Investment advice from a Guru

'As the interest rates rise, people are going to say why should I be taking big risks when I can get 4 to 5 per cent in a bank account.'
'So, I think you have to change your thinking.'
'You need to look at the balance sheet, look at dividends.'
'These issues that have been ignored.'
Illustration: Uttam Ghosh/Rediff.com

"I have been telling my analysts that the days of cheap money are over," emerging market guru Mark Mobius, who recently retired from Franklin Templeton, told the Morningstar Investment Conference. Jash Kriplani took notes.

What is your outlook on Indian markets?

The outlook on Indian markets depends on how the oil prices move.

If you have refinery capacity, higher oil price may be a blessing because your product prices could be higher as well.

So you have to look at both points of view.

But this also means that India will have to accelerate its growth into other forms of power, whether it is solar, wind, nuclear or clean coal, if there is such a thing.

Do you think days of active fund management are over?

I certainly don't think it is over for active funds.

But, a big change has taken place in the industry. Passive has been growing at a very rapid pace.

I would say most of the new money flowing into funds has been passive money.

That means that the pressure on fees is great. And we are also dealing with that with our own company.

How we are going to fix the fee structure so that it is not too cheap, but at the same time it is competitive.

As you know even Fidelity is now zero fee. It is incredible. Of course, they are making it in other way.

The good news is that it is for us active managers to be really active and do something different.

So, I tell my analysts: Look I don't want to see any index companies in our portfolios. I want us to be engaged with the managements so that we can make a difference.

That is good news as active managers have to really do their job.

Do you think environment, social and governance -- ESG -- provides opportunities for active fund managers?

That is right, that is why ESG is a big topic for active managers.

It means now we can say when we invest into a company, we are going to push them to improve their environmental and social practices.

I think on balance it is going to be good for the investor.

The ETFs and passive funds do have a role. No question about that.

What is your view on elections' impact on the markets?

What we are seeing now is convergence. You see candidates when starting out are right-leaning or left-leaning.

They seem quite different. But as elections close in, the candidates converge towards the middle.

This is because in order to garner the largest number of votes they have got to try and appeal to a wide group of people.

This means they have to tone down the extremes. You have seen that in case of Trump to some extent.

In every country you see this tendency to converge in the middle.

What most concerns us when we are looking at a country is the attitude of the government, the law and whether there is going to be enforcement of law.

And the other thing is rights of the individuals because if you don't have property rights then we are out of business.

What are your thoughts on the Government of India?

The government should make it easier for investments to come in. There is a lot to be done.

I think there is a lot to be done in terms of making it easier for the money to come in.

This is even more important now as India is facing a liquidity crisis as a result of what happened to the infrastructure firm and banks being really under pressure.

So, I think it is important to allow the flow of new money to come in.

And one way to do is to have a one stop-shop where investors can go and all the paperwork can be done at once.

What do you think about opportunities in India?

There are enormous opportunities.

There is so much to be done. Not only in India, but all over the world.

Particularly in India, look at the environmental problems you have and some of the social problems. There is really a lot to be done.

Any particular sectors and industries in India where you can apply the ESG theme?

To begin with, there is a lot to be done in the mining sector. Also, how infrastructure can be improved to reduce pollution.

For instance, if the mass transit system in Mumbai could be made faster, that would cut down a lot of traffic and pollution generated by automobiles.

Do you think India can repeat what China has done in the last few decades?

It is already happening. We are beginning to see that change taking place.

The difference in India is that it is like a confederation of states. That is how I view India. It is truly a republic in that sense.

The difference between states are even greater than in US.

In order to achieve this unity, the job is a pretty big one for the central government.

In what ways you think India can improve trade deficit? And do you see the currency becoming weaker or stronger?

Rupee will become weaker going forward.

But a lot of the weakness is already in the price because people have anticipated a higher interest rate in the US.

India can take advantage of this situation by streamlining regulations.

India needs to make it easier for companies to export, as well as import.

You have a situation that if you want to export, say a computer, you are going to need some chips or wires from overseas.

So, import also needs to be made easier.

One way of doing that is by creating economic zones and India is working on that.

The process of making things easier in terms of bureaucracy will be very important.

Besides India and China, where else do you see opportunities in the emerging markets?

If you see our model portfolio, Brazil is up there.

The growth of smartphones has played a key role in bringing about reforms in Brazil. So, we see opportunities there.

