S Naren, chief investment officer - equity, ICICI Prudential MF explains to CNBC-TV18 that the launch of the fund was motivated by the global demand for uncorrelated equity products which offer benefits of diversification.
The fund, Naren adds, focuses on American companies that are strong in brand and leaders in technology as they are most suited to avail the benefits of uncorrelated equity products.
Below is an edited transcript of the interview on CNBC-TV18. Also watch the accompanying video.
Q: There are reports that you are going ahead to collect money for investment in equities. Will the fund invest only in US equities?
A: Yes, it will invest in all the stocks which are listed in US stock exchanges like the NYSE and NASDAQ.
Q: What was the motivation for the launch of such a fund? Why did you not launch a fund for investment in India?
A: We already have a complete suite of products for India with almost 15 strategies to tap equity and numerous strategies to tap debt. We felt we needed to tap the international market with uncorrelated equity products because our experience in 2008 showed that correlated equity products do not offer the benefits of diversification which is why only the gold funds collected a lot of assets in 2008.
As far as uncorrelated asset classes are concerned, American companies are strong because of their brands and leadership in technology and hence are the most suitable to avail of the benefits of uncorrelated products.
Q: Could you explain for investors and organisations planning to enter the US, what are the risks related to currency?
A: Currency can be both a risk and a benefit. Our belief is that American companies have competitive advantages that are not related to the currency.
Of course, we will not be hedging the currency, but at the same time we believe that we are actually investing in a market which provides the leadership in technology and brand for the entire world. So, to worry only about currency is not correct.
Q: But what's your expertise in choosing the best US companies? Will it be done by your fund managers in India? What is the mechanism and what are the SEBI or government of India rules on caps?
A: Yes, there is a USD 300-million fund limit for which we have as a mutual fund. There is no specific permission that any investor needs to take for investing in this fund as it is part of the USD 300 million cap for ICICI Mutual Fund and no individual permissions are required.
To choose companies in the US, we have tied up with Morningstar to research over 1,200 companies and help identify companies which have either competitive advantages due to brand, network or leadership in technology.
We also have research support from other American broking firms operating in India. We hope to create portfolio which we believe will focus on the strengths of American companies.
Q: Do you plan to launch a set of products possibly an ETF for US equities or other foreign equities?
A: We were faced with problems regarding concerns on growth and leverage in the consumer space. So we intended to create an uncorrelated product.
But to create specific kind of uncorrelated products was difficult and that is why we decided that this was a good opportunity to launch a fund with a good mix of strong brands and technology which drive American companies globally.
Q: Since you are launching a blue-chip equity fund for US stocks, let us focus on the Fed meeting. There have been these rallies on positive events like Greece, but they have been short-lived. Do you think that if there is some kind of easing from the Federal Reserve, the rally that follows could be durable? Could we see a rally in risk assets or would that fizzle out on various European problems?
A: As far as our fund is concerned, I would like to move into a product range. I don’t think whether people drink beverages or use personal products would depend on what Ben Bernanke.
Q: What is your view on global markets especially in the run up to the FOMC meet and a possible QE3? Will risk assets be charged up again?
A: For India, it's always a quid pro quo. When risk assets go up, crude oil goes up. We availed benefits of outperformance when crude came fell USD 120 to USD 96 and benefits to the Indian economy in the form of fiscal and current account deficit.
So while a QE will be very beneficial for risk assets, there may be an increase in crude oil and a return of worries about under recovery and current account deficit. So for India, it's largely a neutral event.
In our opinion, the moment there is an increase in diesel price, many of the problems that we worry about in India go away. But the monsoons are our next worry because the first two weeks have not been that good, but the more important month is July when the monsoons recover and diesel prices increase.
I don't think it really matters to us about what happens in Europe.
Q: So what would you advise investors?
A: Since 2007, the mutual funds sector has not received any money, so equity as a percentage of the asset allocation has become smaller and smaller. The challenge for the sector is to understand that asset allocation in equities needs to be maintained when markets fall because that’s a way to make money.
I think that is a challenge at this point of time. The reason why we focused on a US blue-chip equity fund is because when interest rates are low, dividend yields are high as compared to to equities and central banks are printing money, you need to have real assets and equities as assets to lure investors with a very attractive valuation.
Equities have become a much smaller asset class in everyone’s network and our challenge is to slowly increase that asset class in out investors’ portfolio. Though investors have not invested in Indian equities in the last two years, we hope that our combination of both US product and Indian products we will succeed in luring investors to invest in equities.
Q: Do you think the downside in Indian markets is now protected around that 4,900-mark? What kind of upsides are expected in the second half? Would you say there is a possible rally on the cards? Is there a 10% gain that could be garnered in 2012?
A: The downside is certainly much lower with the relentless fall in crude oil. I think the moment crude came below USD 100, it was clear that the downside has become much smaller.
An upside depends on economic policy, particularly on fuel reform. Investors in Europe are so scared of risk assets that investing in them on a long term view will be highly lucrative.