As markets consolidate and the fear of a big correction wanes, investors will come back, and flows should start to turn positive, says Tyagi
NEW DELHI :
The past year was not good for the mutual fund industry from the inflows perspective. Ajay Tyagi, executive vice president and equity fund manager at UTI AMC talked to Mint about the outlook of the mutual fund industry, how markets will behave amid the second wave of covid-19 and his philosophy of picking stocks. Edited excerpts:
What philosophy do you follow when picking stocks?
UTI Flexicap fund follows a philosophy of buying high-quality businesses that have the ability to grow for an extended period of time. Quality signifies the ability of a business to sustain high return on capital employed (RoCE) or return on assets (RoA). Truly high-quality businesses are those that are able to generate high RoCEs and/or RoAs even during difficult times for their industry or sector and therefore operate above their cost of capital at all times.
More often than not, a business with high RoCE/ RoA shall be able to generate strong cash flows and these strong cash flows become the source of economic value creation. Growth on the other hand signifies a steady and predictable growth trajectory rather than cyclical and volatile growth.
Cyclical growth can be highly unpredictable and can surprise investors in either direction as against secular growth where there is relatively more certainty in understanding the long-term drivers and hence future outcomes. While high-quality businesses create economic value, a high-growth business enables the compounding of this economic value. It is for this reason that the fund’s favourite hunting ground for stock selection is the intersection of quality and growth.
Do you think the market is under-reacting to the covid-19 situation?
The markets did go through a very deep correction in the first few weeks of the breakout of the pandemic last year. However, as lockdowns got lifted and economic activity restarted, it becomes clear that there hasn’t been any structural damage to India’s growth outlook. The intrinsic value of a business in its most fundamental sense is nothing but the present value of all the cash flows that the business will generate throughout its life. Since the impact of the pandemic is more transient rather than permanent, we can safely assume that there hasn’t been any significant change to the estimates of the future cash flows of most well-run businesses.
Having said that, one can certainly argue that the valuations of the market at present are higher than the long-term averages by about 15-20%.
In the UTI Flexi fund, the financial services sector has the biggest allocation. Does this warrant a change?
We are bottom-up investors, and hence, we don’t believe that we should change sectoral allocation due to macroeconomic factors. We focus on the underlying businesses that are part of the portfolio rather than on the state of the market, global or local macro factors, etc. Hence, we don't try to predict the sectors that will be most favoured or least favoured in the short run. Our bullish view on the financial services sector is premised on the fact that the credit-to-GDP ratio is very low, and this will continue to improve. Banks that have developed strong underwriting processes with low credit costs and high RoAs will continue to create value and compound this value on account of sustainable growth.
Mid- and small-caps have done well compared with large-caps over the last year. Will a fresh spike in cases change this equation?
Mid- and small-caps have done well over the last year and that is now getting reflected in their valuations. Our philosophy is about buying resilient businesses that have strong cash flows, strong balance sheets and can withstand big drawdowns in the economy like we witnessed last year. To that extent, we are sanguine about the impact of the second wave on the mid-caps that we are holding in our portfolio. In general, we would tend to believe that the impact of the second wave would be more on weaker businesses that are leveraged, don’t have sufficient cash generation to sustain themselves, etc. And such businesses can be there across large-, mid- and small-caps.
How do you evaluate the year gone by for the mutual fund industry?
The past year has not been good for the mutual fund industry from a flows perspective. The equity funds, in particular, saw net outflows through the year although they are stabilizing now and are starting to turn positive. While SIP (systematic investment plan) flows in equity funds have not grown but the silver lining is that they have remained steady. We feel as markets consolidate and the fear of a big correction wanes, investors will come back, and flows should start to turn positive.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!