The active fund warriors: Three mutual fund houses that aim to take passive funds, head on

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Today, White Oak, India’s newest fund house gets launched. It would be India’s 44th fund house in an industry of Rs 37 lakh crore worth of investor assets. Post July 1, the capital market regulator Securities and Exchange Board of India’s (SEBI) ban to launch new schemes got lifted. What’s different about White Oak is that in an industry that appears to be warming up to passively-managed mutual funds, White Oak has chosen to walk down the active funds’ path.

Passively-managed funds have seen sudden surge in popularity in recent times with the investor assets managed by such funds rising three-times over the course of last two years. As of May 2022, exchange traded funds (ETFs) and index funds accounted for Rs 4.87 lakh crore of investor assets. Both new fund houses and existing fund houses are focusing on passive mutual fund schemes to take advantage of this growth in passive funds and shifting preferences of investors. Not everyone.

Here are three newer fund houses that are sticking to the active side of asset management and their rationale for doing so. To be sure, there are many others, namely PPFAS Asset Management Co Ltd that have also stayed away from passive funds. Today, though, let's look at some new to recent entrants on the mutual funds street that count themselves as active warriors.

Opportunity to disrupt active space

The newly-launched Samco Mutual Fund is one such fund that wants to only offer actively-managed funds to investors. Jimeet Modi, founder of Samco MF, says that there is opportunity to disrupt active space as several active funds out there are “index huggers”.

“If you pick up any of the top-20 schemes, especially in large cap category and see their holdings, you will find the same names in more or less the same proportion as the index,” Modi points out.

“We want to offer funds that are truly active. We have so far launched only one fund – Samco Flexicap Fund. The active share of that fund is 91 percent, which means that 91 percent of the fund’s portfolio – either in holdings or weights – is different vis-à-vis the index,” Modi says.

An analysis of data from ACE MF shows that the top-five large-cap funds (in AUM terms) had 65-93 percent of stocks in common with benchmark index Nifty 100.

Also read: Samco MF to provide investors true active fund management, says Founder Jimeet Modi

Samco MF will follow an investment process that it has termed as the Hexashield Framework, to identify investment opportunities. Each potential stock idea would get tested on six parameters. These are reinvestment, growth stress tests, corporate governance, leadership stress tests, cash flow stress test, balance-sheet, debt stress test, competitiveness, pricing power stress tests and regulatory stress tests.

Playing to strengths

White Oak MF entered the MF industry after acquiring Yes Mutual Fund. The White Oak group got SEBI’s approval to enter the MF industry towards end of last year.

White Oak Capital is led by Prashant Khemka, who was the chief investment officer and lead portfolio manager of GS India equity and global emerging markets, at Goldman Sachs Asset Management.

Prateek Pant, Chief Business Officer, White Oak Capital Management, says the focus on active fund management stems from the fact it already has a strong investment team in place for its PMS business.

The fund house has got separate approvals from SEBI, which will allow it to use this 30-member strong research team for its mutual fund business.

“So, our research team will be common, but the senior management within the portfolio management side will be unique to every part of the business,” Pant says. So, fund managers and chief investments officer will remain separate from other businesses.

White Oak will first launch a flexicap fund, which is likely to take large active positions in the mid- and small-cap space.

Also read: Ashish Somaiyaa on why White Oak will debut with active mutual funds

But, can size of the scheme become a constraint for mid- and small-cap schemes?

“Over the last few years, there have been several IPOs, which have expanded the breadth of the market. Size of the scheme can become an issue if the number of listed companies in the mid- and small-cap universe were to shrink or there were not enough new companies coming in. But, right now there is enough capacity to evaluate these investment ideas,” he says.

Pant points out that White Oak’s research team looks at all the companies that have more than Rs 1,000 crore of market cap, which at present spans to a universe of 720 companies.

He adds that the research team has shown the ability to identify unique investment ideas in mid and small-cap space, which are not covered by even the sell-side broking analysts. “Our flagship PMS scheme has 55 stocks, of this 40 are mid- and small-cap stocks,” he says.

At a later point, the fund house also plans to launch a global emerging markets fund for Indian investors. This particular scheme will be first-of-its-kind in the sense that it will be actively-managed by the investment team of a domestic fund house. White Oak Capital has recently launched such a fund in its offshore platform. A team based out of Singapore manages funds launched in offshore markets by White Oak Capital.

An international mutual fund scheme can be only launched in India after overseas investing limits are enhanced.

A century of active investing

Mahindra Manulife Mutual Fund, which is a joint venture between Mahindra & Mahindra Financial Services and global asset manager Manulife Investment Management, is another fund house that intends to stick to active funds.

“Our focus is pretty clear on active management. We have an investment philosophy and an investment process that is time-tested. It is also linked to Manulife’s global philosophy,” says Anthony Heredia, MD and CEO of Mahindra Manulife MF.

While the other two active-focused fund houses are newly-launched, MMF already has 6-year track-record and its JV partner Manulife has more than a 100-year-old history.

Also read: Huge scope to deliver outperformance in emerging markets like India, says Michael Dommermuth, head Asia, Manulife

The fund house’s schemes have delivered decent performance in recent years.

In three-year periods, its large cap and mid cap fund have delivered 11.47 percent and 18.59 percent annualised returns, respectively. Both funds fall in 2nd quintile (set of five) of return performance.

Its multicap fund has delivered 18 percent annualised returns in three-year period, which is the 2nd best-performance in the category.

Heredia admits that it is becoming more challenging to outperform large cap benchmarks in an institutionalised market as large cap companies are over-researched and widely tracked by investors, but he says there are several opportunities to generate alpha in mid- and small-cap segments.

Heredia adds that active fund management is all the more relevant in current market environment, where there is lot of volatility, macro-economic changes, as well as sector-level changes. “It is important to be able to actively adjust the portfolios to take advantage of changes in market dynamics,” he says.

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