Equities cannot beat the bond market consistently for a long period of time: Mervyn Shanmugam, Sanlam Investments Group

What is your take on passive versus active funds? Is there any difference in India in the concepts?

It’s difficult for active managers to outperform passive managers, because markets are just so efficient. From an equities point of view, passive business has doubled in the last five-six years.

Another reason why the passives business has doubled is because of access to international products. If you look at the growth of our passives business, most of it actually came from access to international products. Most of the flow of funds into these passive products has been coming into internationally-managed products, and at low cost.

In India, it’s a slightly different experience. Here, you have about 5,000 stocks. We’ve seen active managers outperform the benchmarks by a large margin. Compare more than 5,000 stocks here with South Africa, where we only have 324 stocks, 1/10 the size of your market. The flexibility that asset managers or investment managers have here, which allows them to take risk beyond the benchmark, should help them achieve those results.

I also see the trend of institutional investors, mostly because of cost, going towards passive products. Passive is the future; it is not an absence of active in the immediate future. It’s going to be a gradual process where you will have, as more investable money comes in, and people reset their expectations on returns, because we are still expecting returns, far higher than the long-term average. You can’t beat the bond debt market consistently for a long period of time. I think we are at a very early stage today.

You come from an Alternatives set-up. How is the market for alternatives evolving in India?

The regulator has done well with the framework for alternative managers to invest in and also provide access to the retail market. In most other places in the world, alternatives are only reserved for institutional investors like family offices. India is very fortunate to have regulations that allow investors to invest in alternatives so easily. 

As for the various asset classes, you have private equity, VC, infrastructure, real estate, private debt or credit — all growing well. The VC market is very active; funds are being raised. In India, they seem to be mostly like regional, but that’s probably because of relationships, and the way they work. 

And you also have REITs and InvITs — the listed REIT products look very attractive; India’s infrastructure programme for international investors sounds interesting — most of the big institutions in the world are here participating.

The private equity market is quite strong.

What I’m really encouraged about is the private credit market, which is new in India, but because of the regulatory arbitrage between what banks can do, what they can fund and what they cannot, it presents a massive opportunity for investors to come in and fund, like bankable transactions and earn some really good spreads.

How do you view the emerging markets?

A weak dollar is good for emerging markets. In the last six months, things have turned positive for emerging markets. But among emerging markets, the top three or four have very good balance sheets, like China, Taiwan, Brazil, Mexico, India. In our view, the best balance sheet, best macro-economic conditions are in India.

There’s always exogenous factors like the wars, and there will always be cycles. Cycles are becoming shorter and tighter.

Coming to the geopolitical situation, what’s your view on the current market scenario globally and India?

We had quite a few of them over the last couple of years; there will be an impact on markets, whether it just disrupts supply chains or impacts currencies. This latest round can be severely detrimental, it’s difficult to quantify what the impact will be. But the markets in India have not really shown much reaction till now.

If inflation is kept low, then you will see bond yields stable. And if bond yields are stable, then that underpins the entire economy. The domestic consumption of the economy supports the growth, which is very different from, for example, China, which also has a very high savings rate, but they don’t consume the manufacture. From that perspective, India should be better cushioned than the rest of the world.