Fund Manager Insights | Inflationary signs not encouraging for equity markets: Rahul Baijal of Sundaram Mutual Fund

Rahul Baijal, Senior Fund Manager - Sundaram Mutual Fund, says that Indian equity market underperformance has caught up with other emerging markets after last week’s post-Budget rally. Talking of stock picking strategy he says he has been adding domestic and global cyclicals across portfolios, while reducing allocations to pharma, FMCG and energy sectors. Baijal who has about two decades experience in the mutual fund industry tells Vatsala Kamat of Moneycontrol about his investing style particularly in the large-cap universe, views on portfolio churn and market risks. Baijal specialises in large-cap funds.

Indian equity markets are scaling new highs in response to the Union Budget 2021. Has it warranted a change in investing strategy for your schemes?

Budget 2021 has led to a resumption in the rally in equity markets after the correction seen in January. It brings a policy shift towards using fiscal stimulus more aggressively to get higher medium term GDP (gross domestic product) growth. This is positive from an equities perspective.

Also read | Budget 2021 done, here is what you must do with your investments

However, Indian market’s underperformance has caught up with other emerging markets on a calendar year-till-date basis. On an FY2023 estimated earnings basis, valuations of many portfolio companies are neither euphoric nor cheap, but somewhere in the middle.

I think the big macro level sector rotation trades seen in the recent past are over. Hereon, stock picking as part of overall portfolio strategy will matter a lot more. We have been adding more domestic and global cyclicals across portfolios and reducing allocations to pharma, FMCG and energy sectors.

Coming to your fund house, what was the reason for a Bluechip fund when you already have Select Focus, which has a portfolio of frontline blue-chips?

Yes, Sundaram Select Focus is a frontline equity scheme, which I have been managing since October 2016. But it is a concentrated, 30-stock large-cap portfolio. The idea to launch a Bluechip fund is to offer a more diversified portfolio in the large-cap segment.

The new Bluechip scheme has around 45-50 companies. Focus has around 30 companies. Our Focus fund can have wider sector and stock deviations from the benchmark; Bluechip fund cannot.

We chose to have a dual product positioning within the large-cap segment because there are two sets of investors. One set of investors who are comfortable with a narrower and focused style of investing and the other who prefer a more diversified style.

There is talk about the mutual fund industry moving towards passive fund investing. Exchange-traded funds and index funds have taken off in a big way abroad. What do you think?

The passive mutual fund industry picked up in a big way in the US when active funds started underperforming on a widespread basis. Low-cost passive funds picked up in terms of attractiveness. Herein lies the challenge. As long as active fund managers in India keep outperforming benchmarks over a long- term investment horizon, the pressure from passives is low. So far, long term track records of most schemes in India have been good.

As a fund manager, what is your investment strategy?

To begin with, I look at a company’s management quality, business model quality and its financials. then I customize stock-picking based on valuations and the fund mandate.

Aside from my research team’s inputs, I do my due diligence through my network of relationships in the industry. To me, examining companies and looking at their positioning within the framework of business, sector and valuation cycles is important. This helps in alpha creation.

Is it tough to outperform benchmark indices? How have you fared?

There have been challenging phases. Sundaram Select Focus Fund, for example, had great years in 2017, 2018 and 2019 of alpha creation. But the last four or five months were quite challenging to the extent that it is hurting one-year performance as well. So, there are cycles of outperformance and underperformance.

Challenging times call for some readjustments. For example, the recent rally has also seen a shift (rotation) globally from growth to value-investing. Of course, there are times when this warrants realignments within the larger framework of the mandate. For instance, in some cases such as telecom, the recent underperformance may be a case of delay but not denial of earnings growth.

What is your view on the Balanced Fund category and its underperformance?

The balanced fund, as a category has had few challenges in the last three years. Firstly, the benchmark is 65 percent of the portfolio in equities and 35 per cent in debt. Till about two months back, bonds were outperforming equities until three months back, when Nifty was at about 12,500 or so. Most balanced funds have been overweight on equities and the bond outperformance compared to equities, which created a challenge in performance of the schemes.

Secondly, within bonds, the higher duration products outperformed given the falling interest rates. Most of these products have accrual positioning and short-term maturities. So, combination of these two have actually hurt balanced funds’ returns.

But things will change in favour of equities over the next two to three years. Equities will outperform bonds. Within bonds, the shorter duration ones will do better over the next two, three years, given that we are at the bottom of the rate cycle.

What do you think an investor must do in euphoric times as we are witnessing now?

Just continue your systematic investment plans (SIP). The last 8 months is an eye-opener to many people and the sharp rally along with volatility reinforces the faith that SIP is a vehicle designed to avoid market timing and therefore it is not wise to pause or stop the SIP. One can take partial profits off-the-table.

What are the biggest challenges to the present equity market rally?

On a global front, keep an eye out for how the US Fed changes its position on balance sheet expansion or consolidation. And locally, I feel risks lie in two areas. One is to see how economic recovery is panning out and its sustainable growth. The RBI’s liquidity management and low interest rates in India will keep markets buoyant. Any indications of reversal by regulators could dampen the sentiment on the street. Any inflationary signs, too, will not be encouraging for equity markets.