The attitude of retail investors towards mutual funds is gradually improving, said Shahzad Madon, fund manager, Prudential ICICI Asset Management Company. In an interview with Santosh Nair, he says that people will increasingly opt for equity-based schemes in the future. Excerpts:
How has been the response of retail investors towards mutual funds?
It is definitely improving. However, investors still favour debt-oriented schemes as most of the equity plans have not fared too well in the recent times. Also, the general impression among the investors is that because some equity-based funds are doing badly, the overall mutual fund industry is in a bad shape. The investors must realise that the performance of mutual funds is linked to the market. Given the current state of our capital markets, investors are generally shying away from equity.
Once market conditions improve, more investors will flock to the market. When that happens, equity-based funds, too, will start faring well. This, in turn, should lure more retail investors to mutual funds.
Investors will gradually move towards equity-based schemes as no other scheme can match the kind of returns that equity provides over a period of time. In the US, where the mutual fund industry has come of age, the general trend is increasingly in favour of equity-based schemes.
What is your investment strategy with regard to equities?
We follow a modified value approach which is more of a bottom-to-top approach in selecting the stocks for our portfolio. The size of the portfolio will be restricted to a select 25-30 stocks. We look at various factors such as free cash flow generated, return on capital employed and quality of management. Even if a scrip fulfills all these criteria, it has to be available at reasonable valuations. We also compare the valuations of the scrip relative to its own history and also with peer scrips. While choosing a scrip, the most important factor we look at is sustainability of returns. For example, there are many scrips which generate a lot of free cash flow. However, in case of any major policy changes, the returns provided by the company could get affected.
We have a scrip-specific approach rather than a sectoral approach. There could be good picks in sectors which are not doing well right now. The stocks in our portfolio are viewed from a one-and-a-half year perspective.
How do you expect the bourses to move in the immediate- to short-term? What kind of stocks would you be looking at?
With no major developments in the offing, the BSE Sensex will continue to remain in the trading zone between 2900 and 3200 levels. On the positive side, there is not much of a downside as most of the bad news has been discounted. Also, most of the major second quarter results will show a marginal improvement or, at worst, may remain flat. However, on the flip side, the global market scenario is still a cause for concern.
We will be looking at cyclical stocks that have been beaten down to ridiculous levels that do not justify the fundamentals. Also, most of these stocks are going through a downturn in their cycles. For example, cement is one such sector. Currently, there is a capacity freeze. Things should start looking up in the next few quarters.
Also, with the government reaffirming its commitment to the infrastructure sector, the cement sector should be the first one to benefit from increased government spending. We are looking at these stocks from a 9-12 month perspective.
