V Srivatsa, EVP at UTI Asset Management Company, has been actively involved in managing the fund house’s offshore assets and is now set to manage some of UTI’s domestic equity assets as well. BusinessLine caught up with him at Chennai for some insights on the markets and these schemes.

Having managed money for foreign portfolio investors and Indian investors, what differences do you perceive between the two sets of investors?

I find global investors more focussed on how we manage the returns rather than the the returns per se. Our market looks primarily at the returns and not at the strategy.

Sophisticated investors like to know the investment philosophy that you adhere to and whether you have stuck to it consistently. Once they get in, they are also more patient.

They are willing to endure a couple of years of underperformance if you are able to show them that you followed a certain strategy consistently. In India, investors want returns faster. The pressure is therefore, high.

If you deviate from the mandate, that is when foreign investors may withdraw the money. While managing offshore money, restrictions on what stocks FIIs may buy is also a constraint. In some of the stocks like private banks, you may not get the required quantities or you may have to pay a sizeable premium on the purchase.

Foreign portfolio flows into India have been robust because of low interest rates globally and India’s high growth potential. What could be the risks to these flows?

Global events, which have not been factored in by the markets, are the key risks. They could be a hard-landing of Chinese economy, sharp rate hikes by the US Fed or the collapse of any global systemically important financial institution.

The consensus is today very clear on the direction of the risk-on money, but if there is a risk-off rally, some money would be taken off the table, especially in a relatively outperforming market like India.

You seem to prefer value investing in your offshore funds. But value investing hasn’t been working well in India. Growth stocks have outperformed. Can this cycle turn?

That is true. In the Indian market, there has been a big clamour for growth. This has led to historical PE kind of measures not working lately.

If you take high growth stocks such as Asian Paints, the PE has gone from about 25 times six years ago to over 40 times in the last few years. While investing in growth stocks has paid off, investing in cyclicals, etc has consistently not paid off in recent years. Typically, if investors have made money on one set of stocks for five or 10 years, they are reluctant to let go of them. That is wrong, but that is how it is.

I think growth stocks and defensives in India are an over-crowded trade. The problem is that, any disappointment in the defensive space is not getting punished.

Any small outperformance gets rewarded excessively. But there is a risk to over-paying for growth. But you need a very strong show by domestic cyclicals or a poor show from the defensives to overcome this bias.

I like to give the example of Hindustan Unilever here. HUL used to trade at 45-50 times in 2001 and touched a peak of 330. It then took 11 years for investors who entered then to break even on that stock.

But it is true that defensive stocks will not crack big-time or subject you to huge losses.

If you look at some of the fancied infrastructure names of 2007-08, many of those stocks are down 70-80 per cent from those levels and will never recover. But that may not happen with these quality names.

So, what strategy would you favour for your portfolios?

I focus a lot on valuations. You will rarely find a high PE stock in my portfolio, outside of some private banks. The endeavour is to find the right GARP (growth at a reasonable price).

What domestic sectors present opportunities for value investors? Would you buy PSU banks?

Private sector, corporate banks present a very good proposition for value investors at the moment, as we believe that credit costs would come down gradually.

The stress on credit quality would wane over a period of time. Besides, these banks have comfortable capital and strong retail operations to manage this stress.

I would avoid public sector banks right now, as I believe that capital-raising would be a big issue in the medium term.

They have not been successful in building a strong retail franchise in spite of very strong legacy and incumbent advantage. On a structural basis, I see lower return on equity for them over a period of time.

UTI’s ULIP 71 is the oldest unit-linked insurance plan in India and it came up much before insurers launched ULIPs. Can you throw more light on how its equity and debt portions are managed? What are the mortality charges levied by this fund?

UTI ULIP was launched in 1971 and has assets of ₹3,454 crore as of end-August 2016 with more than 2.76 lakh folios under it.

Apart from wealth creation through equities, the fund offers life coverage of up to ₹ 15 lakh with lower charges, no medical examination for the coverage, convenience in claim settlement. It enjoys tax benefits under Section 80 C of the IT Act.

The fund’s mandate allows it to invest up to 40 per cent in equity investments and the remaining in debt. Owing to its long-term nature, emphasis is on adjusting this mix depending on the prevailing market conditions.

The equity portfolio is largely driven by three tenets of quality, valuation and growth. The debt portfolio is managed based on interest rate outlook, credit quality, liquidity factors and broad debt market environment.

As regards the mortality charges, we have a tie up with LIC for life coverage. Charges depend upon the age at entry into the scheme. The fund has different charges for 10-year and 15-year plans based on payment periods. For a 25-year-old person, the annual premium paid is ₹1.05 per thousand of life coverage.

On the whole, the fund is quite competitive compared to other ULIPs on charges, transparency, liquidity and wealth creation opportunity.

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