The Demonetisation of 2016, the GST of 2017, the collapse of IL&FS of 2018 and the continued support by the political class of the real estate sector has led to a sharp slowdown in the Indian economy and a near-freeze of the banking system for over 2 years.
Ajit Dayal, Founder, Quantum Advisor, is back in circulation. Though he left Quantum Mutual Fund three years ago, Dayal continues to be the face of the fund house for its most loyal investors. Shivani Bazaz of ETMutualFunds.com caught up with Dayal to find out his thoughts on a wide range of issues from the current pandemic to the future of value investing. Edited interview.
We spoke to you last when you were leaving Quantum Mutual Fund almost three years ago. How have you been? What keeps you busy these days?
Barring trying to avoid COVID-19, I have been well – and busy. While the succession plan had been put in place prior to my resignation from the Boards of the Sponsor and Quantum AMC in August 2017, there was still a residual hand holding that took up some of my time in the following year. In October 2018, I was drawn back to help Quantum in the efforts that we had started on converting our Integrity screen in our investing process to a full-fledged ESG-integrated approach. We had started building teams in 2014 for ESG and I spent some time over the past year on ensuring this process was completed. So, I have retired in one sense – but I let the passion drive me and direct my involvement with Quantum Mutual Funds and the Sponsor.
You still seem to travel a lot, especially abroad. Is there anything left of the India Story abroad?
I spend my time travelling to educate people on the reality of India and asking them not to get caught up in undue optimism or pessimism. The BRIC fairy tale penned by Goldman, Sachs hurt India because it numbed Indian policy-makers into believing that India would rise to some Super Power status because some overpaid economists with little Indian knowledge mandated so on their spreadsheets! By the time of the Great Financial Swindle and the collapse of Lehman in September 2008, the India story was in danger because of the UPA government’s focus on growth at any cost – including questionable and possibly corrupt deals, as has been seen in many court verdicts.
The Modi win in May 2014 was seen by many as a re-set and an opportunity for the realization of the Great India Dream. Sadly, the Modi government has proved and shown its inexperience and incompetence when dealing with economic matters. Their mastery over winning elections and toppling state governments is well established and proven. However, while that may allow a consolidation of social power and a dominance of religious beliefs – it does not feed the stomachs or the aspirations of the poor and the middle class.
The disastrous demonetisation of November 2016, not only aborted the trajectory of an economy that was about to take off after a great kharif crop in 2016, but rolled back the clock on gains made by small businesses and farmers by adding to their debt levels due to a frozen, cashless economy. The GST is, in my view a fundamentally flawed policy authored by the Congress and, sadly, adopted by the BJP. Furthermore, the penchant for issuing one circular a week for two years to explain GST highlights the lack of understanding by the policy makers of the reality of business and also adds heft to my basic premise that GST is a flawed policy because it hurts the smaller companies and limits the flexibility of every state to create its own business plan. Given the distortions that exist in the reality and perception of India – either bullish or bearish – my travels will continue, subject to COVID!
Indian economy was already passing through a very bad phase when the pandemic hit the country. How do you view the current situation?
Clearly, the Demonetisation of 2016, the GST of 2017, the collapse of IL&FS of 2018 and the continued support by the political class of the real estate sector – which supports zombie ghost buildings and prevents markets from functioning – has led to a sharp slowdown in the Indian economy and a near-freeze of the banking system for over 2 years. The unexpected COVID has hit a death-blow to India from a social and economic perspective. Rather than stepping in to send the patient to the ICU, the central government is busy spending money on a new Parliament complex and, in Mumbai, the state and municipal government is spending 100x more on a coastal road being built for 50,000 cars rather than hospital beds which are needed for millions.
The mutual fund industry got a Rs 50,000 crore bailout from the RBI within 48 hours of the Franklin Templeton debacle and has access to bank loans. The migrant workers are still finding and self-funding their way back to their villages and the Atmannirbhar is now a fancy word for a more blunt “you are on your own – the government has deserted you” state of mind.
In a recent article I pointed out that less than 5% of companies may have cash to pay salaries for 6 months – by the time you add interest payments and other fixed costs, companies will not have the ability to survive this unnecessarily long lockdown. Basically, the lockdown was a failure of the central government to plan and the states that have done well are those with better local governments. Maharashtra and Gujarat were failed models and Karnataka and Kerala, to name a few, had successful plans.
Multinationals looking to relocate to India will be haunted by the images of the migrant workers and of the bungling by certain states, including the failure of the Gujarat model and the confusion of the Maharashtra government. When an MNC is trying to de-risk its supply chain, it will not seek another risky host state!
The government’s stimulus package seems to have disappointed almost everyone. How do you rate the government’s efforts to revive the economy?
The government remains clueless on policy. While its citizens are dying, it is worrying about fiscal deficits. The government has now evolved a class partition within migrants. The more successful migrants like fund managers get a bail out, some migrants may sit at home and raise thousands of crores in rights issues supported by government agencies and public money, the less successful get to walk 600 km to reach their villages and can audition for a TV series on Survival.
Indian industrialists continue to give their standard “8 on 10” for every useless policy from any government. The only thing that will work now is a direct transfer of 4% of GDP or Rs 9 lakh crore – sending Rs 10,000 per month for 6 months to 150 million households in India. We need to rescue the largest and most distressed people in our society. The BJP government has done a fantastic job of accelerating the programmes started by the UPA: MNREGA and the Jan Dhan accounts. Now is the time to activate this facility and use it as a safety net for society. Keep in mind that 4% of GDP given to the poor will lead to consumption – that will boost the recovery of the economy, of society, and mitigate the human tragedy to some extent. Having LIC subscribe to a rights issue of Reliance or a Bharti does not help the economy – it helps those specific companies and their shareholders.
