The Economic Times
English EditionEnglish Editionहिन्दीગુજરાતી
| E-Paper
Search
+

    Markets may remain volatile in near term, Nimesh Shah of ICICI Pru MF

    Synopsis

    "No one knows how long the pandemic related situation will continue and hence the fallout from this and the magnitude of economic impact remains hazy."

    ET Online
    Mutual fund investors are facing a crisis of confidence. It is increasingly becoming difficult for them to make sense of a volatile stock market, and the happenings in the debt mutual fund space. Shivani Bazaz of ETMutuaFunds.com spoke to Nimesh Shah, MD & CEO, ICICI Prudential Mutual Fund, to find out how he views the current situation. "No one knows how long the pandemic related situation will continue and hence the fallout from this and the magnitude of economic impact remains hazy. So, in the near term, it is best for investors to bear in mind that the equity markets are likely to remain volatile," says Shah. Edited interview

    Mutual fund investors are facing a crisis of confidence. Prospects of the equity markets are bleak due to the economic disruptions caused by the Covid-19 pandemic. Debt mutual fund space is rocked by the Franklin Templeton episode. The space was already hit by downgrades and defaults. What would you tell investors at this juncture?
    In March, we had communicated to investors that it was the right time to invest in equities. Over the past few months, the global central banks have displayed that they had more money than all the short sellers and created one of the sharpest rallies in equity market history. From 23 rd March lows till date, the benchmark indices such as the BSE Sensex and Nifty surged 36 percent and 37.2 percent, respectively. The role of global central banks in equity markets has been understated.

    That said, no one knows how long the pandemic related situation will continue and hence the fallout from this and the magnitude of economic impact remains hazy. So, in the near term, it is best for investors to bear in mind that the equity markets are likely to remain volatile. They could consider products like dynamically-managed asset allocation funds, which can help make the most of such challenging times and choose to continue with their systematic investment plans (SIPs).

    On the debt side, a recent study by one of India’s foremost rating agencies CRISIL Ltd. is relevant. It states that the closure of six debt fund schemes by a certain fund house has frayed investor sentiment. But the study concludes that things aren’t all bad. “Indeed, dive a little deeper and there are streaks of silver – options among various categories of debt mutual funds that can help ride over the challenges being posed by the pandemic's economic blow,” it explains.Indeed, debt markets offer attractive investment opportunities across varied time periods for the investor, ranging from the short-term to medium and long-term. Investors and advisors must do a careful evaluation of the fund houses and the schemes. Fund houses which have a demonstrated track record of not facing any defaults or portfolio separation would be an ideal choice for investments. While choosing schemes, it would be advisable to consider the risk appetite and liquidity needs of the investor too.

    ICICI Prudential has a solid track record of more than two decades in managing debt investments. There has been no defaults, nor has there been any delay in interest payments in our debt fund holdings. Our fixed-income schemes did not have any exposure to names, which have been under stress over the past two years. This is largely due to the robust processes, which have so far helped in making discerning decisions with no risk of negative developments in the portfolio.

    Reflecting the mood of investors, the inflows into equity mutual funds have fallen for the second consecutive month. What are your thoughts?
    Inflows into equity mutual funds have been subdued for the last two months largely on account of market volatility and uncertain economic environment, arising from the Covid-19 pandemic. However, the silver lining is that all equity fund categories registered net inflows in the month of May. This indicates improving investor sentiment. Going forward, we believe that as the uncertainties wane and the economy rebounds, the equity market sentiment too would improve, leading to fresh inflows into equity markets.

    Currently, an individual investor is well poised to gain from investments committed at this juncture. Barring the top few names where the valuations are expensive, the others are available at relatively cheap valuations, many of which are sustainable dividend yield stocks.

    Credit risk funds continue to be under pressure. The category has seen massive outflows once again. Do you think there is a future for this category?
    In April, credit as an asset class was very attractive, but that segment saw huge outflows mainly due to the panic around winding up of debt schemes incident. However, investors have realized that the trouble in debt markets is not systemic in nature. All funds in the category were able to honour redemption requests from investors.

    Hence, it is business as usual for fund houses where the quality of the underlying debt paper is good. We believe credit as a category is here to stay. From a cycle perspective, Indian credit is going through a burst phase. If one invests in this period, we believe it is difficult to lose money making it an opportune time to invest in this asset class.

    At ICICI Prudential, the focus on client selection, keeping away from concentration risk, using our own due diligence instead of relying only on credit rating as the selection tool, managing liquidity risk and not chasing Yield-to-Maturity (YTM) are all factors that have helped the credit risk fund to deliver a positive investment experience.

    Investors should be mindful of the fact that the key to better investment experience lies in selecting a well-managed fund that matches one’s goals and risk appetite. To identify such funds requires certain skill sets, which retail investors may not necessarily have. Here, financial advisors play a very important role in the value chain by guiding investors to choose the right funds.

