What is your view on the valuations in each segment of the market – large, mid, small cap stocks?
Over the past month, we have seen high volatility and a sharp fall in the markets with the frontline largecap/midcap/smallcap indices falling 20-25%. For the largecap Nifty index, the 1-yr forward P/E and P/B multiples are below their long-term average. The yield-gap ratio, which compares the Nifty earnings yield to the 10-yr Gsec yield, also indicates that equities are in the attractive zone. Many individual midcap and smallcap stocks have fallen 25-40% and the their valuations are attractive.
Of course, one will need to take a closer look at the impact on earnings due to the ongoing events but there are sufficient pockets of opportunity for long-term investors.
How do you read the impact of coronavirus outbreak and the sharp correction in past few days?
Markets do not like uncertainty and the coronavirus has impacted the economic outlook for the short term due to which we have seen a sharp 20-25% fall in global markets, including India. While the coronavirus is seemingly under control now in China, it is spreading rapidly in other parts of the world.
In the US, the Fed has cut its policy rate to near zero and has indicated that while the next quarter will get impacted, it is too early to take a call on what will happen after that as the economic outlook is evolving on a daily basis.
In India, the government is taking proactive action and we have not yet seen the virus spreading rapidly but a few new cases are emerging every day. Next few days will be critical to watch for as we have seen that week 3 and 4 are the most important in terms of containment of the virus. Hence, it is advisable to take a cautious stance, as the markets will remain volatile until we have some clarity on whether the virus is being contained.
Only a handful of stocks have driven the stock market in past few years. What is your strategy to pick stocks in this scenario?
Following our process in a disciplined manner has helped us look beyond just the handful of stocks that have driven the market in the past few years and identify sectors and stocks which can provide reasonable returns over the next 3-to-5 years.
Our portfolio construction starts with a top-down investment approach where the global and domestic macro factors as well as liquidity conditions are evaluated. This is followed by a detailed sector analysis, which finally leads to bottom-up stock picking.
While selecting stocks, our focus is on companies that have potential of high top-line and earnings growth but are reasonably valued and provide a margin of safety. Strong corporate governance, low leverage, dividend history, and free cash flow are some of the critical metrics we look at. We use various relative valuation parameters to screen for businesses at attractive valuations.
Our portfolio has a mix of both secular and cyclicals stocks. Stock selection based on high conviction helps to maintain our focus even during periods of high market volatility.
Why do you think a multi cap fund is a ' must have’ in every investment portfolio?
A multicap fund is a ‘must have’ as it provides the following advantages:
- Ability to ride market cycles: Multicap approach provides the flexibility to be in the desired market cap at the right time and benefit from market mis-pricing. It is ideal for investors looking to take exposure to equities but unable to time the market.
- Optimal mix of market cap: Largecap exposure provides stability and reduces overall portfolio volatility while mid-and-smallcap exposure creates alpha.
Especially in the current environment, wherein the largecap Nifty index is almost flat and the midcap index is negative over a 3-year period, a multicap fund is well-suited not only to provide stability to the portfolio but also capture the upside once the market bounces back.
Take us through the investment and product strategy of Aditya Birla Sun Life Equity Fund. How is it different from other schemes in the market?
Delivering consistent performance is a cornerstone of the fund and guides the investment and product strategy. Our focus on growth while not compromising on quality is a key differentiator for this fund. It helps to reduce risk in a highly volatile environment and we have managed to avoid most of the stocks, which have been in the news for the wrong reasons.
The fund has grown over 68 times in 21 years since its inception. It has consistently beaten its benchmark while generating 21.4% CAGR return since its inception in Aug 1998, which is equivalent to doubling an investment every 3.5 years. The fund has been in the first or second quartile of peer rankings consistently.
The consistent performance of the fund is reflected in the fact that it has declared 27 dividends in 21 years and has not missed a single dividend since 2009.
How should advisors position this fund to their clients?
In terms of positioning, ABSL Equity Fund is a multi-cap fund with the flexibility to move across market caps and sectors. While being a flexi-cap fund, the fund has maintained a discipline around the market cap positions. It is more of a large cap-oriented fund with 65% - 75% allocation to large cap stocks and 25% - 35% in mid-and-small cap stocks. This discipline has helped the fund in being more stable and less volatile as compared to some of the peers.
Which are the sectors you are overweight and underweight at this point?
In terms of portfolio, this fund is over-weight on sectors like
- Pharma – Positive on domestic pharma. The pricing pressure from US FDA & compliance issues for most of the players have eased out. Inspite of good management and healthy balance sheets many Pharma companies have not done well due to the issues mentioned. With most of this behind us, we believe, Pharma companies are valued attractively to perform from here.
Telecom : In India data was exploding and we knew at some stage data pricing will come and consumer will start paying for the same. Operating leverage is high here and increment pricing will flow to profit.
Cement: Government’s focus on infrastructure especially affordable housing, roads &highways bodes well for the sector. Improving cement prices and declining costs augurs well for sector profitability.
Apart from PSU banks, we are underweight on Auto, Oil & Gas, and IT.
What is your five-year outlook on equity markets?
Over a 5 year time period, we can expect the global as well as Indian economy to overcome short-term hurdles and show cyclical recovery. India’s GDP growth should revert to the 7% range. Consequently, earnings growth should also stabilize in double-digits, which should support equity markets.
What kind of returns should an investor expect from multi-cap funds in three and five year period?
With a cyclical recovery being expected in the economy over the next 3-5 years, multicap funds, which have a mix of both largecap as well as mid-and-smallcap stocks, stand to do well and should deliver low-to-mid teen returns over a 3-to-5 year timeframe. One should keep in mind that interest rates have declined and FDs may return 6% or less going forward. We believe multicap funds provide stability and should be part of an investor’s core portfolio.
