‘Investors will adopt active, passive approach to portfolio’

Is it time to reduce the investment in equity and settle it back on the debt side?

Looking at valuations versus the history of equity markets, and whether you look at large-, mid-, small-cap or Nifty 500, I think all these are sending the message that this market is quite expensive. Even if we compare equities to an alternative asset class, such as bonds, as reflected by 10-year government returns, equity as an asset class is not as attractive as it used to be. So, I would say, rebalance your asset allocation away from equity, but in terms of the overall asset allocation methodology that you are trying to follow. Therefore, any answer that is more appealing should be within your asset allocation framework. Today’s valuations are indicating that if you are over-allocated to equities, definitely return it to your target.

You have recently joined as CIO of UTI AMC. So, what will be the way forward?

I will continue to ensure that we remain a process-driven organization. When I came on board in 2017 the change we made was to focus on this process and say that we are a fund house where we can run multiple strategies backed by one investment process. And what we’re trying to do now is to bring the same set of learnings to the fixed income side. We have a good and experienced team, but we are trying to ensure that this is the process that needs to be the backbone of the organization to meet the expectations of investors in the long run. Of course, every investment team needs good people, it is the combination of quality people, along with the consistency provided by the process, that gives you the desired results. Therefore, we will continue to apply this more and more throughout the investment process and where we can add value, bearing in mind that UTI Asset Management is a premier mutual fund, but there are other plays we can make within overall asset management. Location.

Why are we seeing huge demand for New Fund Offers (NFOs)?

It seems like when the markets are at record highs, and I’m talking about price levels, you see a lot of positive news flow. You see a lot of money is being attracted in the market. I’m not sure that’s a good thing. For the past few months, people sitting on the shore have jumped.

Also, some of these NFOs may have closed some of our gaps in terms of product offerings. In our case, for example, we didn’t have a small-cap fund or a focused fund, and we filled that. And the same may be true for many of our peers.

Of course, when you have good news and the market is at record highs, it brings in a lot of people and that’s probably why NFOs have been so successful.

Passive investing is the flavor of the season. How will the mutual fund industry be affected?

I think there is room for the two to coexist. Passive funds do one thing; They manage money at a very low cost. But at the same time, they cannot claim and do not even attempt to create an alpha. Efforts are on to build alpha from active funds. Both products have their own costs and benefits. Our view is that it is not a question of either, but rather a question of what is right for an investor from a cost perspective and to improve the overall return delivered by the portfolio relative to the benchmark. Increasingly you will find that investors will make room for both active and passive in their portfolio. At the same time, as we have seen in other parts of the world, a lot of institutional markets, given that they operate under slightly different conditions, may favor the passive route of investment. We just have to make sure that investors believe that as active managers at UTI, we are able to create alpha for them.

Talking about the market, it has gained momentum in the last 18 months and earnings have also been good. So, where do you still find value in this market?

Today, if we look at the structural growth rate expected in the coming years and a mismatch between recent demand trends and valuations, automobiles will fit into that pack. Of course, if you look at cheap valuations, there are existential questions as well, which is true of the automobile industry as well. Concerns about EVs (electric vehicles) stem from concerns about what this means for generating cash flow and return on equity. From the demand point of view, auto is one such industry which is going through a tough phase for the last two-three years. But there is some value to be found.

The second area is financial. There is some value to be found as the credit side has gone through all kinds of challenges till 2018. We are in a phase where credit growth was declining anyway, and Covid-19 added to that pain. But the good news is that for the first time in many cycles, there are a handful of financial institutions that have not only made provisions in their books, but have also raised capital and are well-capitalized for growth. They are likely to make substantial gains in terms of market share and profitability as you exit this difficult period.

I would also look at larger healthcare, including pharmaceuticals. The sector has seen a phase of re-rating over the past year, but we still think relative to the growth prospects, there are still opportunities out there.