    ICICI Prudential Mutual Fund has been votaries of hybrid funds, especially dynamic asset allocation funds or balanced advantage funds. The entire hybrid category is facing outflows. What is happening? Does it change your view on dynamic asset allocation funds?
    The common behavioural pattern seen among the investors is to invest in equities when the market rallies even at higher valuations and stop/pause their investments when the market corrects. This tends to hurt an investor in the long run and minimises the returns made on the investment. During such times, it pays to have a counter-cyclical approach.

    In order to address this investment flaw, we launched the balanced advantage scheme more than a decade back; a fund which invests in a counter-cyclical manner. The investing strategy also takes care of one’s asset allocation needs. Our objective while launching this fund 10 years back was to get investors invested in a product, which will deliver a good risk-adjusted experience of investing even in volatile equity markets.

    Balanced advantage got finalized as a category of hybrid funds in Indian MF industry post the SEBI Scheme re-categorization exercise. The core idea behind the balanced advantage category of schemes is that the allocation between asset classes is dynamically managed. However, within this category there is a wide variation in the asset allocation practices followed by various fund houses. Some fund house may follow market metrics such as price-to-earnings (P/E) ratio, while some others may use a combination of P/E and price-to-book (PB) to decide on their equity allocation. In some other cases it is trailing P/E of a particular index or in-house propriety model which helps decide on the allocation to equity and debt. In our case, we predominantly decide the allocations based on a P/B model.

    As a result, the performance of the funds in this category too vary. In this backdrop therefore, it is not meaningful to have a near-term performance comparison. Funds, which have more equity exposure in a rising market, will tend to do well and vice versa. The performance and consistency of a fund in this category can only be judged across a complete market cycle. So, making an investment decisions or reviewing a fund solely based on near term performance may prove to be a sub-optimal approach to investing.

    Going forward, we believe the balanced advantage category has the potential to reach the scale of the present equity assets under management (AUM) of the industry. With the increased awareness around mutual funds and the importance of asset allocation for long term wealth creation, we believe balanced advantage category of funds stands to attract larger investor interest.

    Many investors are actively considering multi asset allocation funds at this point. What is your view on them?
    At ICICI Prudential, we focus a lot on asset allocation because we believe that if one gets market cycles right, then one can outperform the average gains. What asset allocation does is that it gives primary importance to market cycles. This is why we are very focused on market cycles/asset allocation.

    If an asset class is at the top of a market cycle, then it makes sense to stay away from it. Conversely, if the asset class is at the bottom of a cycle, then it is time to invest into that asset class. For example: real estate cycle was at its peak during 2011-2013. Any investor who sold real estate anywhere in urban metro during these years made huge gains. Post 2013, real estate sector has not delivered returns. Similarly, in 2007 the equity cycle was at its peak.

    In 2012, when we launched ICICI Prudential US Bluechip Fund, investors were very skeptical about making gains from investing in US markets. Today, after an eight-year bull run in US equities, investors are opting for international funds. Similarly, in January 2018, one of the biggest decisions we took was to return money to small-cap investors in the portfolio management schemes (PMS), which turned out to be an excellent investment decision. Post that, small-caps have underperformed large-caps by a wide margin.

    Each of these decisions was based on where we were placed in a market cycle.

    Do you think investors should play it safe at this point? Do you think tactical bets are a good idea at this point since the valuations in many sectors are attractive?
    Coronavirus is a medical pandemic. No one knows how long the current situation may continue. When the spread of infection tapers off, it will boost sentiment in equities. However, in case a second wave begins in India, as is said to be in certain parts of the globe, volatility is bound to stay.

    Given all these factors, in the near-term markets are likely to remain volatile. So, the optimal approach to equity investing would be through asset allocation funds.

    That said, with respect to India, it is difficult to gauge where exactly we are currently, in a market cycle. Mid, small and value themes are in the early stages of the cycle. So, one can opt for an SIP/STP for investing in these segments.

    ICICI Prudential Mutual Fund is known for identifying a category to bet on to create wealth over a long period. What are you rooting for now?
    Within the debt universe, we believe credit as a space remains attractive due to valuation comfort owing to the high spreads between accrual schemes and repo, which provides a good margin of safety for investments made.

    In equity, we are positive on the value theme since the divergence between value and growth stocks continues to prevail. We are recommending investors to take exposure to schemes with a value bias. Currently, fundamentally sound value stocks are available at inexpensive valuations, providing good dividend yield and having strong earnings visibility.

    The other category we are positive on is the asset allocator category of funds. The current rally seen in equity asset class is largely fuelled by global liquidity. Going forward, whenever the US Fed tapers its accommodative stance, a market correction across the globe including India, cannot be ruled out. At such times, only asset allocation techniques come to aid.

    Hence, asset allocation techniques should be one's mainstay as it is the only way to protect capital relative to the market at all points in time. We believe this category is well placed to make the most out of the volatility prevailing in equity and debt asset classes.

    Any special advice to our readers?
    Follow all the safety protocols to remain safe amidst the covid-19 pandemic. In terms of investing, be mindful of the basics and seek advice from a capable financial advisor.


    Also Read

    The Economic Times