Not 30%, but 12-15% returns still possible from mutual funds over next 5 years: Sundaram MF

Kumar further added that fund managers are moving away from high-quality high growth companies to cyclical growth companies which have potential to outperform the market which is available at reasonable valuations.

Top stocks in Sundaram Select MF include companies like Bajaj Finserv, Sundaram Clayton, FAG Bearings, UPL, SRF, Ramco Cements, Indian Bank, Federal Bank, IGL, etc. among others.

Kumar says that we are focussed on economy related sectors in which reforms are taking shape. The issues which were bogging Indian economy have been infra, power, developers, PSB lenders, and steel and steel ancillary sectors.

“The government has brought many reforms in the last 2-3 years in sectors such as Coal, as well as power & steel sector. A lot of problems of these sectors are addressed and some of these sectors are looking attractive for a longer term potential,” said Kumar.

If one believes the India reform story, PSU banks will be a reformed lot in the next 5 years, thanks to govt, bank bureau. There is a lot of value in this sector, he added.

Positive on cement:

The government has been pushing investments in infrastructure investment and what could be a better than cement sector to play the infrastructure as well as housing sector theme.

“In the last two nearly 6 lakh crore tender have been floated and many were awarded, and push for housing for all scheme give confidence about the cement demand which is likely to remain robust,” said Kumar.

“Cement will continue to be a long-term play for any fund house because cement demand growth is likely to pick up in the next 3 years to double digits,” he said.

Below is the verbatim transcript of the interview.

Latha: How would you first look at this global turmoil? Would you use it as an opportunity to add to your positions?

A: A lot of things have not gone right for the US President and there have been a lot of reversals of his expected action and this is probably one more issue that has cropped up which potentially disrupts markets and creates some volatility for some time.

So, as you mentioned, it is a great opportunity for long-term investors to use this correction to buy as many investors have been expressing concern about the one-way move in the markets for the last couple of months, so whatever little bit of uncertainty and correction or a consolidation that this brings in would be very good for funds to use this to rotate into stocks that they would like to own for a medium-term.

Sonia: I was going through your funds and you have had a relatively large exposure to the cement space over the past many years. Names like J. K. Cement, India Cements, Ramco, etc. this is a space that has perhaps come back into the limelight with the ACC-Ambuja merger as well as now, volume growth in the cement sector after a long time. Is this is a multi-year bull cycle that you are seeing? How would you read it?

A: The last 2-3 years, the government has been really pushing ahead on infrastructure investments and you are seeing that in the last two years about Rs 6 lakh crore of tenders have been floated and many even awarded. Along with that, the recent push for affordable housing schemes, etc. also give a lot of confidence in terms of the cement demands.

So, very sound way to play the infrastructure and the housing sector could be through the indirect beneficiary like a cement sector and here if you would see non-south capacity utilisation levels are pretty much upwards of 80 percent and there is a lot of tightness that is there in the markets. On the south again, we have seen that there has been a lot of discipline amongst the players given that utilisation levels are lower and they need to be profitable.

So, there is a fine balance that has been established in the various markets and cement being a regional play, we have chosen to play stocks which have strength in markets that they dominate. So, that is how we play cement and cement will continue to be a good long-term exposure fund house given the kind of growth that we will see because we are yet to see the growth take off. Till now, whatever has happened has been normal growth, but we will see in the next three years, a huge acceleration on the cement demand side to double digits.

Anuj: The space that has made most money for you has been in the chemicals, specialty chemicals. You have SRF in your portfolio, Navin Fluorine International, UPL as well. As bottom-up stock pickers, are you adding more into these names? Do you think the story has to still play out?

A: We have created a fairly significant position in these specialty chemicals space and in agro-chemicals space. We believe that the last six months and the next couple of months could be a lot more softer in terms of demand globally and that is what has been playing out for these companies too. But, the commentary from global majors is clearly positive that in the next 12-24 months there is a good optic in demand that one expects.

So, these sectors would continue to deliver good growth and definitely one can continue to be optimistic on these sectors and growth potential. The need is to pick up a lot more stocks which are yet undiscovered in this space. That is the challenge.

Latha: Non-baking finance companies (NBFC) have also made money for you and it has been a mixed bag in terms of the numbers of the fourth quarter. For instance, Bajaj Finance seems to have delivered, but Bajaj Finserv, there were some hiccups in terms of the insurance premium growth and several other parameters, basically growth parameters. How have you assessed the NBFC sector itself?

A: Like we discussed in the past, this is going to be a space that one needs to be invested in across a longer period of time, definitely in the quarters from around the demonetisation side, there were some instances where different companies had stress building up, etc. And also on the agriculture insurance side, there have been some issues that has come up when you talk about insurance, etc.

So, while we will look at these numbers closely on a quarterly basis, but we would like to look at them as long-term place where the penetration that they can establish could be pretty significant and the kind of high return ratios that these companies do bring in will mean that there could be substantially long periods of 20-25 percent kind of growth without any equity issuances, etc. which make it very attractive from an investor's perspective.

Sonia: Coming back to the overarching theme, you have been investing in midcaps for years and some of your funds have given great returns. A five year return of almost 30 percent in your Sundaram Select Midcap Fund. But, now it has gotten a bit tougher to find those value stories. So, do you think that these kinds of returns can be replicated even over the next five years?

A: While it will be difficult to comment on a 30 percent kind of a return over the next five years, one can safely expect 12-15 percent kind of an equity return from mutual funds broadly and that is post tax. So, that is going to be significantly good for any type of investor given the return potential of the other asset classes at this point in time.

We do believe that there has been a phase where high quality, high growth companies have commanded premium multiples and have delivered significantly in the last 5-8 years and we are moving into a phase where the economic cycle is on an upturn and at an inflection point. This is bringing in a lot of cyclical growth to industries which are rate sensitive and which are a play on the economic turnaround.

So, the fund managers typically are moving away a little bit of the portfolio from high quality, high growth companies to cyclical growth companies which have potential to outperform the markets and also available at very reasonable valuations. So, that is the broad fundamental shift in portfolio strategy that we have also been adopting over the last quarter or two.

Latha: Give us some examples of what you mean by these economy facing attractive valuation stocks. Do you mean steel, do you mean PSU banks? What are you hinting at?

A: Definitely, the issues clogging the Indian economy have been our own infrastructure sector, be it the roads, the power or the developers and also the lenders like PSU and corporate lenders like ICICI Bank, Axis Bank, etc. and the other sectors that have problems have been the commodity sectors like steel and steel ancillaries so to say. So, if you look at what the government has done in the last 2-3 years, they have brought in a lot of reforms on the coal and power side, on the power distribution side and lastly on the coal. Yesterday, we had a new policy on coal. That is also going to be very helpful and the steel policy was there a couple of month back.

So, a lot of the problems of these sectors have been addressed to the satisfaction of all the stakeholders and so, we do find that some of these sectors are very attractive from a longer term potential and the lenders, especially the corporate lenders, not just the PSU banks, but also those who have a higher bias towards the corporates are significantly good positioned at this point in time.

And if one believes the India reform story, the PSU banks definitely will be a reformed lot in the next five years. We have to give it to the government and the RBI and the Banking Bureau to take those reforms forward and I am sure that they will compete as fiercely as a private sector bank in the next five years. So, there is a lot of value there.