Mutual funds are going through a tough phase, similar to the 2008 period, says A Balasubramanian, Managing Director and Chief Executive Officer, Aditya Birla Sun Life AMC. But investors who stayed with their investments through 2009 until 2014 reaped large gains. Equity investment should not be made for the short term — investors need to be patient and extend their investment horizons, he says. Attention to asset allocation is also very important in such periods. Excerpts from an interview:

Most mutual funds failed to beat their benchmarks in 2018 and the story is the same in 2019. What do you have to say about the ability of Indian MFs to generate alpha?

The scenario now is similar to that in 2008 when the underperformance to the indices was high; the following years were also bad. But as the economy began improving in 2013, the alpha-generation capability of funds improved. Over a period of 10 years, alpha over the Nifty 50 has been 3-4 per cent in large-caps.

The alpha for mid- and small-caps is 7-15 per cent over the Nifty 50, depending on the period we consider. But the past 2-3 years have been challenging because the market has been skewed towards the Nifty 50, which is a function of ₹95,000 crore of inflow into stocks from the EPFO (Employees’ Provident Fund Organisation). This money chases only large-cap stocks.

As the broader market gets better and interest rates come down — which will bring down the cost of borrowing for companies — there can be some booster to mid-sized borrowers. The move to link repo rates to borrowing costs will further improve transmission of rate cuts.

As economic recovery improves, the market breadth will improve, improving fund performance. With the continuous fall in mid- and small-cap funds over the past two years, the leeway of large-cap funds to generate alpha through exposure to smaller stocks has reduced.

Also, when the re-categorisation of funds was done, it upset the fund allocation to mid- and small-cap stocks.

Another factor that affected alpha-generation capacity of funds was the skewing of index weights towards Reliance Industry, TCS, etc. Most fund managers were underweight on RIL, whereas the performance of the stock has been spectacular in the past two years. Valuation-wise, TCS is slightly costlier than Infosys, so money managers have taken larger exposure to Infosys. But TCS has performed better and also has a higher weight in the index. Since not all money managers hug the index, they have lagged.

Money managers who invested in mid-caps have managed to outperform. While mid-cap indices fell 22 per cent, money managers delivered negative 15 per cent; small-cap indices fell 26-27 per cent, while the money managers delivered negative 18 per cent.

Earlier, only one-year SIPs were underperforming, but now, even three- and five-year SIPs are underperforming the market. What is your advice to investors in this scenario?

Investors should not get worried just because the SIPs are giving negative returns. I am a firm believer that three years of bull market is followed by two years of market declines in India. Based on this, it is best to hold on to the SIPs. But investors have to extend the time period for the SIPs.

I use a phrase — to realise my hope, I have to give a long rope. To attain your goals, it is best to continue the SIPs in equity for the long term; in equity, 5-7 years is long term. Second, investors must pay attention to asset allocation and not park all the money in just equity.

You must put money in four different asset classes for different solution buckets — for savings, income, wealth creation and taxation. Equity funds are for long-term goals, fixed income for balancing your portfolio, tax-saving funds are alpha generators with tax benefits, and liquid funds take care of the liquidity requirements of the portfolio. If money is invested across these categories, your portfolio will look good at any point as not all categories underperform at the same time.

What do you have to say about the corporate governance problems cropping up of late?

Governance is of two kinds. One is the way the balance sheet is constructed. Some companies take a high growth path, and each level of growth come with a certain level of risk. How well companies manage the risk is one aspect.

Promoters getting into many businesses and expanding aggressively have resulted in problems for companies. Most of the expansion in our country happens through borrowing and not through equity investing unlike developed countries.

When some companies expand aggressively, they fall short of achieving the desired outcome. But falsification of numbers, like the Satyam case, is not too common. Out of 5,000 companies, one or two could be found doing this. In case of CG Power, it was a guarantee given by the company that was off the books. So how do you catch it when it is not reflected in the financials? What money managers can do is avoid companies with a history of credit defaults and creation of assets with excessive leverage that do not generate revenue.

Reviewing ABSL AMC’s equity portfolio against the light of the recent events, you too have exposure to CG Power…

We held Crompton Greaves originally; the company got split in to two, and one arm — CG Power — came into our equity portfolio. Our equity fund management team is reviewing it continuously; they have had multiple rounds of discussions with the management. The underlying business is strong; the financials were robust. There was no way we could have detected it.

What’s your outlook on the economy and the market in the light of the stimulus package announced by the Finance Minister recently?

This will definitely boost the sentiment. When we met the Finance Minister two weeks ago, she listened carefully and took down notes, and we felt that something is likely to be done. The FM has started taking action and there is more to follow. The statement that she will take a series of measures is heartening. While major measures may be difficult to take, removing the smaller pain points will help. Bank recapitalisation and making funds available for NBFCs will help revive credit growth. Coming to the revival of demand, measures such as the scrappage scheme, government purchase of vehicles and higher depreciation are some good steps. We will still be driven by global market volatility and foreign fund flows, but the FM willing to listen to market participants will be taken positively by foreign investors as well and can lead to reversal of flows in the future.

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