When you are not sure about market direction, buy quality: Anoop Bhaskar

Interview with Head Equity, UTI Asset Management

Last three years has been tough for fund managers with market moving in a range without making a decisive move. Anoop Bhaskar, head equity at UTI Asset Management Co discusses his investment philosophy and UTI growth plans in conversation with Krishna Kant 

 

How do you assess the current rally?

 

It seems the fears of the US Fed tapering its bond-buying programme, that led to a selloff in July and August, were overblown. The tapering is now likely to be gradual and this is helping the market right now. The other is this great rebalancing by institutional investors in the US towards equity and away from fixed income. The logic being you can lose much more in bonds than equities if the interest rate in the US continues to inch up. According to various estimates, potential losses on large-cap US equity will be, at worst, one per cent annualised over the next seven years against three per cent potential losses in bonds. Besides, if the US economy recovers, corporate earnings will also revive, so the pessimistic view on equities looks overdone.

As long as the US keeps getting equity inflows, part of that will flow into global funds and emerging markets. There has not been a significant correction (more than 10 per cent) in the US market in 13 months and this precludes any correction in the global equity markets.

 

 

So you are asking investors to be bullish on equities?

 

I’m saying there is a strong stance not to be bearish on equity right now. This is not a time to reduce equity allocation, though I am not sure whether it is time to increase equity allocation.

 

How are valuations in India right now?

 

Small-caps and mid-caps are still trading at a significant discount to large-caps, so there is no sign of an overheating in India. A lot of investors make the mistake of equating overheating with a particular level of the index, which is not correct. The earlier time the Sensex touched 21,000 was in October 2010.

The Nifty was trading at 23 times its trailing 12-month earnings and mid and small-caps were trading at a premium to large-caps. We had two years of eight-plus per cent annual growth in GDP and corporate earnings were expected to grow at 25 per cent. In contrast, economic growth is moderating now, corporate earnings are best expected to grow in single digits and the Nifty is trading at 17-18 times trailing earnings. This is hardly a sign of overheating.

Some sectors such as fast moving consumer goods, pharmaceuticals and information technology were showing signs of overheating in May and June this year. However, these have since corrected by 15-20 per cent, which translate into both a price as well as time correction.

 

If valuation is benign then why is market not able to break into a higher level?

 

Many investors wrongly associated an index level with overheating despite that fact that underlying factors has already changed in last few years. This has leads to sell-off whenever Sensex makes a new high. 

 

What explains the lack of domestic participation and poor inflow in equity mutual funds?

 

It is a collective failure of the mutual fund industry that we are not able to make a case for equity. Financial products are never bought but they are sold. This requires time and investment and we are still a young industry, one of the least capitalised among all competing segments, such as insurance. No one wakes up in the morning wishing to buy a financial product to secure his child’s education or retirement. Investors need to be educated about the importance of financial planning and asset allocation.

It’s time the segment becomes investor-oriented, rather than growth- oriented. The focus should be on increasing the number of investors, rather than assets under management.

 

Role of asset allocation….

 

The basic question is should we believe in the theory of asset allocation or not. If yes, than it says that you should even invest in assets that have not delivered returns in last five years. For no one can be sure when an asset class starts delivering. Returns in equity are neither linear nor consistent. You can have a year of 75% positive return followed by 45% fall; even though over a period of say 5 years, the total portfolio will deliver 15% annualized return. The problem is that investors only want to participate in the upside and don’t want any share in downside. This doesn’t work and most often they end up on the losing side trying to play catch-up with institutional investors. 
 

Critics say that the industry is partly responsible for this as it never went beyond top few cities…. 

 

Top six cities do account for around 60% of the industry’s AUMs, but even here our share in household’s all financial assets is less than 10%. So we have done a bad job even in top cities where our concentration is highest. 

 

Indian HNIs think that they are very smart and don’t need fund managers to help them manage their wealth. They never discuss decisions that go against them but don’t miss an opportunity to point out our failures like equity market has gone anywhere in last three years.

