‘G-secs offer the best value today’

You would seldom find a passionate equity manager recommending debt products. Sankaran Naren, Chief Investment Officer of ICICI Prudential Mutual Fund, was willing to stick his neck out and do just that in a recent interaction. He also spoke about how the fund house is refitting its equity portfolios to deal with upcoming elections.

Have value buying opportunities in the market shrunk after this rally?

In the large-cap space, yes, value opportunities are shrinking. But after the November-December rally, mid- and small-cap stocks have not moved much and still offer buying opportunities for value investors. Besides technology, pharma and FMCG, there are a number of sectors that trade at good valuations. These offer value picks too.

But to me, the perfect value asset now is fixed income. With a value asset, you usually see fear, lack of interest, bad past returns and low valuations. Government securities (G-Secs) today meet all four criteria. Today, past returns on gilt funds are poor and there is a lack of interest in them.

We all know that stock markets are cheap at a certain PE. But how do you assess valuations of G-Secs? One approach would be to subtract any of the following from the G-sec yield — WPI inflation, CPI inflation, gold price returns and real estate returns. If G-Secs still offer a positive yield after this, you should go for them. Today, at 9 per cent, (the 10-year) G-Sec beats all these variables, except CPI. The CPI is falling too. In fact, if you apply this metric to gilts, you can explain the massive rally from 1998 to 2003 in gilt prices. Today, you can play this opportunity through gilt funds or tax-free bonds. The truth is that investors in India have this misconception that all asset classes can easily give a 15 per cent annual return. But it is actually quite difficult to make that return.

We recently did a study which showed most stocks didn’t deliver a 15 per cent annual return in the last 20 years. So how long is ‘long term’ in India?

That’s why we have done a rethink on this concept. We have said it is better to have schemes where we can sell stocks as the market goes up, and buy them as it comes down. Two of our funds follow this strategy — ICICI Pru Dynamic Fund and ICICI Pru Balanced Advantage Fund.

We have found that this ‘buy and hold for long term’ approach has its own problems. We want the investor experience with our funds to be good; only then can we keep them engaged.

Their experience has been very sub-optimal since 2007. Our view is that our funds should at least be able to generate 10 per cent for the customer, as he can get a 9 per cent return even with FDs.

ICICI Pru Volatility Advantage Fund has now been renamed Balanced Advantage Fund. What is its mandate?

The mandate is to be more defensive than a pure balanced fund. It uses derivatives to do this. We think that interest rates today are high; so balanced funds are extremely attractive if you are able to buy and hold.

This fund has to have 65 per cent invested in equity with some portion in derivatives. We have introduced a monthly dividend option on this fund, which pays out gains as dividends.

Cyclical stocks and infrastructure stocks have rallied on hopes of a pro-reforms government.

Yes, this whole rally has been based on hopes about a pro-growth government after elections. If we don’t get it, there are risks.

How are you positioning your portfolios ahead of the elections?

We don’t believe in the consumption cycle. We have been invested in the policy-heavy sectors. We still think consumption has to slow down. It has already happened on the urban side but not in the rural segment. We were early to shift to a cyclicals-oriented portfolio, way back in August last year. In our value portfolio, we have 30 per cent in public sector companies, which is a good number. We have recently started to sell some of the globally-oriented companies in the large-cap space.

The problem is that the first half of this year is all about getting the election outcome right. That is not the core competence of a fund manager.

Are you still betting on global and export-oriented stocks? In the market, IT and other export-themed stocks have rallied quite a bit.

No. Since September, we have not talked about international investing. The latest trade deficit number is just $8 billion. That has improved the outlook for the rupee. Therefore, we are no longer betting on companies that play on this theme.

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