The great Indian middle class is facing serious threat due to the Covid-19 pandemic. A lot of job cuts and pay cuts are threatening the very existence of the middle class. Will it further dent the consumption story?
Since 2009, a sample of 180 listed companies sourced from Equitymaster had profits of Rs 29 trillion (Rs 29 lakh crore) and paid out 63% of that as dividends of Rs 18 trillion. If they had kept aside a 20% reserve pool – for bad times such as a drought year or a COVID pandemic – they would have had internal reserves to pay salaries for up to 4 months without seeking alms from the government. The certainty of the salary cheque for middle class and lower class India would have been a huge morale booster and allowed a quick recovery from urban India.
In the 1980s I criticized corporate India for being inefficient and sleepy and helped import the concepts of financial discipline and efficiency that came along with the fund flows from foreign portfolio investors. Alas, today, we live in the era of companies focused on quarterly profits and maximizing shareholder value and suppressing their duty to look after the human capital that actually makes the company profitable. With the exception of the glorified CEO and senior managers who are paid too much money. An economy is only as strong as the depth and breadth of the middle class and aspiring lower classes. COVID has shown how we have little respect for this backbone of future prosperity.
Even their investments are not in great shape. Debt mutual funds have completely betrayed the trust of investors. First, it was a series of downgrades and defaults, now a mutual fund just shut its debt schemes to tide over a difficult situation. Many mutual fund investors have started saying mutual funds sahi nahi hai. As an outspoken critic of the industry, what is your take on the industry?
I could write – and probably should write – a book on how the mutual fund industry has become the prime example of a great idea gone wrong. Conceptually, the mutual fund is a great way for most people to invest their savings in the financial markets. Sadly, SEBI uses capital requirements as a filter to separate the crooked from the good. And look where we are.
In 2005 investors were mis-sold the BRIC story and the damage to their portfolios after 2008, caused investors to shy away from mutual funds until Prime Minister Modi brought a renewed sense of vigour to the Indian economy. Though the economic promise was not delivered, the confidence and faith saw more inflows into mutual funds in the past 5 years than in the previous 22 years. All this means is that, sadly, the CEOs and Star Fund Managers of many mutual fund houses rubbed their hands in glee and sold more toxic products to gullible investors.
Franklin Templeton is not the only fund house that took wild bets to earn more returns so that they could gather more assets. Look at the facts sheets of the top fund houses in January 2020 and see the games they were playing with investors’ money to gather more assets. It is scandalous and shameful. SEBI should cancel the licenses of these Asset Gathering fund houses. They have proven themselves to be unfit and improper to manage retail money. Let them use their PMS licenses to gamble with the more sophisticated or aware HNI money if they wish. Mutual fund is a sahi vehicle – but investors have to realise that many of these branded fund houses are cowboys shooting from the hip.
Many equity mutual fund investors, including seasoned investors, are struggling to make sense of the stock market that is increasingly driven by excess global liquidity. You are lucky if your fund manager is adventurous enough to pay the extra high price for the stocks. How does a value investor like you see the situation?
The foundation of my investment experience is built on the “value” style of investment as taught to me by Tom Hansberger, who was a partner of the legendary Sir John Templeton. Over the past 5 years, value has become less relevant as a style of investing. In the US, the technology stocks dominate market movements. In India 3 stocks (HDFC, HDFC Bank, Reliance) accounted for 66% of the gains in the BSE-30 Index between May 2014 till the market peak in January 2020. So it is a concentrated market movement.
Knowing that “value investing” may fall out of favour in a changing world we had built the Quantum Equity Fund of Funds which captures styles from large cap to small cap to growth as a complementary to the Quantum Long Term Equity Value Fund. We have, for years, been suggesting that investors allocate their equity across styles by investing 80% in the other styles and 20% in the value style for a blended and smoother return. This formula has worked and I hope people did – and will – try it! The Value Fund was the first fund we launched because that is what we knew well – and then we built teams to identify and build solutions around other styles of investment and other asset classes. Today, with just 8 funds, you can use a building block Lego-style to create a financial solution to match your needs, keeping the Value fund as one portion of your allocation bucket.
The underperformance of Quantum Long Term Equity Fund has been a cause of concern for many value investors. Do you think value investing has lost its relevance in the current market scenario? In fact, most value funds have been languishing at the bottom in the last few years. And many investors believe we are again going to see liquidity chasing a few select stocks. Please comment.
Value as a style of investing is struggling – worldwide. I see that helping in the near term but the long term benefits of an allocation only to a value fund remains in doubt. After COVID, many companies will be in trouble as they may not have strong balance sheets. So the Value stocks should, generally, have more cash and less debt and have a better chance of survival. After that survival is known and when the economy picks up steam – maybe in the middle of 2021 – then the debate is whether the similar Top 3 stocks will account for 66% of the gains in the future. One needs to recognize that these styles of investment are all like pathways to the divine. There are varied levels of risk in a small cap, mid cap, growth or value approach but they seek the same objective: returns. Personally, I have a blended portfolio with the Equity Fund of Funds and the Value Fund and suggest that investors should consider that.
Be sensible, be safe, and be diversified. This was the advice you had given to ETMutualFunds.com readers in the last interview. (Read: We have done all that we said we would do ) Does the advice remain the same?
Yes, the returns you seek is not an end in itself, made in isolation. The returns an investor seeks is an objective to achieve a future goal. No one has any idea which asset class will do well in a one, three or five year period. Therefore, you must have your safe money in liquid funds, your money for future needs in equity funds and your insurance in gold savings funds. Quantum MF has built these simple solutions methodically, brick by brick. My savings are housed there!
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