broader market, sustained over a long period, should deliver better outcomes. We therefore build high-earnings-growth portfolios, cohort by cohort. Our large-cap, ELSS and multi-cap funds are all built on the same principle.
Even in our large-cap fund, which is the most conservative example in the house, the lowest two-year CAGR earnings growth I have seen is 30%, while the best has been 55%. That is a two-year CAGR, not a one-quarter number. We identify narrow spaces where growth can be sustained for longer than the market expects. That is where market inefficiency exists, and that is what we target for alpha.
The themes include digital over physical, defence, digital capital markets, hospitals and hospital management, and semaglutide, which we believe will be the fastest-growing therapy area worldwide.
There are two ways to make money in equities: growth and value. Investors can pair us on the growth side with a good value manager. Across the house, except for our small-cap fund, portfolios typically hold between 20 and 35 names.
Owning 20 to 35 names in a portfolio makes it a fairly concentrated one compared with peers. Why is it so concentrated?
Prateek Agrawal: It is a highly concentrated and differentiated portfolio. Our Midcap Fund used to hold just 16 or 17 names; it is now closer to 30. We have always said 20 to 35 names, with roughly 3% to 5% position sizing as a target, although market movements can push individual positions outside that range.
If you compare the top-10 concentration in the index with the top 10 in our portfolios, they are similar. The real difference is in the tail: the index has a long tail of small positions, while we do not.
Across the house, we are almost always fully invested. Our neutral cash position is around 3% to 4%, mainly because settlement means you cannot sell one position and buy another with the proceeds on the same day. We do not want to make asset allocation cash calls because that almost never pays off.
Being relatively more concentrated adds risk, and we are risky. But there have been down cycles in which we have not fallen as much as one might expect. Our overlap with competitors and the index tends to be low, so we can look very different from the market.
This year, when markets fell, it coincided with an event in the Middle East and a sharp rise in oil prices. Electrification looked like the way out, and our portfolio had significant exposure to renewables, solar, wind and the transformer ecosystem. That did well. EVs also came back into focus, and something that might otherwise have played out over five years happened much faster.
When the rupee moves sharply, we should normally be hurt badly. But in this period, our investment spaces received a tailwind. New events can draw investors into the same spaces during the window in which they are under pressure.
We are growth investors, and growth investing is inherently high-beta. A faster-growing business can perform better, but when markets turn, its drawdown can also be sharper. We tell investors upfront that we will be more volatile. Someone once asked me, “I’m retired, suggest a fund of yours I can buy.” I told them not to. We will be volatile.
Is the preference for areas such as digital, defence and renewables a house-level view?
Prateek Agrawal: It is a house-level view, although it is not uniform across every scheme. We have very little exposure to large banks, IT, commodities, internal combustion engine vehicles and FMCG. Every manager has his or her own approach for risk control.
If markets follow earnings growth over time, the areas with the strongest earnings growth should eventually produce better returns. Investors have to hold that belief and invest accordingly.
That is also the thinking behind our passive and active offerings. Wherever there are enough investable names in a space, we can offer both a passive vehicle and an active one. Where the number of names is limited, it makes more sense to offer a passive option, such as our defence fund.
Over the last three and a half years, practically all our fund launches are generating alpha today, and most rank number one since inception. They have a very high active share. Legacy managers can struggle to change the direction of the ship; we are not carrying that legacy baggage. We may have launched around 14 funds during this period, with alpha ranging from roughly 1.5% at the low end to more than 20% in two or three funds.
What is your market outlook? FII outflows are slowing and earnings growth is coming back, particularly after the last quarter.
Prateek Agrawal: When someone asks me about the market, I ask: what is the real worry? The monsoon is behind us. Oil prices should ease. On growth, give it time. The previous quarter was affected by a heavy monsoon, which weighed on results, so the second quarter should show better numbers on that base.
On AI, there are now two different views; it is no longer a one-sided story. We do not hold many AI-linked names ourselves.
We believe index valuations are cheap, and investors should expect index returns going forward to be better than earnings growth alone. Once the Middle East-related oil spike settles, prices should ease and the market should get back on track. Across asset classes, equities offer a compelling choice right now.
Which sectors offer the best risk-reward?
Prateek Agrawal: Our portfolios reflect a thematic approach. Capital markets are represented through brokers, online brokers, asset managers and businesses in the broader ecosystem. Hospitals, defence and digital businesses such as fintech and consumer technology also feature.
We may not hold AI infrastructure companies directly because there are few options in India, but we can hold businesses that plug into that ecosystem. Fibre optics, transformers and switchgear are part of our portfolios. In renewables, we hold wind and solar names, including a renewable-energy developer.
We do not pretend that this approach will be steady. Anyone investing with us must know what they are buying. Representing most, if not all, growth spaces prevents excessive dependence on one or two themes. If a space performs and we are absent, we miss out entirely; if we are overrepresented in one space and it fails, there is little to fall back on.
Our minimum position size for a single stock is 2.5% or more. We do not encourage trimming winners beyond 6%, except in one or two cases. Unless a manager is convinced, we do not let a name into the portfolio. We also build disciplined profit-booking into the process.
We maintain a very large earnings-growth delta versus the market. We believe that if this delta is sustained over the long term, it should produce good outcomes. Investors who share that belief should come to us. They should look at performance over a cycle — perhaps five years — to allow the thesis to play out.
Even the best batsman goes through a lean patch. We monitor how much of the portfolio is not performing. If around 65% of positions are working, that is not a problem. If the figure drops to around 50% for two months, we tell the manager to take a hard look. If weaker names need to be changed, they should be changed. There are no penalties for changing; the client’s interest comes first.
We look for sustained, long-period growth and genuine promoter conviction. Our starting threshold for growth is 20%, sustained for two to three years. That makes the portfolio high-beta. We run close to 90% active share and are very risky. Investors should come to us if they can embrace that risk. We believe it can pay off because we build high-earnings-growth portfolios.
Old themes had their time. IT and private-sector banks were once new spaces. Eventually, every business is constrained by the growth of the economy in which it operates. Our growth-projection-period approach means that when a theme reaches that point, we change out of it. That is how we keep the portfolio fresh.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
