Don't hedge currency: Principal AMC

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Rajan Krishnan, Business Head-Investment Management at Principal AMC, is of the view that funds raised in India are fed into international funds. The global fund portfolio has 120-125 stocks and Rs 550 crore of assets under management, he added.

Excerpts from CNBC-TV18's exclusive interview with Rajan Krishnan:

 

Q: What have you seen in the fund in terms of fresh inflows and tactically what have you been doing in the last month or so? Are you sitting on a bit more cash or have you been invested largely for the fund?

 

A: We do not take cash calls on this fund. The funds that we raise in India are immediately fed into Principal Global Investor's emerging markets funds. At best you may have a lag of a day or so but that is not an investment call in terms of cash. It is probably more an operational call. We are seeing a heightened interest as far as diversification and moving investments overseas is concerned, especially when the Indian markets have been a bit flattish and there is a lot of excitement around emerging markets. I think we are definitely seeing a lot of interest in this fund.

 

Q: How have you read the worldwide concerns in terms of the fact that emerging markets might be tipping off or might be getting into a bit of a bubble zone now? Within this fund now, do you keep hedged positions as well?

 

A: We do not hedge the currency and it is traditionally not the way Principal Global Investors manage their funds. What is interesting is the fact that it is a diversified basket of almost 25 countries. The risks are quite different, there could be political risks in Russia and Thailand, inflation in South Africa, or commodity prices in Latin America. It's good that all these risks are unlikely to play out at the same time and that's where the benefit of diversifying across a reasonably wide territory comes from. Almost 25 countries have participated in this fund as far as investments are concerned. While the risks are there, I think it is a reasonably complimentary product to an Indian investor, who has otherwise invested quite heavily in the Indian market.

 

Q: What is your stated call or position on India right now because it forms only 5% of your total fund? You have only one listed entity in your top 10 holdings, any concerns at this point?

 

A: The fund is actually run in a sort of benchmark neutral manner, so the MSCI Emerging Market index has about 6% weightage on India. That is reflected in the portfolio position because typically the fund would not be over or underweight by more than 2%. It is not really a view on the country, it is more to do with the construction of the index, and even the sectors are sort of reasonably benchmark neutral. I think you find Reliance Industries as one of the top 10 stocks there, as the percentage or the weightage to India is more index-led rather than a view on the country.

 

Q: What's your call on Reliance right now and what have you made of the news that has hit the papers this morning?

 

A: I do not have any view on this.

 

Q: Do you benchmark the valuations of India versus other emerging markets as a part of this fund? How do you see India placed?

 

A: India is reasonably valued but some may call it high. When you go across 25 countries, you may find different levels of valuation but you are really paying for growth. China could be valued much higher but the growth there has supported those valuations.

 

It is much more index-driven in terms of which countries get what weightage. The fund is essentially run more in a bottom-up manner, where the stocks that make sense get peaked up. The index has about 800 stocks whereas the portfolio has only about 120-125 stocks. It is stock picking that is critical, rather than actually pushing towards weightage across these countries.

 

Q: China does have a significant weightage in terms of the stocks that you hold. How have you read the intense volatility that the market has been showing this past month-and-a-half?

 

A: China is an interesting market, I think their reactions seem quite dramatic in both directions. The economy is positioned to grow very well and there is a lot of retail interest in the stock market. While there are risks coupled with the diversified nature of interest, there are also a lot of retail customers in the equity market, which mitigates the risk to some extent. As long as the economy stays on course, may be it is fine. I would not rule out the risk that China is a bit expensive or the markets are really been on a role for sometime now.

 

Q: How much money is the Principal Global Fund running at this point?

 

A: We have about Rs 550 crore, which is about USD 130-140 million in the fund.

 

Q: What kind of cash levels would you have at this point, 5% or lower than that or more than that?

 

A: Even lower. I think the cash percent weightage on a daily basis depends on inflows or the net flows that we see. There is no investment management call on cash. Similarly, at the end of PGI Emerging Markets Fund, there is no real cash call and we would probably be a percentage or percentage-and-a-half in cash in that fund.

 

Q: What is the call on emerging markets including India, because we are all inter-linked when we started this year. Most analysts called for an extremely sluggish move for most of them, that move has of course surprised. Do you think these markets can sustain it or trade at much higher levels from here?

 

A: The long-term story in emerging markets is pretty much intact, there is a lot of growth in these markets from a commodity position and they are all very well positioned. The domestic economies are getting stronger at least in the top 10-15 of these emerging markets. The overall long-term story is pretty good though short-term and country-specific concerns will emerge from time to time. Any long-term investor, in a strategy like the emerging markets, should feel reasonably safe over a longer period.

 

Q: Three or four of your top holdings are petroleum or related companies. Is that your stated position or are you actually bullish on this commodity? Within that, how do you see crude, which is hovering around 70 at this point?

 

A: The weightage to petroleum or energy would be in line with the index's weightage to the sector. The fund manager or the fund is not only taking positions on the sector or the country but also taking positions on the stocks. They are trying to keep the sector and country weightage more or less inline with the MSCI Emerging Market index.

 

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