Speaking to CNBC-TV18 Sunil Subramaniam, CEO of Sundaram Mutual Fund, said that some of the discretionary money has moved into the arbitrage segment. â€œThere has been a spike in the discretionary amount because arbitrage funds have seen significant flows. In the next three months there will be enough news to impact market.â€
Speaking to CNBC-TV18 Sunil Subramaniam, CEO of Sundaram Mutual Fund, said that some of the discretionary money has moved into the arbitrage segment.
“There has been a spike in the discretionary amount because arbitrage funds have seen significant flows. In the next three months there will be enough news to impact market.”
He believes the domestic triggers are strong. Despite FIIs selling, local MFs have been strong buyers. “In the market, people are going for domestic sector-oriented stocks. IT and pharma tend to react to [other global factors like] currency.”
The rural-focussed funds have seen good inflows, he said, adding that apart from rural play, financial inclusion theme will also play out well.
Although this quarter, about 40 percent of companies have missed expectations, sectors other than stressed ones like IT and pharma will see an uptick of 10 percent on their PAT on a year-on-year basis, he said.
Also, another healthy trend is the vibrant IPO market. “A lot of supply is coming in. Sectors like asset management industry will see some listing in the next 2-3 years, he said.
About Rs 4000-4500 crore is coming from SIPs and when this money is locked in, it is unlikely the tap will turn off, he said. “Out of these Rs 4500 crore 50 percent are in mid and small-cap funds.
Below is the verbatim transcript of Sunil Subramaniam’s interview to Prashant Nair & Ekta Batra.
Prashant: The amount of money that equity mutual funds took in the month of October is Rs 9,000 crore plus Rs 9,400 crore or so -that is humongous, the largest we have seen in the last 16 months or so. How much of this do you think is discretionary? Just break it up a little bit for us what has really caused this bump to begin with?
A: Systematic Investment Plan (SIP) flows are roughly about 40-45 percent of this inflow, sort of Rs 9,000 crore about Rs 4,000-4,500 crore would be SIP flows. Another significant portion is, I would say, given the apprehension of high volatility some of the discretionary money has moved in to what is called as the arbitrage segment, which is the mutual fund industry captures as equity. There has been a spike in the discretionary amount because arbitrage funds have seen some significant flows over the last two-three months because arbitrage gets better returns when there is volatility and in the next three months there is going to be enough news flows which are going to impact the markets especially the largercaps segment. We have seen a significant portion for the industry is going into the arbitrage segment.
The third is as you mentioned correctly the midcap segment and specific sectoral picks, for example in our fund house we have being seen very strong flows into our rural fund. The fund which was about Rs 140-150 crore about four months back is today touching Rs 600 crore in size. So, it has been a quadrupling of its size. So, a huge amount of flows have been coming in to our rural India fund and similarly in the market, I would say, people are going for domestic sector oriented stocks. Those sectors which are not impacted by international news flows, so for example IT, pharma these are the stocks which tends to react to both the currency as well as international news flows and developments in developed markets.
Whereas financials, consumer, domestic consumer, discretionary, short cycle capex, these are the segments which, independent of what is happening in the international markets, are something about the Indian economy and that is where I think it is a very strong thing that the domestic investor is not getting shaken in terms of its impact of these international news events and actually are putting in more money which is actually helping the markets though foreign institutional investors (FIIs) have been selling over the last month. However, the domestic market has not fallen as much as the pure FII selling should have reflected. That is because domestic mutual funds have been big buyers thanks to these strong inflows. I think that is what is reflecting. It is strong confidence in the Indian economic story as well as everybody is aware these days that mid and smallcaps tends to do better when the economy does better. Hence that is why you are seeing a significant shift in flows towards the mid and smallcap segment.
Ekta: If you could just apprise us a little more about this rural fund which has grown from around Rs 150 crore odd that you mentioned. Which are the sectors that you are currently investing in and what kind of returns have we seen compared to the market?
A: If you look at the returns it has kind of given double the largecap returns in the last year, 50 percent more than the midcap returns in the last year. Over three year period it has delivered something like 30 percent per annum.
Ekta: What are the sectors?
