Markets have been quite volatile this year. But investors who have been reacting to every up or down have often found themselves on the losing side. Kalpen Parekh, MD & CEO, DSP Mutual Fund, talks to BusinessLine on the approach investors should take when there is an inter-play of factors beyond one’s control, the AMC’s portfolio positioning in the current environment, the activity around passive products, and much more.

Excerpts from the interview:

From February to now, it’s been a wild swing for the markets. What’s the caution you would advise? 

Worrying about markets and acting on every near-term event is not healthy while building a durable portfolio. We assign weights to worries that are material, which can last longer, can impact earnings or the business models of companies, and if not so, then we don’t worry much about it.

There are events that are in the opposite directions and happen in very fast cycles – within 15 days or so.

So how do we respond to these opposite events, which happen frequently? We have created a lot of style diversity in our funds. There are some pools of assets that are clearly defined around quality and growth as strategy. There’s another pool defined around quality and value. The third pool is fungible. It will navigate depending on market cycle. But we are not very reactive to, you know, shorter-tenure events.

But having said that, the present geopolitical events can have far-reaching implications. In the near term, the worry for us is energy and commodity prices remaining high. Over the last 5–7 years, our macro variables have remained strong, but these events can be the turning point in our macros, whether in terms of deficits, higher government borrowings, inflation or currency. A reasonable part of our portfolios is partly consumer of commodity, and it does impact margins and profitability of some of them.

Profile
Kalpen, who holds a Master’s Degree in Management Studies in Finance and a Bachelor’s Degree in Chemical Engineering, has 23 years of experience. Prior to joining DSP, he was responsible for growing businesses at IDFC MF, Birla Sun Life AMC, and ICICI Prudential AMC

Are we at a point where markets may correct due to weak earnings?

The market is already pricing this in (earnings weakness). But the real data will come over the course of the next few months. The benefit of lower costs and cost savings, and hence an improvement in margins, is behind us. But good companies have improved their execution and leadership companies in each sector have dramatically improved their financials. Whether metals, commodities or tech companies, all saw margin expansion till last year. Starting from last quarter (Q3 FY22) with higher energy prices and input cost, cement, consumer, engineering and auto companies started facing challenges on the margin front. There will be many sectors where the advantage of tightening of cost structures and improvement in profitability will vanish, and they must compete in the new environment.

Factoring in for this phase of high input cost and inflationary pressures, would you be churning your portfolio?

We like companies with good ROEs, reasonably good free cash flows, low or no debt. In that construct, we have been reasonably overweight on banks, NBFCs and IT and we are happy with our weights in these sectors. When we look at the worries discussed earlier, these sectors aren’t much affected by the concerns. So, we don’t want to make big shifts at this point.

There is a small part of the portfolio that has been impacted by these worries and price has corrected a lot. Stocks here are available at lower than the last 3–5 years’ average valuations as the stock prices have discounted the downside risks. Cement and consumer companies are two such segments. Auto is another and one where we have increased our weights.

As for autos, does the shift from fossil fuel to electric vehicles bother you?

EV is a very big, secular thing playing out globally and it will play out in India also but over the next 10 – 20 years. In between, there will be short term demand for fossil fuels like we are seeing today. 18 months back, we introduced a frontline Natural Resources Fund, which invests around 40% in metals, 20% in gas, 30% in global traditional and new energy companies. When metal stocks went down and oil prices temporarily went to zero, without very technical reason, we introduced this fund to our investors. The theme has made more returns than any other sector.

Valuations in a lot of sectors you mentioned have run up a lot…

We ensure that at the extreme ends of valuations, we trim some profits. Now, since the peak, some of the tech stocks are down between 20 per cent and 25 per cent and we reallocate at this point. So, these are small tweaks we keep doing. Generally, most of our funds have a holding period of 5–7 years. There are many stocks that have remained for 8–9 years in the portfolio. The temperament of our fund manager is you embrace corrections and thrive on volatility. Now is a good chance for someone who is less invested in markets to build asset allocation.

Do you see a repeat of 2013’s taper tantrum?

Our central bank has ensured that we won’t see 2013 type of fragility, The government and RBI has very strongly focused on keeping inflation under control and strengthening our Forex reserves. So taper tantrum may be limit; its intensity would be much lesser is our hypothesis Globally, a lot of governments have a lot in terms of stimulus in the last 1 – 1.5 years. Relatively, India has not given out a very larger stimulus. To that extent, we are in a better shape. But if rates rise very sharply globally, our interest rates will also rise. But the larger threat is energy prices and inflation remaining high.

For almost three years in a row DIIs have heavy-lifted the markets. Can they continue anchoring the market?

Everything is cyclical – whether liquidity, interest rates or inflation. In that context, I don’t want to extrapolate these flows into perpetuity. Whenever other alternative asset classes like interest rates rise enough and offer a positive real rate of return, investors may increase their exposure to fixed income or the trend in gold price starts improving, then it can create a credible alternative. But till this happens, there is structural strength to this trend of sensible discipline, long-term investing, becoming a part of every new investor’s rulebook.

There’s a slew of passive fund launches across the industry. With SEBI’s strict categorisation norms, is passive/smart beta the only way forward, for the industry? 

At the first level, I think base of customers investing in the industry is expanding; so don’t worry whether it is coming in passive or active. Now, can I say that passive funds will give the best return versus active? Global data point indicates that it is very difficult to meet benchmarks. But so far in India, there are more managers who have been able to consistently beat benchmarks, though I don’t take that history with complacency; benchmarks are becoming more and more efficient through smart beta products. I think these trends will accelerate, which is why we are seeing more funds being launched in the passive space. Investors should not look at active or passive funds in binary terms.

New AMCs are entering the market with a lean and tech-first approach. Do you see them disrupting the business?

Technology is a huge enabler, and whoever does not embrace and move ahead with it will not have space in the sector. Our consumers are using technology in every other sphere of their lives and why would they give us special treatment. We must upscale and become more user friendly. DSP was amongst the first to invest aggressively in tech.

With curated stock portfolios comparing themselves to mutual fund portfolios, is there a case for tighter regulations for the former? 

We’ve taken a small stake in smallcase. As a trend we see it (curated portfolios) as very progressive, which is opening up so many new investors to the cult of investing. Anything that helps in market expansion is good. Thereafter, it is up to our ability to execute and add value to that investor. No doubt this is competition for us, because from the same wallet that money is going into elsewhere. But which category is not having competition? We cannot live on our past laurels. We must be on our toes. These new platforms with smarter thinking will keep us on our toes and hopefully it will make us better.

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