Long-term wealth generation a challenge: Ajit Menon, CEO, PGIM India Mutual Fund
January 16, 2021 3:15 AM
Any negative news whether it is related to the impact on the economy of the other strains of Covid-19, difficulty in rollout of the vaccines or any inflationary impact that could disrupt markets can also happen.
Ajit Menon, chief executive officer, PGIM India Mutual Fund
By Urvashi Valecha
If investors don’t beat short-term volatility, long-term wealth generation will be a challenge, says Ajit Menon, chief executive officer, PGIM India Mutual Fund which recently launched their PGIM India Balanced Advantage Fund. In an interview with Urvashi Valecha, he explains what kind of returns should investors expect from equities.Edited excerpts:
The perception is that balanced advantage funds are more to beat volatility than to create long-term wealth. What is your view on the same? We are currently launching our Balanced Advantage Fund. Trends so far have been that retail investors tend to invest when markets are growing and expensive and redeem or avoid markets when they are correcting and cheaper. Investors also unfortunately don’t seem to have very long investment time frames in India. One way to look at it is that if one doesn’t beat short term volatility then long term wealth creation will be a challenge anyway. Compounding is what creates wealth and one has to ensure that they are protecting their downsides much better and participating better in the upsides. That’s what products like balanced advantage do. It helps one beat inflation over medium to long term, it is not about maximising returns. If one does that then the wealth creation journey will be much smoother for investors rather than having great euphoria and disappointments in between.
Equities are trading at all-time highs, what kind of returns should investors be expecting at this juncture? Our house view is cautiously optimistic because, in this kind of situation, the valuations in many cases are stretched beyond fundamentals. Any negative news whether it is related to the impact on the economy of the other strains of Covid-19, difficulty in rollout of the vaccines or any inflationary impact that could disrupt markets can also happen. Our approach has been to ask investors to expect returns from their equity investments which are in line with the nominal growth rate of the economy plus maybe 1% to 2%. So, that is what one should expect from their investments not just today but at all times. I believe we are looking at a low double digits range in which one should expect returns from the good equity portfolios over the next five years.
Equity schemes have seen outflows for 6 straight months, what is the thinking of retail investors given that fresh money has also come into equity MFs in December? We are one of those fund houses lucky enough to have positive net equity flows month on month for the last six months. It is difficult for me to say when the change will happen and when overall industry equity flows will become positive in the year. Once, the entire vaccination drive becomes clear in terms of logistics and progress made across countries including India, more confidence will come through in the markets and investors will feel that it is a good time to continue to allocate to equity. Probably if there is a meaningful correction in the markets, due to some of the risks mentioned earlier, then the money that has been sitting on the side lines or in fixed income will move and automatically one will see the positive net flows but that’s difficult to say when it will happen.
It is becoming difficult to generate alpha. What is your view on large cap funds and their performance? I don’t hold the view that it has become difficult to generate alpha even though evidence may suggest that largecap funds have found it difficult to beat the benchmarks near to medium term. That is because of the nature of the markets we have had now between 2018 to 2019. It was a very narrow range of stocks that were doing well. As a fund manager if you have not had a meaningful exposure to those stocks of the Nifty which have been moving up then you will underperform the benchmark. When markets are really matured there is very little information arbitrage available so fund managers find it very difficult to generate alpha over an index. As far as the Indian markets are concerned, that is still some time away, this is a very temporary phenomena where large caps are not beating benchmarks, maybe another ten years from now as our markets mature yes, there will be a challenge.
Are ETFs the future? There is a long way to go, according to me. We think that in markets like India which is an EM, active management can generate better outcomes for investors over the medium term and long term (10 years). For us at PGIM, we want to make sure that we are conscious of the macros and we are doing bottom-up stock picking. Active management has very long legs as far as India goes and ETFs and passive investment will continue to be relevant for a certain set of customers and investment objectives.
What is your outlook for the markets for 2021? We are cautiously optimistic because of the way these numbers are calculated whether they be GDP or earnings of the company. Given the low base of last year, one will see a good growth rate number as far as FY 21 is concerned. There is definitely earnings visibility and consensus around the fact that earnings are improving and they continue to surprise on the upside. In the near term, vaccination drives are yet to be rolled out significantly and new Covid-19 strains continue to be a big risk on the horizon. The biggest risk of all is with the high liquidity what will happen to inflation. If it was to rise, that would mean a rise in interest rates which would affect equity valuations, it will also hurt bond portfolios.