In an interaction with Shweta Papriwal, Editor, indiainfoline.com, Mr. Sanjay Dongre, Executive Vice President and Sr Fund Manager, Equity, UTI AMC Ltd. said
"Multi Asset Funds are talk of the town on account of black swan event experienced by the capital market in the last twelve months".
How are you looking at the current market scenario? How do you see the road ahead for our equity market?
Post March 2020, all the major economies including India came out with all time high monetary and fiscal stimulus to counter the slowdown caused by COVID-19. Such a large monetary and fiscal stimulus convinced the market that it would lead to V shaped recovery in the economy and earnings. Hence, we had witnessed V shaped recovery in the stock markets. From economic point of view, large monetary stimulus is leading to excess in the money supply. M3 (money supply) growth at 12% is now far in excess of nominal GDP growth which is inflating the financial assets like equity markets.
In the short term, there would be disconnect between real economy and equity market. However excess liquidity may create its ecosystem in terms of growth, credit and inflation. Generally, equity markets are leading indicator and hence may move well ahead of recovery in economy and earnings. Quarterly results of companies reported significant reduction in other expenditure. As per most of the managements, part of reduction in cost/expenditure are structural in nature. If this were to be true, then operating leverage could be big surprise as the sales recovers to previous levels. This means, earnings of the companies could recover to previous highs much faster than market is expecting. Risk to the equity market at current valuations would be high inflation and resultant high yields.
How has the performance of your Infrastructure fund has been performing? What are your expectations?
One of the ways of reviving the economy would be the heavy govt spend on infrastructure sector which was clearly emphasized in the Budget present by the Govt in Feb 2021. High spend on capital goods/infrastructure sector tend to have high multiplier effect on the demand in the economy over medium term. Higher ordering in the infrastructure sector such road, railways, metro, urban infra etc. would benefit EPC players, equipment manufacturers, cement companies etc.
UTI Infrastructure fund is focusing on the following:
Companies in gas supply chain
Corporate oriented banks
Current valuations of EPC cos and corporate oriented banks are attractive when compared to historical valuations. Early normalization of demand should benefit cement sector. Gasification of Indian economy may continue to benefit companies in the gas supply chain in the medium to long term. With three players left in the telecom sector, increase in tariff should reflect in higher cash flow generations for the telecom companies.
Recently, fund houses have been emphasizing a lot on multi asset funds. Why has multi asset funds become a most talked about category recently?
Multi Asset Funds are talk of the town on account of black swan event experienced by the capital market in the last twelve months. Over last 20 years, there were three occasions where volatility in the capital market was at peak. On these occasions, there was sharp fall followed by sharp recovery in short time period. This kind of volatility in various asset classes can be nerve wrenching for the investors. It can cause damage to their portfolio in short to medium term. Only way to deal with violent volatility in the capital markets is to have balanced asset allocation which can reduce the short-term volatility without giving up too much return in the long term.
One strong reason to have exposure to various assets classes is that ‘winners rotate’. It is very difficult to predict winning asset class every year. All investment Gurus give one investment advice “Don’t put all your eggs in one basket”. Depending on the risk appetite and investment horizon, investor can balance risk and reward by allocating investment in various assets classes such as equity, fixed income, gold and real estate. Asset allocation does not eliminate risk. But it can reduce exposure to extreme high and lows in performance.
Why should investors keep investing in multi asset funds across market cycles?
Multi asset funds having static asset allocation may not give best results to investor across the market cycles. Asset allocation in multi asset funds need to respond to changes in the market conditions. For Investor, most beneficial form of portfolio rebalancing is dynamic assets allocation. When applied in a discipline way over a time, dynamic asset allocation can provide various benefits to the investors namely
Lower portfolio volatility b) Comparable long-term returns c) Fewer extreme negative outcomes.
Valuation of broader market can be used as a trigger for dynamically changing asset allocation in the multi asset fund. Globally, valuation matrix such as P/B multiple, P/E multiple, Dividend yield are used to gauge the extent of market overvaluation and undervaluation. These parameters can be used to dynamically alter asset allocation in multi asset funds.
UTI Multi Asset Fund is dynamically managed multi asset fund and it invests in Equity, Debt and Gold. For dynamically changing asset allocation, the fund uses three factor quant model. The three factors are trailing P/B multiple of Nifty, 12-month forward P/E multiple of Nifty and Dividend yield of Nifty.
What is your message to investors and distributors keeping in view the current market scenario?
Valuations have started becoming richer when compared to historical valuations. One strategy to beat volatility would be to pay utmost importance to asset allocation. At higher market valuations, investors need to have lower exposure to equity asset class. At lower market valuations, investors should have higher allocation to equity asset class. In order employ this strategy, investor needs to follow valuation-based discipline while investing in equity asset class. Current COVID crisis had created opportunity in Mar 2020 for the investors to increase its allocation to equity. At current high valuations, investors should be prudent enough to reduce allocation to equity class. UTI Multi Asset Fund by following the valuation-based quant model for dynamic asset allocation, is able to meet the above-mentioned investor objective. The lower equity at higher market valuations and higher equity at lower market valuations enabled the fund to deliver higher risk adjusted return to the investors.
How have you changed your sectoral weightage to thrive in the covid-19 world? What are the sectors that you are overweight and underweight at this point?
In post Covid world, one needs to look at the companies having leadership / dominating positions in the sector, having strong balance sheet and strong cash flow generation. Such companies are likely to navigate the uncertainty far better and emerge stronger post crisis. From short to medium term perspective, funds would have positive outlook towards IT, Pharma, Telecom, Speciality chemicals and Financials. However attractive opportunity is also present where disruption on supply side is leading to surviving incumbents thriving post disruption.