BS Fund Cafe: How to navigate markets in election year, discusses CIO panel

In recent months, fund managers have ended up facing rude surprises of auditors resigning from firms citing companies' withholding of information

Navigating the markets in an election year, challenges around generating alpha, and sectors that look most favourable were key talking points during a panel discussion involving the country’s top money managers. Most chief investment officers (CIOs) were unanimous in their view that the impact of elections on markets is short-lived and in the long run, earnings determine the market’s direction.

“Since 1979, in each year that saw elections, returns have been positive. The link between election results and markets is quite weak. However, the linkage between profits and markets is quite strong,” said Prashant Jain, executive director and CIO of HDFC MF.

Manish Gunwani, CIO (equities), Reliance MF, said: “It is necessary to take a step back and see how much elections really matter. From the macroeconomic sense, the impact doesn’t seem that large. For a Rs 170-trillion economy, only Rs 5 trillion discretionary spending is controlled by the central government. There are so many variables that move the market. It is difficult to take one event and talk about it as a major trigger.”

Besides the ramifications of elections on markets, the CIO panel discussion also focused on challenges in generating alpha in the current market environment. The panelists acknowledged that alpha-generation could get more challenging in the future.

“As markets get more institutionalised, it will be more difficult to extract alpha. Currently, the MF ownership is not that high but going ahead, there will be more competition and this will make the job of a fund manager quite difficult,” said Vetri Subramaniam, group president and head of equity, UTI MF.

Jain said there will always be good quality firms that can be potential investment opportunities. “Indian mutual fund investors have been successful in extracting alpha from non-MF institutions as well as foreign institutional investors. As an industry, we have managed to outperform foreign funds. Perhaps, the fact that as fund managers we enjoy more proximity to the domestic market, plays in our favour,” Jain added.

On the valuation front, the money managers said the current valuations are fair for an investor with a three-to-five-year investment horizon.

On the sectoral front, S Naren, ED and CIO of ICICI Prudential MF, who is known for his contrarian bets, said that given the brewing trade wars, export-oriented themes can throw up interesting opportunities. “Amid rising interest rates, large-caps have come back in favour and also banks with good deposit franchises seem interesting,” he said.

For Mahesh Patil, co-CIO of Aditya Birla Sun Life MF, discretionary consumption looks like an interest space and cyclicals also show some promise.

“The penetration is quite low. Also, reforms such as goods and services tax (GST) should benefit the players. We are also seeing early signs of recovery in industrial goods. There are some green shoots in the capital goods space and we should see a pick-up in this space in the next couple of years,” Patil said.

Navneet Munot, ED and CIO of SBI MF, agreed with Patil. “We are at the cusp of an industrial recovery. We are also seeing a global recovery play out. This, along with the rupee weakness, should benefit export-oriented units,” Munot said.  

The mutual fund industry has grown at a fast pace. The assets under management (AUM) for the mutual fund industry has nearly doubled in the past two years from Rs 12 trillion at the end of 2015-16 to Rs 23 trillion at the end of 2017-18.

On how larger-sized funds can become difficult to manage, Naren said that hybrid funds offer a good solution to this potential problem. “In hybrid funds, when valuations in equity go up, you can sell equities and increase debt allocation and vice-versa,” he said.

In recent months, fund managers have also ended up facing rude surprises of auditors resigning from companies citing companies’ withholding of information. According to Patil, such unforeseen issues can be addressed if the fund manager does proper due-diligence. “If one does the necessary homework, the fund manager can back his calls when such events take place,” Patil said.

The markets are also facing a futuristic question whether machines can replace fund managers. Subramaniam said that robo-investors can also make the markets more competitive. According to Munot, the future will be anyone’s domain, but both humans and machines will co-exist in the world of investing.