‘We look for relative value pockets’
The Indian equity markets
have been on an uptrend, thanks to steady inflows from domestic institutional investors and due to stable macros and expected turnaround in corporate earnings. At the same time, global markets, too, have been rallying on the back of pick-up in economic growth in several developed markets.
S Naren, ED & CIO, ICICI Prudential AMC
Just like a rising tide lifts all boats, in a momentum market, such as the one underway, irrespective of the company fundamentals, several pockets have witnessed a runaway rally. Therefore, finding value in such a market is not an easy task. What essentially one looks for at such times is the ‘relative value’ pockets. Currently, sector-wise, banking, big pharmaceutical companies, information technology (IT) and rural theme look attractive from a three-year investment perspective.
When it comes to investing in the current market, mid- and small-cap valuations appear rich compared to large-caps. Therefore, we have been advising investors to opt for large-cap schemes for fresh investments into pure equity schemes. It is typically seen that when markets move from a boom phase to a bubble phase, the rally tends to move to select names in the benchmark oriented large-cap names.
Dynamic asset allocation/ balanced advantage category of scheme, is the other option one can consider for incremental investments, at current levels. This is largely because the markets are no longer cheap.
Thus, investing in such a category ensures that the investments made are spread across debt and equity, based on relative attractiveness of the asset classes.
The factors to watch out for over the next one year are rising crude oil prices, dollar strengthening and geopolitical tensions. Given that globally the valuations are stretched, any correction in the global markets can have a ripple effect on India as well.
‘We must not give up on quality over momentum’
Nilesh Shah, MD, Kotak Asset Management Company
The markets have risen steadily since February 2016 with remarkably little volatility. Inflows have surged into mutual fund schemes.
At last count, almost 80 per cent of cumulative flows in the 10 years have come in just last one year. There is a financial tsunami for mutual funds.
With greater power comes greater responsibilities. When our sizes were small, we generated tremendous alpha and added value to clients. We made errors but we’re able to rectify it quickly.
Now, there is an extra burden of expectations riding on our shoulders. We must take care to make investors understand the principal of asset allocation and long-term investment. We must make them understand the need for disciplined investment.
People give us money so that we manage it well. With increased size, opportunities are going to become rare. In today’s market, we must not give up on quality over momentum. We should not give up liquidity over concentrated holding. We must not make same mistake which a retail investor is likely to make.
The need for adding value to our client’s money is going to remain as strong as before. We must learn the art of long, short, leverage and concentration to add value to our clients. At some point of time, we must learn the art of offshore investment. These are new skills and will take time to learn. As mutual fund managers, we must remember that when we bring a bank fixed deposit person into balanced fund by showing the dividend track record, it can break the trust which the industry has gained over last many years of hard work.
‘Growth at reasonable price’
Anand Radhakrishnan CIO – Franklin Equity,
Franklin Templeton Investments – India
The mutual fund industry has witnessed rising flows into equity-oriented schemes over the past one-and-half years. To put it in numbers, the monthly inflows during FY18 have averaged around Rs 22,000 crore
(Rs 220 billion) per month till December 2017 (compared to Rs 10,500 crore (Rs 105 billion) per month in FY17). The industry is, however, quite far from a situation where rising assets
can become a challenge. Equity-oriented mutual fund assets
comprise merely six per cent of the total market capitalisation
in India. Also, the industry’s assets
(gross domestic product) ratio is only 12 per cent. This is far lower than global average of 55 per cent, mainly because less than five per cent of Indians invest in mutual funds.
The real challenge is managing the returns’ expectation of investors during times of such unprecedented flows especially when markets trade at valuations above their long-term average.
The Franklin Templeton India Equity Investment team has always followed a steady investment philosophy that focuses on individual companies and the wealth they create for their shareholders rather than being swayed by a momentum-driven strategy. We follow a bottom-up approach to stock-picking with significant consideration to ‘growth at reasonable price’ (GARP) strategy across market capitalisations. While broad analysis of economy and various sectors is a starting point, the stress is on a deeper search for businesses and managements creating wealth, some of which could even be from out-of-favour sectors. The focus is on qualitative and intangible aspects of investments and to look beyond traditional measures of company analysis. In our experience, superior investment results are generated by thinking independently and having the conviction to go with what one believes in, rather than just following the herd. Developing and refining the stock selection process is an ongoing basis and utilising resources to improve understanding of various businesses, technologies and management philosophies continues to support us in generating superior risk adjusted returns for our investors over the long term.
‘High quality with some cyclicals’
Manish Gunwani, CIO - Equity, Reliance Mutual Fund
The steep returns in the market in 2017 has stretched valuations compared to historical averages. However, this has to be seen in context of two factors — a) the valuations are on the base of very tepid earnings growth for last four-five years due to softness in both global and domestic economies and b) the valuation multiples of only specific sectors or companies have been pushed much above historical averages, and not for the overall market.In the FY12-17 period, the economy was in a soft phase. So, the relative earnings’ growth of high quality companies – those which have high return on equity and consistently gain market share – was very strong. This lead to rich valuations.
We believe better value is in the companies benefitting from economic growth revival. With global growth picking up over the last few quarters and the fog of the goods and services tax going away, the chances of a broad-based growth picking up are bright. Hence, cyclical sectors like financials, industrials, infrastructure, etc, which have many stocks
at reasonable valuations are likely to provide better risk reward at this time. Our investment strategy is to focus on bottom-up stock selection to have a mix of both segments – structural winners with reasonable valuations and beneficiaries of economic growth revival where operating leverage is high.
THE STORY OF GROWTH AND RETURNS
Source: Value Research, BS Research Bureau
SIP: Systematic investment plan