Hybrid strategies help deliver better risk-adjusted returns as they have cash and can identify undervalued assets to invest in, says S Naren, ED and CIO of ICICI Prudential AMC. In an interview to Siddhant Mishra, he says bulk of the money coming through the SIP route shows investors have been extremely disciplined in how they use mutual funds to create long-term wealth. Excerpts:
With indices hitting an all-time high, how should be the investor behaviour at this point?
Last year, when the markets were lower, the mutual fund (MF) industry received huge inflows. Today, when the markets are touching all-time high, inflows have moderated. Bulk of the money is coming through the SIP route — the optimal way to invest for the long term. It shows investors have been extremely disciplined in the way they use MFs to create long-term wealth. At the same time, the industry has done a good job in popularising SIPs, systematic transfer plans and hybrid categories like the balanced advantage and multi asset.
Despite many of the large cap funds underperforming the benchmark, what has made investors stick to MFs?
There is a role for active management in investing, especially in India. Five years back, the regulator introduced scheme categorisation, which defined the mandate for each category, thereby bringing all offerings in a category on a level-playing field. As long as the market movement is not narrow, there will always be scope for large cap investing through active strategies. Since the scheme categorisation, there have been funds that have outperformed the benchmark.
What has made you a strong proponent of the hybrid category?
The best way to invest for the long term is via hybrid. During March 2020, when the markets tanked, we had the opportunity to deploy sizeable amount of money into equities across most hybrid schemes. Similarly, in May 2020, when credit was attractive, we got the chance to invest in credit. In a hybrid product, we are in a position to invest in attractive products at attractive times.
Be it Warren Buffett or Howard Marks, all investment gurus say that if you invest in undervalued asset classes, you actually make money. That is something hybrid funds are able to do because they always have cash. They are able to identify an undervalued asset class when it is cheap. Hence, hybrid strategies can deliver better risk-adjusted returns. At this point, investors can consider categories like multi-asset, balanced advantage, equity and debt or equity saving, all of which are very interesting categories both in a booming or a correcting market.
Data shows that passive funds sector tracking the Nifty have crossed Rs 4 trillion in AUM. Are investors preferring passive strategies?
The gush of inflows seen in the Nifty index fund is primarily thanks to the efforts of the government by making the Employee Provident Fund Organisation (EPFO) invest in passive strategies. So, to understand the actual inflows from investors towards passive strategy, one needs to look at the amount, net of EPFO investments.
What are the factors that could spur the journey to becoming a Rs 100-trillion industry? What are the likely challenges?
One major benefit over the last decade is that we have not seen any major correction. At the same time, Europe, Japan, China, and the US saw significant corrections. The absence of a big fall and the responsibility to manage other people’s money is a fantastic combination. This is one of the reasons we strongly believe in asset allocation, systematic investing, systematic transfer plans and defensive investing. As long as investors have a good investment experience, the industry will grow. On the other hand, if investors lose money, the industry will see a slowdown.
With fixed deposit rates getting attractive, but indexation benefit taken away, is there still a case for fixed income instruments?
We think debt is an interesting asset class and can be best played through hybrid categories like equity savings, equity and debt, multi asset and balanced advantage.
Debt MFs have very good governance, compliance and liquidity architecture. This combination will ensure investors continue to invest. Investors will continue to invest in debt for the short term, particularly liquid, liquid plans and other debt schemes for the short term. We recommend investors to invest in hybrid categories like equity savings, balanced advantage and multi-asset categories for the long term.
ESG as a concept has not taken off in India. Even in the US, it is a divided house. How do you view it?
Without good governance, one can never make money in equities. Similarly, without good social norms, a country will not prosper. Over the coming decades, global warming and related issues will become prominent. Historically, companies that follow good ESG norms tend to benefit shareholders the most.
Whenever we have invested in companies with good corporate governance, we have always benefited. For example, in 2007, people who invested in companies with bad governance saw their holding value come down to zero over time. Similarly, stocks of NBFCs with poor governance did not do well. In our opinion, ESG is a very good indicator of a company looking after the interests of minority shareholders.
What is your take on present valuations?
India has one of the best structural stories in the world. It has good demographics, good long-term growth and corporate earnings are improving. There are no NPA issues thanks to a robust banking system.
There is no other country with such a robust story for the next decade. Hence, Indian valuations are high, relative to the world. In equity markets, good news and high valuations come together, while bad news and low valuations come together. Today, we have good news and high valuations.
Given the encouraging Q4 earnings season, which sectors are you bullish on?
We have been bullish on telecom, banking, pharma, auto (done very well of late), power, capital goods-related sectors and capex-oriented sectors.
Besides the MF industry, FPIs have also been increasing their bets on auto, auto companies and capital goods. Why so?
The time between 2010 and 2020 was that of a lost decade for capex-related industries such as capital goods. Similarly, for the two-wheeler industry, there was not much growth seen for the past six years. Some auto companies suffered owing to semiconductor shortages. Typically, after a challenging phase/lost decade, such sectors tend to have a good period.
How do you see the interest rate scenario going ahead?
Interest rates in India are unlikely to head higher. Also, they may not come down sharply as US interest rates continue rising. We believe rates in India will not come down till the US interest rate cools off. The recent revival in rains is a healthy development; we do not have to worry about monsoon failure.
FPIs have seen some revival of late. With talks of rate hikes in the US, there is a fear of FPIs pulling out again. How long do you expect the domestic investors to lend support?
There will be phases where FPIs have bought and sold aggressively. In the recent past, it is only the FPIs who have been buying in a very big way i.e. Rs 80,000 crore in two months. They are looking at India as a long-term opportunity. They will periodically sell and we will use that opportunity to buy. What we do worry about is that Indian valuations are not cheap.
How does India fare vis-à-vis other emerging markets? What makes India attractive compared to its EM peers?
High growth, a good geopolitical situation, robust corporates, no banking crisis, stable macro-economic situation, reasonable earnings and good earnings growth are some of the reasons.
In the next a few months, India will enter the election mode. Such a phase usually sees the government seeking to spend more to spur consumption. How do you see this?
In equity markets, when common policies favour a certain sector, we look for opportunities in that sector. While at it, we always look from a long term, not just short term.
With more MFs being launched, has this industry has become quite a crowded space?
Larger the number of players, better it is for the industry as healthy competition will aid the growth of the industry.