A: Basically, if you look it at it is called rural India fund so what it does is it is betting on rural transformation. So, every sector where the rural uptake, which is thanks to the monsoon and to the pay commission which is also more than half of it is diverted towards rural India, so those sectors which are benefiting. So, if you see it has got consumer discretionary like auto, it has got agro, agro inputs, pesticides, farm chemicals, farm inputs. It has got farm machineries, it has got tractors, so it has got a range of things and it also looks at the kind of products with the rural consumer who has got a greater per capita income if he is going buy, for example from a base level commodities they will now shift to higher value added goods. So, milk, proteins companies which are specifically catered into that demand so it has got a very wide range of stocks. So, it is not only an agriculture story it is an agri plus-plus story. The rural non farm sector employment which the rural infrastructure spend of the government is creating, is also creating. A big part is financials because you have these payment banks; you have got financial inclusion, Jan-Dhan Yojana, driving greater bank account allocation, money moving from the black money cash sector into the banking sector. So, financials are again a big play there and we do expect even housing and rural loans to pick up. So, it has got a broad range, so any company or sector which is going to inordinately benefit from the rural transformation is something that the fund is picking at its long term pick.
Prashant: Getting inflows of course is a great thing but it becomes a bit of a problem for fund managers in the sense that either they have to find newer ideas if earnings for well regarded established companies don’t pick up. Take the current quarter is an example. About 40 percent, little over 40 percent of companies which have reported earnings so far have missed earnings expectations. About 20 percent odd are inline the rest have beaten. While one was taking into account that we are at the cusp of earnings turnaround, it kind of keeps getting pushed back. You and I have talked about this many times in the past. So without going into what you things earnings themselves will do, as you continue to get this inflow and earnings are not picking up at the pace at one expects how long do you think this will last I mean the flows themselves will last?
A: A couple of things here one is that if you disaggregate the earnings, you have mentioned in terms of number of stocks but if you disaggregate the earnings and take away those sectors which are under bit of stress like IT, pharma and some consumer things haven’t shown the topline growth expected. If we disaggregate and financials which again continue to report some surprises, if you take away these kind of troubled sectors the other sectors actually we have seen a 10 percent growth in terms of year-on-year in the profit after tax (PAT) growth.
We are not as bearish on the earnings as you think because if you look at sector disaggregated wise the sectors that we think will continue to do well and what this current road is reflecting is the last year full impact of commodity price drop and to some extent the interest rate drop. That is what will be the story for the rest of this quarter from the rest of the earnings that you will see reported. However, from next quarter onwards we will see the topline growth of consumer and those kinds of companies. So, domestically focused companies are the ones which are going to show this, one. Second, you talked about the fact that valuation have gone up in these sectors and where does the fund manger deploy money. So one of the healthy trends we are seeing is the very vibrant initial public offering (IPO) market. So, a lot of supply coming in and we expect especially in areas like financials, sectors like my own industry, the asset management industry you will see some listings in the next two-three years in that, insurance as a space, payment banks as a space. So, there is going to be a lot more supply and supply which is on the domestic oriented front, there will be a good demand for it and that will help overall valuations also, not rise as much if they were only chasing a few stocks.
Third thing you talked about how long these inflows are going to last. As I mentioned to you just a few minutes ago Rs 4,000-4,500 crore a month are coming through Systematic Investment Plans (SIPs) and generally the average tenure of SIPs is three-and-a-half to five years. So, when this is money which is locked in and this is coming it is very unlikely that suddenly the tap is going to turn off in the next three-four months if there are some disappointments either in terms of news flows from international market, Fed rate hike and stuff like that of if there is some earnings disappointment.
We think the flows will continue and my estimate is that out of these Rs 4,000-4,500 crore almost 50-60 percent of the flows are in the mid and smallcap funds. So, there is going to be a lot of buying in these segments especially in areas which are linked to domestic economy. I keep repeating that, all these international news flow which is causing volatility is not going to affect our economic growth one width and so buying in these whenever there are corrections is an extremely long-term strategy which will deliver value for investors. So, I don't see a threat that is happening and more importantly you have mentioned that prior to my conversation that this is the tax saving season, so you are going to see a lot of loopholes into tax saving funds coming in which again are all diversified funds. All tax saving funds are diversified funds with a good allocation made in smallcap. So, the flow pattern will continue to be healthy, no reason to be worried over the next three-four months.