This week on the Mutual Fund Show, Jinesh Gopani and R Sivakumar, fund managers at the Axis Mutual Fund stress the importance of balanced mutual funds, and the need to invest in systematic investment plans for a meaningfully long duration or for perpetuity.
Here are edited excerpts from the conversation.
Jinesh, is this a good time for direct equity investors or mutual fund investors toinvest in the market?
Jinesh: That depends on the risk appetite of the investor. You have both kind of investors, you can either go direct or indirect. I think mutual funds are a better route because the risk gets diversified, and money management isall about risk, rather than looking only at returns. Normally, fund managers can diversify therisk because they know what type of company are they investing in, whattype of risk they are earning for the portfolio because diversification helps you in terms of avoiding mistakes in the bad times. Sowhen tide turns and everything falls, you fall less and again when youbounce back, you bounce back smartly. That is when on a CAGR basis youcan deliver decent returns. I think that is why investors should look to invest in mutual funds rather than investing in the market directly, which is a riskier game.
Everybody talks abouthow valuations are stretched. Should people wait for a good time or is it as agood time as any?
Sivakumar: When you measure equityvaluations, when you look at certain parameters such as the price-to-earnings ratio, it looks a little higher than normal. But you have to remember earningshave been so weak in the cycle, earnings are always backward looking, it's whatis being delivered. But the market is always forward looking. So when you havethese turning points where there's growth momentum, price-to-earnings ratio starts to look expensive. Between 2003 and 2008, earnings compounded at 30-35 percent per annum for four to five years. So whatlooked expensive in 2004, looked very cheap in 2006, for example. So, it's amatter of looking forward and the expectation is that we are at the cusp of a growth recovery.
What about the fixed income markets. That woulddetermine a large portion of returns from balanced funds or debt funds?
Sivakumar: So, when you look at debt, we have had a hugerally in the last three years, but looking forward, the view is very different. The view is that inflation is already bottoming out. We are at 3 percent inflation, also because of a sharp fall in food prices. If foodprices normalise and inflation goes back in the 4-5 percent range,there is no great case for interest rates to fall further. But on the otherhand, you have a new game in town. If growth comes back, corporate bondslook very attractive relative to government securities because you get upgradestories, high-yielding bonds that you are able to buy today which you could notbuy a couple of years ago. So, I think the opportunity set in fixed incomebonds have shifted away from long duration bonds to corporate bonds.
AUM growth for the industry, for your fund house as well, has been very strong. Does it make investing that much moredifficult because there is so much of money chasing so few stocksthat are quality in the strictest sense?
Jinesh: It's always a chicken and egg situation. Whenyou have an idea, you don't have money and when you have money, ideas run out.It's always like that. But when you look at 3-5 year kind of horizon and if you have many sectors which would be evolving and growing at breath-taking pace, I think there is a fair amount of idea generation which can happen. Obviously you should be careful in the near term. Inflows alone should not allow you to invest in stories where youare not comfortable. So you have to do your due diligence, research and put in money.
Thegeneral premise of investing is that timing the market is not as important astime spent in the market. But, to either of you, is this a good time to enterSystematic Investment Plans (SIPs)?
Sivakumar: I will give two ways to look at this. If you seethe behaviour of investors, even though they do an SIP, you see that a lotof SIPs fall off during the worst of times. SIPs fall off when themarket falls but the advantage of an SIP is to buy more when the market isdown, due to the averaging. So you buy less once the markets run up. Any time is a good time for a SystematicInvestment Plan but that must be systematic. So if you get in today, and let'ssay there is a correction in the next six months, don't stop your SIP. Stay onthe path.
Make sure the SIP is meaningfully long. SIPs of 12 months, 24 months are too short. They need to be 36 months, 60 months or longer, or for perpetuity.
Forsomebody who is uninitiated and wants to start investing in SIPs, he getsworried by the chatter that markets are getting overvalued, do youthink they should wait for 2-3 or 6 months for better levels or that's notadvisable?
Sivakumar: Almost impossible to time. The whole idea of anSIP is to remove the time risk. If you have got ‘X' amount of money that you mustinvest in the next 60 months or 100 months, now is the time to start. Don'tworry about exactly getting to the top or the bottom of the market. It is not goingto happen.
What are your thoughts on balanced funds?
Jinesh: On a CAGR basis if you take any fund, in the last 20years they have 18-20 percent CAGR tax free. So, in my view, equity is the placeto be. Because you are at the cusp of the next leg of growth. Hopefully if allgoes well in the next 7 years, assuming the government comes back to power, I thinkyou can go to 9-10 percent GDP growth and in that you will have a nominalGDP growth of let's say 14-15 percent. Normally, companies grow to 2 times ofthat. The kind of earnings compounding which happen, and hence the returns andthe returns on equity (ROEs), can be big. So why do you want to miss that opportunity?
Sivakumar: When you look at mutual fund investments by retail investors, they typically tend to be equity. Let's say if 60-70 percent of retail money in mutual funds is in equities, whereas if you look at our own total basket of investments, savings data from RBI for example, 80 percent of money is in fixed income instruments, typically in fixed deposits or other things. So, one of the advantages of buying a balanced fund is also buying some debt in your mutual fund. Investors for various reasons, especially retail investors, have not really participated in bond funds. So, a balanced fund is a way to get some good bonds in your portfolio without having to then buy two funds- a debt fund and an equity fund and therefore gets a little bit of asset allocation going.
Doesthat rationale go on right now?
