Is it time to reduce exposure to equities and reinvest it in debt?
Looking at valuations versus the history of the equity markets, and whether you look at large, mid, small caps or the Nifty500, I think all of them give the message that this market is quite expensive. Even if we compare stocks to another asset class, for example bonds, as evidenced by the 10-year government yield, stocks as an asset class are not as attractive as they used to be. So I would say rebalance your asset allocation away from stocks, but in the context of the overall asset allocation methodology that you are trying to follow. Therefore, any answer to which is more attractive, should be within your asset allocation framework. Today’s valuations indicate that if you are over-allocated to equities, definitely correct it to get back to your target.
You recently assumed the CIO responsibility for UTI AMC. So what would be the way forward?
I will continue to ensure that we remain a process-based organization. The transformation we made when I got on board in 2017 was to focus on the process and say that we are a fund house where we could execute multiple strategies, all supported by a single investment process. And what we’re trying to do now is bring the same learning mix to the fixed income side. We have a good, experienced team, but we try to make sure that this is the process that needs to be the backbone of the organization to meet the long term expectations investors have of us. Of course, every investment team needs the right people, it’s the combination of the stability provided by the process and the quality of people that gives you the results you desire. We will therefore continue to apply more of the same to the whole investment process and also where we can add value down the line, keeping in mind that UTI asset management is a mutual fund. investment, but there are other games we can make within the overall asset management space.
Why are we seeing a high demand for new fund offerings (NFO)?
It seems like when the markets hit record highs, and I’m talking about price points, you see a lot of positive news. You see a lot of money being drawn into the market. I don’t know if that’s necessarily a good thing. People who have been sitting on the sidelines for the past few months have jumped into the water.
Also, some of these NFOs may have filled some of the gaps we had in terms of product offerings. In our case, for example, we didn’t have a small cap fund or a targeted fund, and we did. And that may well be true for many of our peers as well.
Granted, when you have good news and market records it tends to attract a lot of people and maybe that is why NFOs have been so successful.
Passive investing is the flavor of the season. How will the mutual fund industry be affected?
I think there is room for the two to coexist. Passive funds do one thing; they manage money at very low cost. But at the same time, they cannot claim, nor do they attempt to create alpha. With active funds, the attempt is to create alpha. Both products have their own costs and benefits. Our approach is that it is not a matter of choice, but a question of what is fair for an investor from a cost perspective and for improving the overall returns that the portfolio gives relative to the benchmark. More and more, you will find that investors will create space in their portfolios for assets and liabilities. At the same time, we have seen in other parts of the world that many institutional markets, given that they operate under slightly different circumstances, might end up going down the passive path of investing. We’ll just have to make sure that investors believe that as active managers at UTI, we are able to create alpha for them.
Coming into the market it has had a run-off for the past 18 months, and even the profits have been good. So where do we still find value in this market?
Today, if we look at an industry with a lag between the structural growth rate that could take place over the next few years and recent trends in demand and valuations, then autos would fit into this pack. Of course, if you see cheap valuations, there are existential questions as well, which is also true for the auto industry. Concerns about EVs (electric vehicles), worries about what that means for cash flow generation and return on equity. From a demand perspective, the automobile industry has been going through difficult times for the past two or three years. But there is value to be found.
The second sector is finance. There is value to be found because the credit side has been going through challenges dating back to 2018. We’ve been in a period where loan growth has been slowing down anyway, and covid-19 has kind of added to that pain. . But the good thing is that, for the first time in many cycles, there are a handful of financial institutions, which not only have preemptively set aside provisions on their books, but have also raised capital and they are well capitalized for growth. At the end of this difficult period, they are likely to gain significantly in terms of market share and profitability.
I would also look at broader healthcare, including pharmaceuticals. This sector has undergone a re-rating stage in the last year, but we still believe that compared to the growth prospects, there are still opportunities.
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