Disciplined investment is the mantra to meet goals rather than letting fear deterring you away from the destination, says Swati Kulkarni.
Investors can build investment through SIP and STP in equity mutual funds in a staggered manner in these uncertain times, against a lump sum investment, Swati Kulkarni, EVP & Fund Manager – Equity of UTI Mutual Fund, said in an interview with Moneycontrol’s Kshitij Anand.
Here are the edited excerpts of the interview:
Q. What is your view on the markets? Some positive reports have come in that countries across the globe are reducing lockdown curbs and hopes of a new medicine are also something which is comforting.
A. This pandemic has put an abrupt halt to economic activities as many countries, including India, had to enforce a lockdown. We have experiences of other countries relaxing the lockdown and re-tightening it again after the number of COVID-19 cases increased.
The exit from the lockdown would be calibrated on the specific region’s experiences, which brings in uncertainty about the timing and pace of recovery.
The vaccine will reportedly take at least 10-12 months to come to the market. Thus, uncertainty around COVID-19, its impact and earnings releases are bound to keep equity markets volatile. However, after the correction, at 18.5 times trailing P/ E multiple, the valuation is at attractive levels compared to historic range.
Q. If someone plans to construct a portfolio, what should be the ideal portfolio allocation and why?
A. The financial goals, investment horizon, liquidity needs and risk tolerance vary from person to person. Hence, the portfolio allocation among different asset classes should also be person-specific.
One may get some guidance from our UTI Multi Assets Fund, which allocates funds among Debt, Equity, and Gold assets based on the equity allocation recommended by the proprietary model.
This fund has seen an increase in allocation to equity assets to the maximum permissible level (as per the mandate) of 80 percent in March 2020.
This allocation in January 2020 was only 45 percent. The increased allocation underlines the attractiveness of the valuations of the equity market.
Q. Nifty50 is still trading at a premium compared to historical averages, but the earnings are likely to take a hit in the coming quarters. What are your views?
A. Forecasting the earnings hit and FY21 earnings are challenging in the current uncertain environment. Therefore, as a navigating tool we could look at the trailing twelve months (TTM) reported earnings-based valuation, current TTM P/E at 18.5 times is below the 10-year average.
At market lows of March 2020, this valuation was even more attractive at 15 times TTM PE; 1 standard deviation below the 10-year average.
So is the case with price to book ratio of around two times. Also, the earnings yield (inverse of P/E) is at 5.4 percent very close to 10-year government securities rate of 5.8 percent, indicating that the risk-reward is in favour of equity investment for the medium to long term investors.
Q. Your funds have managed to outperform the benchmark. What has been your investment philosophy?
A. UTI Mastershare and UTI MNC fund predominantly invest in companies with the strong competitive franchise. Such companies are often referred to as companies with wide economic moats.
They generate consistent cash flows, have low leverage and leading market share with pricing power or cost advantage, and generate a high or improving return on capital employed.
We believe that such companies are wealth creators and sources of alpha over the long term. The investment philosophy of the UTI Dividend Yield Fund is to invest in companies quoting at high dividend yield and where the dividend pay-out can increase with growth in earnings.
We believe this framework helps in buying cash-rich companies willing to return cashflows (through dividend/buyback) to the shareholders consistently along with the possible capital appreciation with earnings growth.
Q. What do you advise mutual fund investors amid the clouds of uncertainty due to COVID-19?
A. Focus on your financial goals; the disciplined investment is the mantra to meet those goals rather than letting the fear deterring you away from the destination.
There have been many instances in the past 28 years where the market corrections have lasted for more than three-four months and have been deeper too but the patient investor who stayed invested has eventually made strong positive returns.
Q. Warren Buffett is sitting on piles of cash and he is not investing at a time when markets across the globe are witnessing selling pressure. Does it suggest that there is more downside and investors should ideally have more cash in hand? Your views.
A. The institutional investors go by the investment mandate and that could be different. As institutional investors, we go by our mandate to invest in equity shares.
Berkshire is a unique entity with the insurance business, operating businesses and investment operations. They may need to keep cash for any large opportunity or for supporting the existing businesses if the economic pain continues.
As equity mutual fund managers, our mandate is to invest in equity as that equity allocation call is already taken by our investor as part of her/ his financial planning.
Our endeavor is to focus on stock selection to generate alpha rather than timing the market with varied cash allocation. The risk is also when you stay in cash and the market recovers.
Most markets have recovered over 20 percent from March 2020 lows. This is not to suggest that they will not go down. We do not know, rather we prefer, using our time and collective efforts in selecting the right stocks which will not only weather the current difficult phase but could consolidate their competitive positioning post the uncertain times.
Q. India has a long road ahead to catch up with China. But, it must be now that India acts. Which are the companies that are likely to emerge as big winners from Trade War 2.0?
A. True, localization and de-risking supply chain are the key themes that the companies across the globe are likely to focus as learning from this pandemic.
We will have to be competitive in terms of the quality, dependability, delivery and price to benefit from this as many other destinations will also be competing. Reforms will be required in land, labour laws besides the faster clearances and decision making. Infrastructure and logistics also will have to improve.
If we can showcase these improvements FDI from global majors can also follow. Auto components, chemicals and active pharma ingredients manufacturing are some of the areas where India has an advantage of skilled manpower and could see opportunities ahead of other sectors.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.