 

What about UTI Mutual Fund, that has lost market share in recent years?

 

We already have one of the biggest networks in the segment, with direct presence in nearly 150 cities. We are focused on consolidating our presence, rather than increasing the market share. We haven’t launched new products in three years and have been instead trying to increase our customer base and adding value to existing funds. We have traditionally been weak in metros and our market share is highest in smaller centres. The private banking channel plays a role in metros but it was a weak link in our distribution chain. Now we have created a separate team to push this and will scale it up over time.

 

How do you overcome the challenge of being a standalone and independent mutual fund unlike many of your competitors which are part diversified financial conglomerates with presence across all assets classes.

 

The only advantage that MF with bank parentage is that they have a lower cost of distribution and a positive spill over affect from their mother brand. But regulations is moving in the direction where banks are being asked to maintain open architecture and transparency the way in which they sell their own group products through their own channel. 

 

Even in mature markets like US and UK, where there are large integrated financial services firms, independent and standalone fund houses such T Rowe Price, Fidelity and Franklin Templeton among others are thriving. There is definitely a space for independent fund house in India and it our job to create a strong USP and differentiating factor in our favour.

 

How do you manage your portfolio in times of volatility, where select stocks do well but the market fails to make any decisive move?

Our philosophy is, when you are not sure about the market direction, buy quality. It means investing in top-tier companies in out-of-favour sectors or fundamentally strong companies in sectors that are doing well. Or, if you can spot some trend that can dramatically change the fortunes of an industry, buy into that. For instance, we were one of the first fund houses to anticipate a fall in international rubber prices and its beneficial impact on tyre makers. We started accumulating tyre stocks around 18 months earlier and are now sitting on neat profits, on our investment in stocks such as CEAT and MRF.

Does it mean buying cheap or low value stocks?

 

I don’t believe in a value versus growth debate. We believe in buying good companies where expectations of growth are muted and they have fallen in price. India is a growth market and not a value market, as investors are not willing to pay for value stocks. We might buy undervalued stocks but we still buy a growth story. We didn’t buy tyre stocks because these were available at a fraction of their book value but because we believe that from a four per cent Ebitda (operating earnings) margin, CEAT can have three quarters of a 12 per cent Ebitda margin. When that happens, the stock will be re-rated. Buying value without a proposition is a dangerous thing.

 

How much do you track macros or big picture variables?

 

Of course we do. The sector allocation is done on the basis of macroeconomic fundamentals, but the stock selection requires bottom-up approach. So if we believe that rupee will depreciate we will increase the allocation of IT, but then the selection of a particular IT stock will be done of the fundamental analysis of the respective stocks and our assumptions about their growth prospects. 

 

But how do you decide the right portfolio allocation given that even in macro-driven sectors such as IT and pharma, bulk of the returns were provided by one or two stocks? 

 

It’s a judgment call of the fund manager and that where the skill and experience of the fund manager comes into play. Sometimes their call is bang on target and they are able to maximum their gains and at others you are not that successful.

 

What a fund manager can do is that he can keep playing with weight allocation game based on parameters like valuations, but she will always maintain a certain minimum exposure in top perfor,ing stocks and then increase and decrease the exposure depending on factors such as valuation etc.

 

Secondly every company has a golden period so a smart fund manager is one who is able to align the portfolio exposure with their golden period. But they should also have a plan-B knowing fully well that best of companies may start delivering average returns sooner than latter. Our job is to buy and sell companies not to become their biggest supporters. 

 

Has the sector substitution ended? 

 

Some sections in the market believe that worst is behind and the economy will improve from here on especially if there is a strong mandate for BJP next year. This they believe will revive investment demand and explains the recent rally in sectors such as capital goods, metals and construction among others. We however remains cautious and stay invested in in good companies across all key sectors including past winners in sectors such as IT, pharma and FMCG for instance. L&T is our biggest bet in the capital goods and investment space.