Mutual Funds

Opportunities across sectors, market-caps, says Vetri Subramaniam of UTI AMC

Parvatha Vardhini C | Updated on April 05, 2020

For those willing to invest for long term, this is your time to increase allocations to equity

“We are in an environment where stock-picking is a bigger contributor to alpha than sector selection. So, which sector is more affected or less affected in the next two quarters matters less,” says Vetri Subramaniam, Group President & Head of Equity at UTI Asset Management Company. Excerpts from a telephonic interview :

Where are the investment opportunities emerging currently? Is this a good time to buy mid- and small-cap stocks?

While FY21 may be a washout in terms of earnings, you don’t pay 15, 20 or 30 times earnings for a stock based on next year’s prospects alone. You rather pay based on the confidence you have in the company’s earnings over the next 5-30 years. The only way to look at equities is where you are in the context of the valuation cycle. When it comes to this, all the measures tell us that today we are in very attractive territory. Those who are willing to invest for the long term, this will be your time to increase allocations to equity. You need to increase it in the context of your overall asset allocation.

Even when you are fully invested as per your asset allocation plan three months ago, your equity value has fallen by 30 per cent.

So, you can rebalance. Are we at the lowest point ever in terms of valuation? The answer is no. Valuation has been lower in 2008 and 2003. But there is always mark-to-market risk.

If you are a long-term investor, you should be able to tolerate mark-to-market risk because these valuations are attractive for long-term investors.

The large-cap segment valuation has any ways corrected to below the long-term average.

On price-to-book value basis, they have dropped less than one standard deviation below the average, which means they are actually cheap. If you look at mid-caps, valuation has gone below large-caps. So, pretty much across the board now, in every sector and in every market-cap segment, there are stocks which are attractive. That does not mean though that every stock is attractive.

Which sectors are likely to do well in the near to medium term?

When we buy these companies from a long-term perspective, who is less or more affected in these two, or next two, quarters matters less. As fund managers, for us to create alpha over the next few years, getting the stock selection right is important.

Are we owning companies that are likely to emerge from this challenge reasonably unscathed, compete better and grow faster when the situation improves? We are in an environment where stock-picking is a bigger contributor to alpha than sector selection. Saying that the current situation is good for telecom and bad for aviation is simple, first-level impacts. This is not the most appropriate way to understand the impact.

Keep in mind when the sector gets impacted, it could lead to a shakeout on the supply side.

Therefore, even if a sector faces challenges, you could look at a situation where going ahead, because the number of participants competing for market share comes down, individual companies actually come out stronger. So, company selection is the key.

Do you see a difference in the response of retail investors to the market correction now vis-à-vis in 2008?

In the last three or four years, we have seen a massive increase in the number of investors coming through the SIP route. The initial findings that we have tell us that investors have stayed the course.

We are doing everything we can to ensure that investors stay the course because the whole purpose of doing SIP is rupee-cost averaging.

So far, we would say that the signs have been quite encouraging. But we will have to see how long it lasts. There could be some cases where people could pull out if they need money for emergencies. If they face a challenge in their businesses, their investments become the source of liquidity. I am not saying that there is no negative impact or no redemption though.

Much is currently being said about why one should continue SIPs in equity funds for long term. What is the ideal portfolio return that one can expect when investing for long term?

We need to go back to the basic question as to why we are investing. We are investing to get protection against inflation.

The level of inflation is continuously moving down. So, the level of mark-up that the asset class has over inflation will also automatically come down.

In the past, equity returns have been at 15 per cent, but consumer price inflation was at 9-10 per cent .

Now that the RBI has committed to 4 per cent inflation, plus or minus 2 per cent, then at 4 per cent inflation, you build in something for the risk-free rate of return, let’s say 6 per cent, which is the current yield for 10-year bonds.

Then, if you add equity risk premium on top of that, say 600 basis points, there is an outcome of about 12 per cent return for equity. The 12 per cent number is not unfair in today’s environment. However, don’t be surprised if 10 years later, your actual outcome is 8 per cent and inflation is 2 per cent. As long as real returns are healthy, you would not have lost out.

What would you call long term?

We keep doing this analysis as to what is the period over which one needs to remain invested to earn a reasonably healthy rate of return. Those numbers are reasonably consistent. If you stay invested for a one-year period, the likelihood of getting a negative return is as high as 20 per cent. But once you move to a five-year period, the likelihood of getting a negative return drops to zero. And, 85 per cent of the time, your return is more than 8 per cent.

As you take a 10-year period, the probability of a negative return is zero and the probability of a getting more than 8 per cent goes to 96 per cent. Though these numbers are four or five months old, when you see rolling returns, they will not change too much. So, it is clear that a 5-10 year horizon pays off.

It goes back to how one approaches investing. If you are investing to prepare for the years in which your fixed sources of income reduce, or for where you don’t receive a fixed income anymore, then you have 30 years or more.

Published on April 05, 2020

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