Earnings Dispersion Favors Active Management
As market valuations rise and corporate earnings growth diverges significantly across companies, the debate between active and passive investing has taken on new urgency. During the Moneycontrol Mutual Fund Summit held in New Delhi on September 16, senior fund managers argued that the current market environment creates distinct opportunities for active stock selection.
Chandraprakash Padiyar, Senior Fund Manager at Tata Asset Management, noted that investors are entering a period characterized by "very wide dispersion in earnings" and valuations. Because differences between companies are becoming more pronounced, Padiyar suggested that broad market exposure may no longer be sufficient. Instead, investors may need to look for funds that can navigate these specific disparities.
Rajat Chandak, Senior Fund Manager for MF Equity at ICICI Prudential AMC, echoed this sentiment, predicting that active managers are likely to perform well in the coming quarters due to this divergence. However, he cautioned that selecting the right active fund requires a deeper analysis than simply reviewing past performance charts.
Understanding Manager Philosophy
A recurring theme among the panelists was the importance of understanding the investment process behind a fund. Rishi Kohli, CIO at JioBlackRock Mutual Fund, emphasized that investors should spend time understanding how a fund manager thinks and approaches investing in India.
"If you are comfortable with that process and genuinely buy into the manager’s investment philosophy, then you can invest and stay patient," Kohli stated. He highlighted that different investment styles go through cycles of outperformance and underperformance, making consistency and philosophical alignment critical for long-term success.
Kohli also pointed to the manufacturing sector as a key area of interest, noting that many companies in this space are growing rapidly and are likely to continue doing so. He further mentioned "systematic active" strategies, which combine active stock selection with rules-based processes, as a way to add diversification dimensions to a portfolio.
The Challenge of Choice and Asset Allocation
Pratik Oswal, Director at Motilal Oswal Financial Services, shifted the focus to the broader challenge of portfolio construction. He highlighted that the Indian market has evolved from a simple landscape to one with more than 700 investment products. This explosion in choices creates a complex environment where investors must carefully distinguish between products to identify the specific role each serves in their portfolio.
Oswal strongly advocated for dynamic asset allocation, arguing that the focus should not just be on picking the right fund, but on how different exposures are combined. He noted that modern investors increasingly want their personal views reflected in their portfolios, whether through specific sector exposures, themes, or individual stocks, leading to highly individualized investment strategies.
Key Takeaways for Investors
The consensus from the summit suggests that while passive investing remains a valid tool, the current market conditions favor a more nuanced approach. Investors are advised to:
1. **Look Beyond Returns:** Evaluate the investment style and approach of the fund manager. 2. **Prioritize Active Selection:** Consider active funds that can capitalize on earnings dispersion. 3. **Focus on Allocation:** Use dynamic asset allocation to manage risk and align with personal investment views. 4. **Stay Patient:** Align with a manager's philosophy to withstand market cycles.