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Aniruddha Chowdhury/Mint
Aniruddha Chowdhury/Mint

Negative sentiment doesn’t mean it’s a bad time to invest

Sentiment was negative in 2013, 2008 and even in 2011 and 2012. During all these periods, while market performance was challenged for a while, subsequently rallies were fairly sharp. People who remained invested, have made money.

Manish Kumar, as the chief investment officer at ICICI Prudential Life Insurance Co. Ltd, oversees assets, both equity and debt, worth about 1,007 billion (as on 31 July 2015). Of his 22 years experience spanning equity research, trading, fund management, 11 have been with the life insurance company. Kumar shares his views on the current market environment, and how the company tries to meet the needs of both aggressive and conservative investors.

Is the current negative sentiment in the equity market justified?

The sentiment is negative but that doesn’t mean that this is a bad time to invest. For example, sentiment was negative in 2013, 2008 and even in 2011 and 2012. During all these periods, while market performance was challenged for a while, subsequently rallies were fairly sharp. People who remained invested, have made money. On the contrary, when sentiment was very positive and people invested heavily, the following 12 months of returns may not have been very good.

In the current situation, it makes even more sense. Fundamentally, because of the sharp correction in oil prices and the challenges in the Chinese economy, other emerging market economies are coming under pressure. There are many global funds that have exposure to emerging markets, including India, and which may be witnessing redemptions as investors aren’t happy about returns. Coupled with other markets, Indian equities has become a part of this sell-off.

The slowdown in China and other economies is good for India, because India is an importer of some commodities, especially crude. This means better trade balances and lower prices for us, lower inflation and better fiscal deficit for the government. Thus, we can be more constructive in reducing interest rates and stoke growth of the economy.

While picking stocks are you more inclined to give higher weight to growth or value?

As a philosophy, we wouldn’t like to be called value or growth driven. The mantra that we follow is value in growth and growth in value. If a growth stock is priced disproportionately high, it may not make money for you even if earnings growth remains high. We search for reasonable valuation in growth stories. With certain value stocks—they may remain undervalued for a long time as growth opportunities may not be there—we have to look for growth in value. We aren’t operating in a pure value or a pure growth territory. We should look at valuation in context of growth and try to find a reasonable match. Over and above that, we have filters of management capability, execution ability and so on. The basic filters are what help in times of uncertainties.

There is concern around credit risk. Fear of defaults is looming at a time when economic recovery is delayed. How are your portfolios positioned with corporate bonds?

We don’t invest in securities rated below AA. We have to balance maximising returns and delivering consistent returns. Lower-rated securities give a better yield but if there is a possibility of losing principal, then the effective return comes down. This doesn’t mean that we shouldn’t take any risk. But we need to see the direction of the economy, which has been southwards in the past few months. Some borrowers in the market don’t look good to us, either due to the stress in the industry or the way they operate. In some cases, we are wary of the inadequate equity cushion. Having said that, when there are possibilities of upgrades, we don’t hesitate in taking risk and add slightly lower-rated securities as well.

In the long run, equity can deliver good above-inflation returns whereas fixed income is more for near-term commitment. Insurance itself is a very long-term product. How does one marry the two aspects appropriately?

In traditional products, asset allocation isn’t really in the hands of investors; we decide that. In our case, it is broadly 80% debt and 20% equity—this helps in delivering stable returns slightly higher than inflation. This means that volatility is low on an annual basis, which is what many investors want.

In the current financial year, 85% of our business is coming from unit-linked insurance plans (Ulips). In these, the investor can decide whether to invest in equity or a mix of equity and debt.

How much returns do traditional products give? What proportion of Ulip investors actually chooses pure equity exposure?

Various factors impact traditional policy returns, such as age of the policyholder and policy term. So, there is a wide range of returns.

A Ulip does not only mean equity; it is a powerful instrument to invest across both asset classes i.e. equity and debt. Roughly 55-60% of Ulip premiums are directed to equity, but this can vary. There are times when 75–80% premiums can be in equity; at times it could be lesser than 50%. Ulips constitute about 75% of our assets under management (AUM). The debt-equity ratio in our AUM is 52:48. About 47% of new fund flows are in debt (for the first quarter on financial year 2016).

What is the average holding period for a Ulip?

Most investors come with at least 5 years’ horizon, although we propagate at least 10 years. Investors tend to withdraw after 5 years. But on the positive side, this used to be 3 years. We are moving towards a longer-term horizon.

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