We see opportunities in Vietnam, in Korea, in Taiwan.

Again because of this China trade war situation, many of the companies there should benefit.

In East Europe, we see Romania as an opportunity. As a result of the reforms, Romania is the fastest growing east European country now.

What is your outlook on the US markets?

People are now beginning to realise that some things that Trump has done have been rather good.

For instance, the tax reforms have been very beneficial for the economy.

A lot of people don't realise that Trump thinks like a businessman.

So, if you look at what he says and does, you can see a businessman. So, he says ok I am going to cut taxes.

I know the deficit is going to increase. So, what I will do about the deficit? I will slap a 20 per cent import on Chinese goods and that would bring in money to the treasury.

That is the kind of thinking he goes through. I think people are now coming around to realise that maybe some of his policies are beneficial.

He has confronted a lot of the issues that were ignored by previous administrations. So, we are going to see a continued growth in the US.

Although you must remember, the stock market is a leading indicator. It tells you what is going to happen.

The stock market has already told us that the US economy is going to be great. Now, you are seeing a correction in the stock market.

So year on year, next year you are probably going to see a downturn.

While we may have a high number this year, next year may not be so good in percentage terms. So, I think we got to be ready for that.

How do you feel about rising rates in that context?

Rising interest rates depends on what is happening on the inflation front or the perception of inflation.

If the real rate is good, then you better watch out those companies that have heavy debt.

I have been telling my analysts that the days of cheap money are over.

The days of people putting money in bitcoin or these currencies is over.

As the interest rates rise, people are going to say why should I be taking big risks when I can get 4 to 5 per cent in a bank account.

So, I think you have to change your thinking. You need to look at the balance sheet, look at dividends. These issues that have been ignored.

What are the countries that you feel have gotten ahead on the ESG front or firms you admire?

If you look at some of these service industries in India that are doing outsourcing work; Tata for example.

They are clean because very little environmental damage in the kind of things they are doing.

But, then you have to delve into labour practices. How they are dealing with their employees? I would say for the most part they are pretty good.

Then when you get into the manufacturing or the mining area, there is room for incredible amount of improvement.

Lot of work needs to be done in that area.

How has your investment philosophy evolved?

Philosophy has evolved over time. At the beginning when I was working with John Templeton, we were concerned about value.

When we talked about value, we talked about price-to-earnings ratio, price-to-book ratio, dividend yield, etc.

Very little attention was paid to the management and to the people behind the company.

But over the years, I have realised that people are most important. The numbers you can get. Put that on a computer and it can generate all kinds of spreadsheets.

But the key to growth and survival of a company are the people behind it.

Who is leading the company, what kind of morality do they have, what is their philosophy.

These are the kind of things we are looking at more and more.

These are the things that separate men from the boys so to speak. Also, what we are looking for is more and more is involvement of women.

For example, we would like to see women on boards of the companies. We'd like to see women in executive positions. They add a completely new dimension to the whole process.

For example, at our investment trust in UK, the chairperson is a woman and we have another woman on the board.

We have four members – two men and two women. But as I said the key is to look for people behind the company. Who owns the company, who controls it, what is their philosophy, what is their history.

If you could go back in time and give yourself a piece of advice, what would it be? And what advice do you have for people starting their investment career now?

Probably most important thing is not to follow the crowd.

Even though we were warned about it several times, we didn't pay attention. And part of the reason was pressure from our clients. Because everybody was so concerned about the index.

How are you doing against the index this week, this month, this year. The tendency was that the index was the heard.

The tendency was to go along with the group and by the way when I talk about the ETFs and passive funds, I think now we can break away from the herd and do something really independent.

But, I think that was the big mistake we did in the beginning.

We were too close to the index and we were not reminding ourselves that we had to do something different.

This means that prior to the Asian crisis, we should have been reducing our holdings in the portfolios.

If we were to come back next year for the Morningstar Investment Conference 2019, what you think we would be talking about?

I think we would be probably talking about the incredible improvement that has taken place in terms of ESG-related issues.

This is a big rollercoaster that is coming down at us. It is not stopping, it is increasing.

We have been talking with clients with all over Europe -- family clients and institutions.

And all of them ask what are you doing about ESG?

In fact, there is a whole industry that is growing around ESG.

Even MSCI has a special vision on how to deal with ESG -- how to evaluate ESG and so forth. And then you have impact funds.

Their main purpose is not to make money, but make an impact on ESG.