When you have good news and record highs in the market, it tends to bring in a lot of people and maybe that is why NFOs have been so successful, says Vetri Subramaniam
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Vetri Subramaniam assumed charge in August as chief investment officer (CIO) of UTI Asset Management Company Ltd. Subramaniam was earlier head of equity. He spoke with Mint on the fund house’s strategy, impact of rising demand for passive investing on the mutual fund industry and sectors where he is finding value in this market. Edited excerpts:
Is it time to reduce exposure to equity and plough it back to the debt side?
Looking at the valuations compared with the history of the equity markets, and whether you look at large-, mid-, small-caps or the Nifty500, I think all of them are giving the message that this market is quite expensive. Even if we compare equity with an alternative asset class, say, bonds, as reflected by the 10-year government yield, equities as an asset class is not as attractive as it used to be. So, I would say, rebalance your asset allocation away from equity, but within the context of the overall asset allocation methodology that you are trying to follow. Therefore, any answer to which is more attractive, should be within your asset allocation framework. Today’s valuations are signalling that if you are over-allocated to equity, then certainly correct it back to your target.
You recently assumed charge as CIO of UTI AMC. So, what would be the way forward?
I will continue to make sure that we remain a process-based organization. The transformation we carried out when I came on board in 2017 was to focus on the process and say that we are a fund house where we could run multiple strategies all supported by one investment process. And what we’re trying to do now is bring the same set of learning to the fixed income side. We have a good and experienced team, but we’re trying to ensure that it’s the process that needs to be the backbone of the organization to meet the expectations that investors have from us over the long term. Of course, every investment team needs good people, it’s the combination of the stability provided by the process along with the quality of the people, which gives you the outcomes that you desire. So, we’ll just keep applying more of the same to the entire investment process and also where we can value add down the line, keeping in mind that UTI asset management is a leading mutual fund, but there are other plays we can make within the overall asset management space.
Why are we witnessing huge demand for new fund offers (NFOs)?
It seems that when the markets are having record highs, and I’m talking price levels, you see a lot of positive news flow. You see a lot of money getting attracted into the market. I’m not sure if that is necessarily a good thing. People who were sitting on the sidelines over the past few months have jumped in.
Also, some of these NFOs perhaps closed some of the gaps we had in terms of product offerings. In our case, for example, we didn’t have a small-cap fund or a focused fund, and we filled that up. And this may well be true for many of our peers as well.
Certainly, when you have good news and record highs in the market, it tends to bring in a lot of people and maybe that is why NFOs have been so successful.
Passive investing is the flavour of the season. How will the mutual fund industry be impacted?
I think there is space for both to coexist. The passive funds do one thing; they manage money at a very low cost. But at the same time, they cannot claim and do not attempt to create alpha either. With active funds, the attempt is to create alpha. Both products have their own costs and benefits. Our approach is that this is not a question of either-or, but a question of what is right for an investor from a cost perspective and to improve the overall returns that portfolio gives relative to the benchmark. Increasingly you will find that investors will create space in their portfolios for both active and passive. At the same time, we have seen in other parts of the world, a lot of the institutional markets, given that they work under slightly different sort of circumstances, could end up favouring the passive route of investing. We’ll just have to make sure that investors believe that as active managers at UTI, we’re able to create alpha for them.
Coming to the market, it has had a run-off over the past 18 months, and even the earnings have been good. So, where do still find value in this market?
Today, if we look at a sector with a mismatch between the structural growth rate that could take place over the coming years and the recent demand trends and valuations, then automobiles would fit into that pack. Of course, if you see cheap valuations, there are also existential questions, which is true about the automobile industry too. The concerns about EVs (electric vehicles), concerns about what that implies for the cash flow generation and return on equity. From a demand perspective, auto is an industry which has gone through a tough time for two-three years. But there is some value to be found.
The second sector is financials. There is some value to be found because the credit side has gone through challenges going all the way back to 2018. We have been in a period where loan growth was anyway decelerating, and covid-19 kind of added to that pain. But the good part is that, for the first time in many cycles, there are a handful of financial institutions, which not only pre-emptively made provisions on their books, but also raised capital and they’re well capitalized for growth. As you exit this difficult period, they are likely to gain significantly in terms of market share and profitability.
I would also look at larger healthcare, including pharmaceuticals. This sector has seen one leg of re-rating over the last one year, but we still think relative to the growth prospects, there are still opportunities there.
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