‘Focus on longer time horizon to hedge against market volatility’

Kalpen Parekh, President at DSP BlackRock Investment Managers, takes questions on flows, fund size and consolidation in the industry. Excerpts:

The MF industry is seeing a flood of inflows lately, but the worry is if too much money is coming in at very high valuation levels for the market?

An asset class turns popular when either the past returns are very high or the future outlook looks encouraging. Both are happening right now, along with other options for investing such as gold, real estate and FDs turning less attractive. The markets look expensive because the Price (P) has moved up in the hope of the Earnings (E) moving up in the next few years.

It has been a slow cycle of recovery and hence, it is important that investors invest with caution, longer time horizon, and moderate return expectations. A large part of flows are via SIPs; hence, current valuations or market levels don’t matter, especially if these SIPs last five, 10 or 20 years. While investors do panic on corrections, it has been seen that in this cycle investors have bought into corrections.

At some point, if the fund sizes are too large to manage, should AMCs not be warning off investors?

DSP BlackRock, for instance, stopped taking lumpsum money in DSP BlackRock Microcap Fund two years ago. Since February this year, we have also stopped new SIPs in this fund. We are confident about our companies from a long-term standpoint in the Microcap Fund. Yet, we wanted to caution investors not to extrapolate past high returns as the norm. We also guided investors who wanted to invest in Microcap Fund to add either a large cap fund or balanced fund to their portfolio recognising challenges of liquidity and higher volatility.

This has had some business impact and was a difficult decision for us. This fund accounted for over 60 per cent of our SIP inflows. We have seen few other fund houses also limiting sales in select products, basis liquidity constraints. This is a sign of maturity and intent towards ensuring a good investor experience.

But you should also recognise that our market respects size first. Whether it is investors, advisors, media, rating companies or regulators, they all respect size. We see many investors say that they feel safe investing in the top five funds. This needs more education that size has no relevance to safety or better performance. So, we have to strike the right balance between gathering size at the right time in the right product to ensure that the investor experience is always kept in mind. Warning investors too early can also go wrong as markets can remain expensive for longer than we think!.

So, a better approach is to insist on longer time horizons which would offset all temporary volatility and also use staggered investing or hybrid funds where diversification can cushion against high valuations.

Can funds use cash calls or expand the number of holdings to handle burgeoning size?

Cash calls are a good idea in theory. But in practice, they require us to time the market well which has proved to be very difficult. Instead, we think talking to investors about asset allocation and encouraging them to invest in lower volatility products is a good thing to do.

What is your view on SEBI’s move to consolidate and reduce the number of schemes in the fund industry?

Less is always more. So, it’s a good decision, though we still will be left with many schemes after the exercise. I see more value in the uniform definition of fund categories across equity and debt schemes. That will make comparison of risks and returns of funds more logical. Lastly, I hope this leads to faster clearances of funds, especially if there are new ideas that complement the existing ones.

Many AMCs today clearly align themselves to either a growth or value style of investing, but DSP BlackRock’s positioning isn’t as clear. Your views.

We don’t like to slot ourselves as growth or value investors. As Warren Buffett said, both growth and value are joined at the hip and differentiating between the two would be myopic. We look for growing companies available at a reasonable price. We also have a preference for companies whose incremental return on capital shows a rising trend.

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