Photo: HT
Photo: HT

How fund managers manage the bull run

Fund managers are tested not only during market volatility but in bull runs too. Some are coping by refusing fresh inflows. Here are some more of their strategies

In the first week of December 2017, L&T Emerging Businesses Fund would most likely stop accepting inflows in excess of Rs2 lakh a day. Fund manager Soumendra Nath Lahiri refused to confirm this but another senior official from the fund house said that a board meeting took place earlier this week to take a decision on this issue. L&T Asset Management Co. Ltd would not be the first instance of a fund limiting its inflows. Why do fund houses limit or stop accepting money occasionally?

The S&P BSE Sensex has returned 24% returns so far this calendar year, after returning 2% returns in 2016 and losing 5% in 2015. Equity mutual funds have returned 22% over the last 1 year period and 17% over the last 5-year period. Investors are happy and pouring over Rs5,500 crore every month through systematic investment plans (SIPs). But are fund managers happy with this?

Mint spoke to fund managers and financial advisers to know how they are managing money in these markets. If you are investing in mutual funds, this gives you a good idea of where your money is getting invested.

Holding cash

When equity markets go up continuously, many fund managers increase their cash levels, steadily if not sharply. As per Value Research, 21 out of 38 fund houses have increased their cash levels in their equity funds on the whole. At end of September 2017, equity funds held 5.85% cash of their total equity assets, up from 5.65% in August and 5.79% in July. 

One such fund house is Quantum Asset Management Co. Ltd whose cash levels in its equity funds (it has just two actively managed funds) was at 21% at the end of September 2017, up from 13% in May 2017. Fund manager Atul Kumar feels that broadly the market looks overvalued, but there are “pockets available at good valuations, still." And he added: “We follow a bottom-up stock picking strategy; we don’t hold cash just because equity markets hit a level, say 30,000. We are seeing less value in the markets these days," said Kumar. 

Then, there are equity-oriented schemes like ‘dynamic funds’ that can even increase their cash levels to up to 35%, in some cases 100%, as opposed to other diversified equity funds that can hold only up to 10%. ICICI Prudential Dynamic Fund (IPDF)’s cash level was 25% of its assets at September-end, compared to 19% in May 2017. Invesco India Dynamic Fund’s (IIDF) cash level was 34%, up from 20% in the same period. As these funds can hold more cash than plain diversified equity funds, they prefer to hold cash when they can. 

Behind a pile of 5.93% cash (of its overall equity assets) that BNP Paribas Asset Management (India) Ltd has been sitting on (end of September 2017), lies BNP Paribas Dividend Yield Fund (BDYF), whose allocation to liquid short-term debt instruments was close to 9%, up from 5.67% as of July 2017-end. “We normally don’t take cash calls, but we have been getting a lot of inflows in BDYF on the back of its good performance. Since it follows value-style investing, we are waiting to identify the right stocks. Also, when the price movements in some of our holdings are so sharp, we sell but avoid redeploying so quickly because we wait for the right price," says Anand Shah, deputy chief executive officer and head of investments at BNP Paribas Asset Management India Ltd.

Searching for value….

Although many fund managers await the earnings of companies to pick up, many fund managers we spoke to claim that they are finding some avenues to invest in. So where are fund managers investing? According to figures by Morningstar India, banks and financial institutions remain the largest areas where fund managers still invest these days. At the end of September 2017, mutual funds held close to 30% in banks and financial services, almost the same as in July 2017. Some fund houses, though, have increased their allocation in healthcare and information technology sectors; which haven’t done well in recent past.

“We’ve been slightly ahead of the real estate sector space. We believe this sector will become a significant driver going ahead. The good-quality listed real estate companies are expected to deliver," said Soumendra Nath Lahiri, chief investment officer, L&T Investment Management Ltd.

A recovery in metal prices has also given hope to fund managers like Prashant Jain, executive director and chief investment officer, HDFC Asset Management Co. Ltd.

“Many sectors that were experiencing low profitability—like metals, corporate banks, engineering—are gradually reverting to their historical average levels of profitability. This is driven by higher metal prices thereby leading to improving growth for engineering companies," Jain said.

Fund managers like Anup Maheshwari, chief investment officer-equities, DSP BlackRock Investment Managers Ltd do not believe in holding cash as “investors wants an exposure to equity markets when they come and that is what we have to provide…at all times." He added that in “pretty much all markets, there are some opportunities." Like Jain, Maheshwari is drawn to cyclical sectors like materials (such as cement, agro-chemicals, specialty chemicals), as well as automobiles at present.

…in newer avenues like IPOs

When existing investment ideas come in short supply, many fund managers look forward to new issues that hit the market. And the year of 2017 hasn’t disappointed. According to figures provided by Prime Database, there have been 27 initial public offers (IPO) so far in 2017, up from 26 in all of 2016 and 21 in 2015. A total of Rs3,073.07 crore have been allotted to mutual funds in 2017 so far, compared to Rs1,433.78 crore in 2016. According to Prime Database, three of the biggest allotments to mutual funds this year from the IPO segment have all been from insurance companies. Amidst companies from the usual sectors that have hit the market, 2016 and 2017 have seen insurance companies as well as the first mutual fund house in India being listed. In 2016, ICICI Prudential Life Insurance became the country’s first insurer to get listed on the stock exchange after its Rs6,000 crore public issue. Four insurance companies, so far, have got listed with two more insurance companies having just completed their IPO process and are expected to get listed soon. In October 2017, Reliance Nippon Life Asset Management Ltd, India’s third largest mutual fund manager, also got listed. In 2018, HDFC Asset Management Co. Ltd, India’s second largest mutual fund is expected to get listed. “While financial services like banks continue to be a space where mutual funds deploy capital, new spaces like insurance and mutual fund companies are opening up, which are interesting avenues," said Maheshwari. 

What should you do

If your SIPs are going on, then continue them. There is little merit trying to predict if the markets are indeed overheated or not and if and when there would be a market correction. Those who exited equity markets last year because they thought that markets were overheated, are now sitting on cash and missed out on the 2017 run.

But taper your expectations, going forward in the market. And existing investors who have their financial goals approaching in a year’s time or two, it isn’t a bad idea to switch to conservative mutual funds like short-term debt funds to ensure your capital stays protected, should equity markets correct.

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