In conversation with, Suresh Soni, CEO, Baroda BNP Paribas Asset Management
"The Indian Economy is Seeing Resilient Domestic Demand"
As we can see a lot of mergers and acquisitions happening in the mutual fund industry, do you feel that the industry is moving into a consolidation phase? What is the impact of these events on investors?
Also, could you throw some light on how the Baroda BNP Paribas’ merger, apart from AUM, has helped you from the business perspective? Over the last two decades, the mutual fund industry has seen consolidation amongst the existing players. However, lately, newer players are also entering the industry. Consolidation is also leading to a situation where the surviving asset managers have a stronger commitment to the Indian MF industry and will continue to invest and grow their businesses. A renewed commitment from existing asset managers and entry of new players is a sign of confidence in the potential of the industry. This should inspire confidence among investors. The MF industry continues to grow at a healthy pace with the assets under management (AUM) growing more than five times in the last 10 years at a CAGR of 18 per cent.
The merger of Baroda AMC with BNP Paribas AMC to create Baroda BNP Paribas Asset Management has helped us immensely. The merger not only results in larger AUM but, more importantly, a wide array of schemes across equity, fixed income and hybrid categories as well as a large distribution footprint with a presence at more than 90 locations across the country. The size of our investment team has more than doubled, and so has the breadth and depth of our coverage. The merger combines the respective strengths of the two parent companies, namely, Bank of Baroda and BNP Paribas Asset Management. We benefit from the best practices of a leading global asset manager as well as drawing on the understanding of retail and the trust of a top-tier nationalised bank.
What is your stance on passive investment funds such as index funds and ETFs? Do they prove to be beneficial for investors in the long run? Moreover, in the near future are you planning to launch products in this space?
A majority of active Indian fund managers have outperformed their benchmark over the years, and over 85 per cent of the industry assets are in actively managed funds. Given the significant under-ownership of MFs in India, we expect both active and passive funds to grow. Passive funds represent around 15 per cent of the industry AUM but are growing at a faster pace than active funds. The trend of passive is supported by institutional investors like EPFO and growth in investment advisors. We have strong confidence in our investment process and talented team. It will be our endeavour to deliver better than benchmark performance in actively managed strategies. Having said this, we are monitoring the developments in passive funds. We will be looking to launch our passive initiative in 2023.
What is your outlook on the Indian equity markets in the short to medium term? What are the pertinent risks facing the markets in H2FY23?
Global economic growth rates are being toned down by both the IMF and OECD. The US FOMC has reiterated a preference for inflation control over economic growth. Similarly, India’s GDP growth rate expectations have also moderated with the RBI estimating FY23 GDP growth to 7 per cent at its last MPC meeting. The Indian economy is seeing resilient domestic demand with consistent improvement in GST and toll collections. Energy consumption data coupled with the pick-up in vehicle sales and rebound in credit growth point to a pick-up in consumer demand as well as an improvement in the capex of both the government and private players.
The Nifty EPS growth continues to be in the low teens on the back of strong growth in domestic sectors such as automotive, capital goods, telecom and banking. The earnings’ growth is expected to be broad-based across the sectors. Risks to the market come from global factors. Recession fears in developed world and its impact on Indian exports, geopolitical risks and the impact of rising US rates on capital flows will remain the key factors to monitor.
What are the emerging trends you are witnessing among mutual fund investors? Also, how should retail investors navigate the current market volatility with mutual funds?
We are seeing the maturity of retail investors as inflows into mutual funds, especially through the SIP route, continue to be resilient. Investors are learning to stay invested through volatile times in the equity markets. We believe investors should continue to follow their investment plans linked to their financial goals rather than worrying about near-term market movements. Equity is a volatile asset class. Over the long term, equity potentially can deliver the highest returns among major investment asset classes. The period should be five years and beyond. Investors can stagger their investments during volatile times and use the STP and SIP routes to invest in equity funds and mitigate the risks from any sharp movements in the equity markets.
Could you shed some light on the investment philosophy behind the recently launched Baroda BNP Paribas Multi Asset Fund?
Each asset class has its own risk-return characteristics. Equity, debt and gold are the three distinct asset classes with markedly different risk profiles as well as determinants of returns. These three asset classes have an extremely low correlation with each other and therefore are ideal for a portfolio that seeks to reduce the risk from a single asset class while at the same time also capturing the growth and income potential of the respective asset class. Equity in the portfolio provides the potential for growth while debt provides regular income and potential stability in the portfolio and gold provides potential growth as well as reduces the overall volatility of the portfolio. It also provides a hedge against inflation.