Not an era of index investing, 2023 all about stock picking: Nimesh Shah, ICICI Prudential AMC

Investors would have to be more mindful in choosing stocks this year vis- a-vis an index investing strategy that worked well in 2020, said Nimesh Shah, the CEO of ICICI Prudential AMC, India’s second largest money manager in terms of assets under management. The year could see ‘multi-asset class investing’, he says, where one would be better off investing to create wealth over the next five years.

In this conversation with Moneycontrol, Nimesh Shah candidly shared his lessons from ICICI Prudential’s journey that started with Rs 35,000 crore corpus, to more than Rs 5 lakh crore entity under his 15 years of leadership. Edited excerpts:

What is the strategy of the AMC for 2023 considering the Fed rate hikes that have come through or will come through? Do you think as an AMC, your strategy will align, or change based on the situation? Do you have a long-term perspective on which pockets would be attractive?

We would make our investments with a business cycle point of view over five to seven years. I believe that India is slightly highly valued, we are 10-15 percent highly valued. That is why I said invest in 2023 to make money over the next five years. Instead of doing a one-time investment right now, either go for the balanced advantage category, which I am very happy with, overall. One may look to invest through a systematic transfer plan over the next one year. In my view, for the whole of 2023, one should look at investing, and not harvesting. This year is for investment for money to be made over the next five years.

Would traction be building in the debt segment for 2023?

We have got a fund called ICICI Prudential Multi-Asset Fund which has now an almost an 18-year track record. Almost 65% of the corpus will be invested in equity, and around 25% will go in debt, and there is investment in metals as well.

We can also invest in gold and silver. In a lot of our funds, we were able to take the exposure to silver and have made good returns of it. So, 2023 will clearly see a multi-asset class investing, and not only in equity and debt. A lot of metals are at an all-time low.

You're bullish on metals space, especially after what we have seen in 2022?

In 2019 too, we invested in metals, and we made money in 2021 as well. So, metal will go through its cycles. One must understand that everything is stock-specific now, and 2023 will be a year of stock pickers. Even in metals, can you identify a company which has got a very good governance structure? It is in the aluminum space, it has done an acquisition and if you go deeper, it is also into downstream products. Downstream products need not be commodities. So even when aluminum prices fall, people see that this company has stability in profits even with in aluminum space. That’s because if one is making cans out of aluminum, then the profitability is improving. So, over a period, people realise that these companies may not only be metal plays, they may have added value too. One cannot say that I am negative on metals, or positive on the space. Ultimately, the story will be corporate-centric. Within metals, we will have lots of opportunities.

There would be many, many opportunities in every industry. See, this is not an era of index investing. There was a time where you would invest in the index and make money, whether it is technology or pharma. In 2020, you could have touched anything and made money through index investing. But 2023 will be a stock specific.

The year gone by saw only a 4-5 percent return on the index. But some of our PMS (Portfolio Management Services) or AIFs (Alternative Investment Funds) have given much higher returns. They did not disagree with the macro story, but the mindset of those fund managers was that one doesn’t have to look at the entire macro. Our research arm became more and more important in phases like this. Our track record in the last one year has improved returns for three years, five years, because in a low-return environment, our kind of fund management does very well.

ICICI Prudential AMC’s assets under management have grown from Rs. 35,000 crore to a Rs. 5 lakh crore under your leadership. What are the things you have got right, since this is a lesson that most investors or fund managers should look at while starting out.

We are blessed with a very strong brand, and I am not saying ICICI is the only one. There are others too. We are blessed to be one of those brands where there is a lot of trust. That has gone well for us, and I have inherited a very strong brand which is well-known across the country.

If you don't make mistakes, you will be okay in life with a strong brand. The country will give 6-7 percent growth and there will be 4-5 percent inflation. So, nominal growth will be 11 percent as seen in the last 10 years too. The corporates will grow by around 12-13 percent and that too has happened in the last 10 years. So, there is steady growth.

Ours is good business to be in for a bank, as the depositor graduates to become an investor. Ten years ago, the mutual fund industry was 11 percent of the banking system. Today, it is 22.5 percent and I think by 2030, it will become 1/3rd of the banking system. The size of India’s banking system is around Rs. 170 lakh crore today, which in 10 years' time can be Rs. 350 lakh crore. At a third of it, India’s mutual fund business will be Rs. 120 lakh crore in size. We are going to become three times the size in the next 10 years. What took 25 years to double will now happen in the next 10 years. When there is a such a momentum for the industry, I have three "I's" with me, India, industry and ICICI.

In this company, we track something called as "Happy Customers" at the transaction level and that percentage for us is very high. 84 percent of our sales happen with existing customers. My only job in life is not to goof up and ensure that customers don't get a negative experience.

In all the 15 years of journey that you have had at ICICI AMC, which strategy has helped you the most? Is it value investing or growth investing?

In the last 10-15 years, there is not a single New Fund Offering (NFO) which a customer has lost money on. We never launched sectoral NFOs when the sector is doing well, because it is very easy to collect money citing the sector’s performance. We have launched sectoral funds when the sector has done very badly.

The Indian investor has matured today and is better off buying when the markets get corrected.

You're actually vouching for the IT sector for that matter, which has not done well, and select names from metal space is probably one of the strategies that you have as an AMC have?

Counter-cyclical investing has worked for us and the size that we manage helps take such a bet. We have been investing in a telecom company because we believe that all of us pay much less for the service. World over, one doesn’t get telecom as cheap as in India. At some point, we will slightly charge the customer more. When you do this kind of investment, revenue will increase very fast. We manage more than Rs. 50,000 crore in equity and we cannot have only one style.