Return expectation from an equity investment point of view have to be nominal this year — GDP plus 3-4% over a five year time frame, says A Balasubramanian, Aditya Birla Sun Life AMC Limited (ABSL AMC), tells ET Now.
Edited excerpts:
We started the year with a lot of promise. It was a dream start to financial markets and now suddenly things are looking shaky. Portfolios have taken a hit. Good news is, domestic institutional investors do not have redemptions. But the bad news is portfolios have got damaged.
Correct. Since November last year, this has been a challenging moment for money managers — both equity and fixed income. On one hand, interest rates are rising, both globally and locally. But apart from that, high expectations and optimism got built in the last two and a half years and the market ran up quite ahead of the curve. But earnings failed to keep pace.
With the change in macro dynamics, both globally as well as locally, revisit the macro variables. The current account deficit has been rising thanks to high oil prices in the recent past. That essentially has affected the overall macro variables.
However, some of the micro variables are showing an improvement largely driven by the domestic led growth on the back of public sector spending by the government. Second, rural consumption has also been showing an uptick which is reasonably visible. But since the macro variables have been more challenging, money managers have been facing a tough time.
For many years, we have been going through this period of outperformance, underperformance and then the challenge that we face in terms of picking stocks as well as securities in the bond portfolio.
We always go through this pain after every two and a half to three years. One has to accept this fact and have some kind of faith that once the oil prices settle down at lower levels, then government spending ultimately will lead to growth return.
Is the bull market in mid and smallcaps over?
The way the stock prices have fallen, especially in the mid and smallcaps, there are multiple reasons for that. Also, FIIs have been selling in India. They always prefer to sell the tail stocks, the tail portfolio. So, there will be much impact on the portfolio but the stock prices will definitely be hit. So, that is one reason.
Second is, the money managers have to adjust the portfolio post the recent guideline that came from SEBI on consolidation of schemes and people have adjusted their portfolio.
The third reason of course is that a large portion of the PMS investors have a low tolerance for fall and high degree of happiness for high returns.
So, because of the two extremes of expectations on portfolios, we have seen some bit of selloff coming from PMS portfolio as well. Having seen the way the stock prices have fallen, we believe that the worst is over as far as the mid and smallcaps are concerned.
If we wait for some time, it may actually bounce back given the fact that people would like to see the results coming in the next few quarters as well as the fact that in a rising interest scenario, macro variables are not that robust at this point of time.
Having said that, it is time for stock pickers and if you have a three-year timeframe, it could be worthwhile going into deep dive and looking at stocks rather than looking at broad sectors.
While SIP money is long term in its nature of commitment, do you worry if the mid and smallcap selling escalates any further, there would be redemption pressure which till now has not been witnessed across mutual funds?
One big change in the trend that we have witnessed in the last few years has been the acceptance for staying invested in mutual funds with a clear long term view. The confidence is growing. Also, there has been messaging both at the industry as well as at the individual fund house level that during volatile times stay invested and hold on to your investment for the long term. The acceptance has been very, very high.
Second, though we see some amount of redemptions, the industry is moving structurally on the positive side to building an SIP as a book. One sees the SIP book size growing, the lumpsum as a percentage is coming down and people making money also moving out. Net-net, e are seeing an inflow rather than seeing an outflow at the industry level.
But as a fund manager it must be a tricky time because you do not know whether to profit take from small and midcaps, to add more into largecaps or buy this decline? What are you doing tactically?
Tactically, it is the money managers point of view. Our job is to actually outperform the index. That is the first and foremost mandate. The second is, within that look at sectors that could outperform the broad market. One of the things money managers have been doing is tweaking their own portfolios and increase weight where there is less risk like in IT, pharma, retail oriented banks and other consumer driven companies.
In our case also, we adjusted the portfolio. Having done that and given the size of the fund, even money managers would be finding it extremely difficult to shift your portfolio significantly from one stock to other stocks.
That kind of swing is almost impossible in a small portfolio. It is easier to do in a bigger portfolio. One can reduce the risk in the portfolio by doing the allocations here and there.
One of the things that got redefined in the recent past is that a very clear definition has come for the largecaps and midcaps and smallcaps. Up to a market cap of Rs 40,000 crore will be considered a largecap, between Rs 40,000 crore and roughly about Rs 5000 crore will be considered a midcap and below that it will be considered a smallcap.
Therefore, the money manager has to walk the talk by moving within that boundary. Even if he likes largecap and midcap names, the midcap portfolio manager cannot jump the gun and buy the largecap names.
This will bring in huge benefits for investors as well as for the portfolio managers in the long run. We may face pain in the short-term but the benefit will be seen only in the long run.
