In an interaction with Shweta Papriwal, Editor, IIFL, Sanjay Dongre, Executive Vice President and Sr. Fund Manager – Equity at UTI AMC Ltd said, "today the valuations have become cheaper. Since there is no visibility of earnings, it is better to look at other matric such as price to book value to gauge the fall in the valuations."
How are you looking at the current market scenario? How do you see the road ahead for our equity market?
Should we brace ourselves for a long period of a sideways market as the world and India slowly attempt to get back on their feet again? Black swan event like COVID and lockdown of economy has created uncertainty on both demand and supply side. As there is no absolute visibility of earnings, the market has reacted violently with decline of more than 25% in take last three months. If we look back at the history of last 20 years, there were sharp decline in the markets in 2000, 2003 and 2008. Market has taken 12-15 months for bottom formation process and recovered to previous highs in 3-4 years. In the COVID environment, key is to have herd immunity getting developed, to find treatment and to get vaccine in next 12 months time. In such a scenario, normalcy is expected to return to the economy faster thereby removing the uncertainty and improving the visibility. Today the valuations have become cheaper. Since there is no visibility of earnings, it is better to look at other matric such as price to book value to gauge the fall in the valuations. Today the valuations are very close to the valuations of 2009 when one assess various sectors/companies on price to book multiple. However one needs to brace for high volatility in the next 12 month period.
Which sectors and themes are you now over and underweight for portfolio strategy?
Cash crunch created by Covid will severely impact businesses/govt. finances. This could trigger rapid consolidation, technology driven disintermediation, large asset sales &govt's subsidy distribution getting better targeted. In the short to medium term, emphasis is likely to be on Health and Hygiene. Consumer behaviour would favour online platforms and aversion to crowd. As the valuations have become attractive across the market cap, stock selection gets higher priority and importance. 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 havepositive outlook towards FMCG, IT, PHARMA. However attractive opportunity are also present where disruption on supply side is leading to surviving incumbents thriving post disruption
Are you implementing any changes in fund strategy for UTI Infrastructure fund or focusing more on certain sectors where you see great value?
There is no change in the strategy for UTI INFTRASTRUCTRE fund.The fund continues to have positive outlook on the sectors such as Telecom and on companies whichh are part of gas supply chain. They are relatively less impacted in the COVID environment.Value seems to have emerged in the power utility sector where the valuations have become attractive and earnings impact is less on account of regulated return.
Referring to the fact sheet of your fund ‘UTI Multi Asset Fund’. How are you looking at its performance in the current scenarios? UTI MAF follows the quant model for dynamic asset allocation. Quant model uses three factor model namely trailing dividend yield, trailing price to book and 12 month forward price earning multiple. On Feb 28, 2020 when the nifty was at 11200 level, the fund had net equity exposure of 41.28% and rest was in arbitrage, debt and gold. On March 31, 2020, when the nifty was at 8600 levels, the fund increased its net equity position to 77% and rest in debt and gold.
One year return as on Apr 30, 2020
UTI MAF Return. -4.05% Avg
Return of funds in Hybrid Category. -9.22%
Avg Return of funds in Large Cap category. -13.29%
Above data shows that the UTI MAF by following the quant model for dynamic asset allocation,was able to protect the downside to a large extent compared to the funds following the static asset allocation.Now the fund has 78% equity at current market levels and thus it would be able to participate largely in the marketrally on the upside. Thus the lower equity at higher market valuations and higher equity at lowermarket valuations may enable the fund to deliver higher risk adjusted return to the investors.
What are the two biggest lessons for you during this phase?
When the growth vanishes for high growth stocks, it leads to substantial de-rating of stocks. Secondly one needs to be more cautious about the companies having high leverage as it work both way. In high growth period, it helps companies to generate higher returns for its shareholders. In bad times, it may lead to a question of survival.
What is your message to investors and distributors keeping in view the current happenings in the market?
Investors and distributors should pay utmost importance to asset allocation. At higher market valuations, investors needs to have lower exposure to equity asset class. At lower market valuations, investors should have higher allocation to equity asset class. With market declining more than 25% in the last three months, the valuation has become attractive in the equity market. Current COVID crisis has created opportunity for the investors to increase its allocation to equity. In next 12 months, equity market may undergo the process of bottom formation while economy may start returning to normalcy. Investor should use this timeframe to increase their allocation to equity asset class. Systematic investment plan (SIP) is the best route to ride the volatility in the equity market.