One is not clear about the exact reasons why S Naren’s speech at a mutual fund distributor event in Chennai was pulled out, but it’s unfortunate that it was. The chief investment officer at ICICI Prudential AMC is among the country’s senior-most mutual fund professionals and his views on the risks of investing in expensive stocks, even in a staggered manner, should be heeded. Naren reportedly advised investors to pull out of mid- and small-cap stocks, warning that even long-term Systematic Investment Plans (SIPs) in these segments may struggle to deliver strong returns. To say that these views have not gone down well with stakeholders of the mutual fund industry would be an understatement. They have raised a stink and some have moved to ensure his opinions do not reach the larger investor audience. That’s a sign of how powerful the mutual fund distribution fraternity is and how unwilling it is to tolerate anything but an evergreen bullish commentary on stocks. Fund managers too are rushing to control what they perceive as damage caused by Naren’s view that valuations of mid and small caps are “absurd”. Some are describing Naren’s comments as “fear-mongering” and asking investors not to take note.
Naren has cautioned investors against putting money into the wrong product via SIPs at the wrong time. He is referring to the continued flows into equity schemes that invest in small- and mid-cap stocks, which are trading at rich valuations, even after the recent correction. He has drawn a parallel to investments over certain periods during which SIPs, as an investment plan, would have resulted in losses. Among these were the 1994-2002 and 2006-2013 periods, when SIPs in mid-caps would have eroded investor wealth. According to him, the outlook for SIPs in such schemes looks unfavourable unless done for 20 years.
Naren is not the first fund manager to be red-flagging small-and-mid caps. Others too have been pointing out that valuation multiples of 60 and 70 times are unsustainable; they have called out the froth in certain pockets of the market. A few months back, Kotak Institutional Equities observed how much of the market exuberance had been fuelled by retail investors buying stocks based on “narratives” and without considering the valuations or business fundamentals. Of 132 mid-cap stocks, 65% have seen a fall of over 25% from their peaks. Of 940 small-cap stocks, nearly 74% witnessed fall of over 25%. Also, the BSE Midcap has lost 15.23% from its peak on September 24 while the BSE Smallcap has fallen15.4% from its peak on December 11.
However, fund managers and brokerage analysts are usually eager to justify even stratospheric valuations on one count or the other. So it is unfortunate that a fund manager who is trying to be honest with investors and giving them sound advice should be stopped in his tracks. This doesn’t speak well of the corporate governance practices of the mutual fund industry. Investors have on many occasions accused several asset management companies of not always playing straight. There have been instances of front-running and debt schemes going bust because of investments in poorly-rated companies. However, all fund managers and strategists are entitled to their views. The Securities and Exchange Board of India needs to investigate why exactly the speech is no longer available. An industry which advocates patient investing should show some tolerance of other views.