You are highlighting that you see about 16% to 18% FY19 earnings growth. Now that has been a wish for market participants for a really long time, it has never really come through. What convinces you that returns can match earnings expectations this time?
Expectations in the last few years have been pretty robust, especially on earnings growth. What the companies have been delivering have been far below the expectations and we believe that cannot continue beyond a point. End of the day, every company has to go through a consolidation when it comes to the question of managing their resource planning and balance sheet and the way the business model is built.
Look at your cost structure. For the first time in last few years, the Sensex companies have started repaying the overall debt in the portfolio, which will lead to a reduction in interest costs and thereby boost earnings. This is the trend that we are seeing. Their EBITDA versus the total debt have also been showing improvement. So, balance sheets are now getting better. Any uptick that could come led by rural consumption going up and a good monsoon could also lead to a better agriculture output.
We also do not see significant pressure building up on NDA, on macro variables such as oil price going up quite significantly. If we are able to see some bit of semblance over there, geopolitical risks which used to be one of the big factors for global flows into the equity markets could also get reduced to some extent. People will then have more time to look at earnings rather than tracking the macro variables.
Yes, but what does even a half decent earnings performance this year mean for returns?
On equity schemes, you should never set an expectation on a year on year basis and should always look at return on a three to five year timeframe. Having said that, last year was a relatively poor year on earnings and we may probably see the market remaining range bound for a period of six to eight months. Given the fact that we have election next year and as macro variables are a little uncertain, this is the time for consolidation. Return expectation from an equity investment point of view have to be nominal, GDP plus 3-4% over a five year time frame.
Investors also have to look at fixed income as an asset class. Generally, talking about mutual funds, we automatically think of equity. But mutual funds also provide opportunity to participate in fixed income schemes especially when the interest rates are rising. It provides a greater opportunity for investors look at the mutual fund fixed income schemes given the fact that the banks are not under tremendous pressure to increase the deposit rates as their credit growth has been very poor.
What are you telling investors right now for the next one year? Would balanced funds have a higher portfolio allocation and would that be a prudent strategy or would you say it has to be a mix of a multicap and balanced portfolio?
The allocation between equity and debt has to be 50:50. Second, within the equity compound of your portfolio, a large proportion of money should be in multicaps. I am looking at longer-term growth and the balanced fund helps in hedging the risk without giving levy to minimise the cash call.
Therefore, one is better off investing in a mix of multicap and balanced fund, that is a hybrid equity oriented balanced fund. Second is some portion of a midcap fund which is actually for long term. Everybody has to understand that each of the asset classes tend to outperform the market with a significant margin over a longer term. Midcap gives a significant outperformance to the largecap over the longer term but in the short term, it can get us out of underperformance as well.
Are you getting a sense that if not in large schemes, but at least in the smaller schemes, if not today may be tomorrow the redemptions will start?
I do not think so. There are two types of investors — the existing investors and new investors, but mutual fund still remains underpenetrated. The number of new customers have been rising and therefore you will see a mix. You will never get that number right.
So, the trend of SIP culture that we have seen in India in last three years where on a monthly basis, Rs 8000-10,000 crore is coming continues? Do you think this is a multi-year trend irrespective of what happens to markets, elections, macro?
The biggest, fundamentally sound structural change that has come for the industry is the building of the SIP book. The SIP book for the industry as a whole has been growing each year by roughly about Rs 1,000 crore per month. Every year the industry has been adding close to about Rs 180-200 crore per month in SIPs and all of them are coming from new investors. Some of them come from the existing investors who actually want to get more and more SIP by way of investing.
At the same time, another structure which also is building up is called SWP (Systematic Withdrawal Plan) given the fact that the monthly requirements of investors are not currently being met by investing in fixed deposits or investing in fixed deposits or any fixed deposits of the companies. They also come through the mutual fund and fixed income schemes and have their monthly requirement plan through a Systematic Withdrawal Plan. These are two concepts that will help the industry to structurally became stronger in the long term.
Tell us more about the endeavour and the kind of breakthrough you expect with getting every average Indian to invest in the market through this programme?
One has to look at what are the investment opportunities that exist today? Take any asset class in which the investors can invest across the country whether it is real estate or is gold or stocks or fixed deposits or any fixed income carrying instruments such as bonds or the mutual fund schemes. In all the asset classes, the mutual fund actually provides all the benefits including the convenience. Mutual fund should not be looked at only from the return point of view. It provides lots of convenience, safety. Also, any time you want the money you can get the money with the relatively lower cost. Dealing with most of the other asset classes, leaving aside fixed deposits, is extremely difficult.
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