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As the new CIO, what are your three key priorities for the fund house?
At PGIM India AMC, we already have a robust investment process focused on growth at a reasonable price (GARP). This runs across our platform and we are getting ready for the future by leveraging our talent for expanding the franchise into alternates and international business. We want to have a distinct approach to each part of the business and my focus will be on the mutual fund business.
Given our current size and growth aspirations therein, I intend to make the investment management much more methodical and scientific. I also intend to increase the risk management measures and continue our focus on consistency of risk-adjusted performance.
I intend to conduct research into seeking evidence into various parts of process to ensure that we have a scientific system to perform well over long term on a risk-adjusted basis as mentioned above. This system would be the bedrock of expectations of improvement in our fund performance in the medium to long term. This will help us reduce and explain better any volatility in near term performance.
I am also looking to add more resources and mentor members of the investment team to add depth of capabilities. Since we intend on having a higher focus on a scientific investment approach, we need deeper and sharper research on our investment ideas. We intend to build an in-house, robust investment decision support system. Hence, we intend to broad base our investment team to handle the scale that we aspire for across our verticals.
PGIM India MF has a well-established investment process. From your decades of investing experience, what are the three learnings that will be useful to you in making the investment process more robust?
Markets are usually very efficient in the short term (less than 1 one year). However, significant inefficiencies lie in long term bucket. Hence, investors with a long term investment horizon can spot superior opportunities only with a long term horizon.
High Return on Equity (RoE) along with strong and sustainable earnings growth is the secret to successful long term compounding.
Stock prices track their fair values over long term. In short term, they fluctuate around the fair value. Thus, investing is simple but not easy.
How will you combine investment management process and fund managers excellency to deliver alpha?
Our investment process sets the guard-rails to ensure fund remains true to mandate. It serves as a guide-book for portfolio construction, helps to prevent making mistakes and lend predictability to performance.
Fund manager's capability is in making decisions based on probability of scenarios. Investment process helps in guiding these decisions after analysing the forecasts and their impact on risk-reward trade-off.
What changes will you make in investment strategy and existing MF portfolio of the fund house?
We will continue to target a high active share across our strategies. However, this active share is intended to be spread across a larger number of opportunities. Thus, while the opportunity to generate alpha is dictated by our active share, the volatility in this alpha is expected to be reduced due to diversification in shorter time frames.
Also, we will want to change the upper and lower caps of exposure at a sector level. We continue to design processes to help us manage risk and not eliminate it. Hence, we will continue to take different than benchmark sector strategy. However, the range of differential weights can be narrower. The intention is that the primary driver of expected Alpha in most funds should be stock selection, with sector allocation contributing a relatively smaller slice of outperformance.
In our stock selection process, we largely focus on our research and investment efforts towards high quality companies, generating sustainably high return on equity and which are expected to have a long term structural growth in their businesses. As a corollary, and in keeping with our current view on the markets, we would be trying to reduce our exposure to deep cyclicals and companies whose businesses are vulnerable to material fluctuations in their product or services demand. We are also trying to reduce our exposure to companies whose profitability may be significantly vulnerable to commodity price fluctuations.
What is your medium-term market outlook on equities? Could you take us through the key factors that could shape the markets in the near future?
Markets appears to be trading at a small premium to its current fair value. Also, near term earnings are likely to remain under pressure due to expected economic slowdown. The slowdown is likely due to: a) slowdown in developed markets b) interest rate hikes and c) ebbing of pent up demand from the pandemic period.
However, the medium to long term growth in fair value is likely to be strong. Hence, the current potential upside remains reasonable for an equity investor with a 3 to 5 year view.
India is on its way to being a 5-trillion-dollar economy; which three sectors are likely to perform well during this journey?
Consumer Discretionary: We like companies in both discretionary and grocery retail, quick service restaurants and luxury products.
Financials: We expect significant growth in retail consumer finance in sub-segments like mortgages, personal loans and credit cards. There are many other ancillary financial services like capital market, wealth managers, which are likely beneficiary of this trend.
Healthcare: Similar to the trend visible in most developed countries, a larger proportion of growing per capita income is spent by consumers on healthcare, as the economy grows. We like many companies in the hospitals and CRAMS (Contract Research and Manufacturing Services) space in this sector.
The common theme in the above sectors is that as disposable income increases, expenditure on discretionary expenditure goes up dis-proportionately compared to total income. We are seeing this pan out across multiple companies in sectors as discussed above.
Many MFDs are not comfortable with the current market valuation and hence, not recommending lumpsum in equity funds. What is your view on this? Should they continue to do SIP/STP or should they consider lumpsum?
We would recommend that any investor should not make their investment decisions based on near term events/expectations. We expect strong growth in corporate India's fair value in the medium to long term. Hence, the current potential upside remains reasonable for an equity investor with a 3 to 5 year view. Considering our optimistic medium to long term view, we would recommend investors to continue participating in the equity markets based on their professionally advised financial plan. SIPs are recommended as a disciplined approach to saving and investing for the salaried individual. Lumpsums tend to largely score over SIPs in the longer term.