Sivakumar: It does. At any point of time. You will not 100 percent of your portfolio to be in equity. So, tothat extent, to create a good mix you can use a balanced portfolio. But in thelong run it makes sense to have equity in your portfolio. But how you build it, whether you use balanced and equitiestogether or bond funds and equities together, I think the choice can be yours.
Jinesh: I think it also depends on the risk appetite of investors. If it is the first time, he would like to come in balanced (funds) and then test his waters and go into an aggressive equity portfolio.
Thatis typical behaviour. But that may not be the right behaviour. People could optto, even though they are first timers, to go for pure equity?
Sivakumar: You can do pure equity if you have substantialamount of fixed income investments outside the mutual fund industry.
Would youadvise different kinds of fund allocation for different ageprofiles?
Sivakumar: The short answer to this is that - people saythat you should do 100 minus your age and that is what your equity allocationshould be. If you're 20 years old, 80 percent should be in equity. If you're60 years old then 40 percent should be your equity. That's the rule of thumbfor making a decision on how much equity to buy. And that's a reasonable wayof building your portfolio.
The Axis Focussed-25 Fund (4-year return - 17 percent) has outperformed the benchmark but lags the category average. Is that the right way to look at it?
Sivakumar: A benchmark is a way to figure out whether the fund manager is doing a better job than the market. Benchmark outperformance is what the fund manager is aiming for. In the peer set or in the wider mutual fund group, there are some funds which take different calls, that is why you have a range of returns. So the question really is that when you look at category average of large cap equity funds versus that of mid-cap equity funds or multi-cap funds, it is difficult to figure out which category are you benchmarking on. The fund manager is focused only on one thing and that is to deliver returns over and above the market benchmark. So, it is useful to look at the fund relative to its peer group but you need to be very careful on which peer group you are selecting.
I was looking at the Axis Equity Saver Fund. I believe that the returns are northwards of 9-9.5 percent. Who should approach this fund, why should he approach this fund. What are the kinds of returns one can expect?
Sivakumar: It has about 45 percent of equity and there is a little bit of arbitrary component and a debt component. We get a mix of different sources of returns. The fund is under two-year old, so I can't give you a long-term track record but in that period, I think we havemanaged to deliver something pretty good. What we likeabout this fund is that, it is genuinely balanced. So, there are a lot of fundsin this balanced space which are between 65 to 80 percent which are equity.Therefore, they are not really reflective of any balance, they are primarilyequity portfolios. So, what we have chosen to do is to actually have somethingwhich is close to 50-50, 45-55. So, I think the idea is to provide riskadjacent returns. That is to say not pure equity returns.
I was looking at your overall sectoral thematic allocations. Financials at 33-34 percent, consumer discretionary at 23 percent and then industrials and materials and so forth. That's a lot of weightage to financials. And the good ones are not cheap. Be it private banks or be it NBFCs. It's only the PSUs which are lagging. You still allocate 34 percent? And therefore, are there a lot of PSU names here?
Jinesh: We don't have PSUs..
But you still allocate 34 percent?
Jinesh: So, it includes NBFCs, housing finance companies andprivate banks - most of it is private banks. When I started my career, my top holding was trading at 4 times price-to-book and now also itis trading at 3.5-4 times price-to-book.
Our philosophy is to identify promoters and companies who have steadiness in their business model and it don't get whipsawed when the market or the economy is on a downward slope. Obviously, we will have some shave-off in price movements but they will bounce back very smartly. In 2009, you saw a correction of 30-40 percent but the so-called PSUs corrected almost 60-70 percent. From there, the market share that these private banks have and the technological edge which they have over PSUs is helping them grow much faster than the PSUs. Plus the age factor comes in. The kind of investments they have done in technology to go to the next level of customer acquisition is certainly not there in PSUs. So, if you take the futuristic view of where they are heading, how the business model is shaping they might be much ahead of the curve.
No,I am just asking you, are you okay with owning such expensive financial names?
Jinesh: So, India is an inter-bank country. You have enoughopportunity to grow for the next 20 years, you need to find a company whichis doing the right things at the ground level - customeracquisition, taking on small businesses and giving loans to smaller entities and tryingto be more granular than going for higher corporate loan funding inwhich we are seeing asset quality issues prop up.
I think the business model is such that it can be sustain for the next 20 years and they are ahead of the curve in terms of technology. So, if you ask me whether I would buy more, the answer is yes. Finance is a space which is more secular in nature, more steady, unless and until something goes haywire on the economy and things just collapse, then there will be repercussions, these companies have been able to manage their asset quality pretty well compared to others.
One, NBFCs are trading at expensive valuations and two, by not having PSU banks you seem to be saying despite themeasures what the government is trying to take, you will buy into PSUs only ifthey yield results. You don't want to preempt them.
Sivakumar: If you look at the last 10 years of data, state-owned banks vs private banks you will see two cycles of steady slowdown in growth. Onewas in 2008-2010 during the global financial crisis, then the things recovered. And then again in the last couple of years, you have seen a slowdown. If yousee in 2008-2009, everybody lost business, the entire growth system camedown. Everybody took an equal hit but private sector (banks) did a little better.
In this cycle, the entire slowdown is on account of the nationalised banks and private sector banks have continued to grow. Depending on who you talk to there is a huge slowdown in India or everything is doing well. Who would you rather be with? So, there is this entire segment of business which is still growing and what looked expensive 15 years ago is still trading at the same valuation today. The book value has grown, compounded at the rate of 20-25 percent. So, it's the question of the longer-term compounding stories. If you are able to stay with valuations and if it comes again, valuations will always catch up if their underlying business growth is strong.
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