With a long innings at Aditya Birla Sun Life Asset Management Company since 2005, Mahesh Patil, CIO-Equity, has a track record of delivering strong returns through diverse stock-picking strategies in the large-cap segment. The fund house has a total of Rs 2.69 trillion in assets under management. Patil has the conviction that the long-term earnings growth potential of companies will drive Indian equity markets over the next three to five years, with brief adjustments or corrections along the way. However, he is not averse to Indian investors parking some money in international companies, especially in the digital space and disruptive sectors such as e-commerce.
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There are signs of fatigue setting in after the S&P BSE Sensex scaled 50,000. What would your strategy be at these levels?
After the sharp rally for many months, we are in a phase of consolidation. There are some headwinds now. Bond yields are inching up and there is a pause in interest rate cuts. Minor corrections in equity indices are mainly due to fears of the impact of a second wave of COVID-19 on economic recovery. Indian equity markets, particularly, are adjusting to it and we are seeing some profit-taking from investors.
But this does not alter the broader, long-term outlook for the markets. I think the drivers for economic growth such as infrastructure investment and real estate sales are in place. The second wave is unlikely to get out of hand given that fatality rate is much lower this time, with the vaccination drive gathering pace.
Hence, our portfolio has a growth bias as I think the Indian economy is likely to grow at around 6.5 to 7 per cent even after two years. We strike a balance between growth and value investing.
Have any sector weightages changed since a year ago, when valuations across the board were cheap?
Yes, there has been some realignment in our portfolios. We still like pharma, but we have reduced our large overweight after significant outperformance last year on the back of earnings upgrades and flight to safety. We also cut weightages a bit in oil and gas and consumer goods sectors, the latter due to high valuations. We have moved those weights to cyclicals in sectors such as metals, cement, industrials and banking. Within defensives, we have increased weightage to the IT sector and continue to remain overweight on the consumer durables and home improvement sector due to its structural long term growth potential.
You have seen several market cycles. What is the underlying philosophy that has helped create alpha over broader indices?
As a fund house, our underlying investment philosophy is “growth at a reasonable price”. I give emphasis to the broad business narrative of a company that displays strong earnings growth potential without ignoring parameters such as return ratios, free cash flows and valuation. The core part of the portfolio (comprising 60-70 per cent of the scheme) is invested for a long-term period of three years. But, I have a small satellite portfolio with a one-year view, which are short-term tactical plays.
What is your view on interest rates?
The rise in bond yields is in anticipation of economic growth and inflation. However, globally, central banks are taking an accommodative stance and have committed to keeping rates low for some more time. What we are experiencing right now is temporary adjustments due to the inability of supply to catch up with the sudden recovery in demand. Historically, inflation has been trending lower and has been anchored over the last few years.
Also, productivity improvement that we have seen in the post-COVID world, will limit any impact on profitability. I also believe that food inflation will remain fairly benign. So, I do not expect any phenomenal increase in interest rates in the near term.
We are still in the early stage of a recovery. From an equities perspective, strong earnings growth outlook will drive markets with brief adjustments along the way. We need to worry only when growth starts to peak.
Would you recommend investors take exposure to overseas markets, through international funds?
Developed markets have done well in the last decade. This is not to say that they will continue to outperform ahead. Over the next five years, emerging markets are likely to fare better. However, investors in Indian equities have hardly any exposure to the digital space and disruptive sectors such as e-commerce, which may be good long-term bets. Also, rupee depreciation will boost returns. Therefore, I would think that an investor could allocate about 10 percent to international funds.
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