Except for PSUs, there isn’t genuine value among value stocks: PGIM Mutual Fund
In the upcoming Budget, we are looking forward to further simplification of norms for investing into mutual funds and a level playing field, says Srinivas Ravuri, CIO Equities, PGIM MF.
PremiumPGIM India Mutual Fund, the erstwhile DHFL Pramerica Mutual Fund has been charting a slow but dogged path to recovery in the past year, since the shock collapse of its former sponsor, DHFL. 2019 saw a flight of assets from its debt schemes, some of which had exposure to DHFL. In the middle of that year PGIM, the joint-venture partner and a large global asset manager acquired sole control of the asset management company from DHFL. This was followed by the appointment of HDFC Mutual Fund's Srinivas Rao Ravuri as its CIO Equities.
In 2020, some of its equity schemes rose to the top of their category charts, particularly PGIM Diversified Equity Fund and PGIM Midcap Fund managed by Aniruddha Naha, under Ravuri’s direction. They have delivered returns of 37.18% and 49.01% respectively in the past year compared to 22.11% and 26.74% for the S&P BSE 500 and S&P BSE MidCap 150 respectively (as of 21 January).
It's international feeder fund, PGIM Global Equity Opportunities Fund has also delivered a strong 68.41% return over the past year, although much of it stems from consumer discretionary and international tech stocks in the underlying scheme that it feeds into. Mint spoke to Ravuri to decode PGIM's equity funds strategy and to understand the soon-to-be-launched Balanced Advantage Fund (BAF).
What is responsible for the outperformance of PGIM Midcap and Diversified Equity Fund in the past year?
In both these schemes, we pick companies that have characteristics such as high free cash flows and low debt. We pivoted towards pharma and chemicals and away from financials towards the end of 2019 - we were far less optimistic about the economy than our peers. That tilt paid off in a big way in the year gone by. We have taken growth at a reasonable price (GARP) as our approach and we do not see buying cheap stocks--simply because they are cheap--as a viable strategy. Except for PSUs, there isn’t genuine value out there among so-called value stocks. In the case of PSUs, there are reasons to be optimistic. The government is talking about buybacks rather than offers for sale which tends to depress the price of the company. Buybacks also involve tenders of government-owned shares and hence can help reduce the fiscal deficit.
The market looks overvalued. Where do we go from here?
We are not buying the market. We are buying a set of companies that we believe offer value. If you look at our portfolios over the past few months, you will see a significant rotation from companies that have run up into those that still offer value. We do not take cash calls. But that is why we are launching the BAF - asset allocation becomes important in volatile markets and timing the market is very difficult. We have created an enabling provision for international equities up to 35% in the BAF but we have no active plans of allocating to international stocks, as of now.
The BAF follows a PE model to determine asset allocation. Should more valuation measures be considered? What does the model currently allocate to equity?
Our work with other experts in this area suggested that we stick to a core philosophy that is simple yet effective and we believe that PE is an effective signal for attractiveness and expensiveness of the markets. We do not want to complicate that any further. At current valuations, our BAF will be at the minimal 30% equity threshold. It does have enablement for international equities but not gold.
Any expectations from the upcoming Budget?
First, let’s not have high expectations from the Budget as whatever needs to be done for the economy is being done outside the Budget as well. There is still an element of doubt on current economic indicators how much of this growth is driven by pent-up demand and how much is structural demand . So in this context, direction from government on roadmap for sustainable growth is what we are keenly looking forward to. Government seems to be extremely receptive to suggestions from the industry. From a mutual fund point of view, we are looking forward to further simplification of norms for investing into mutual funds and a level playing field.
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