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In conversation with Mahesh Patil, Chief Investment Officer of Aditya Birla Sun Life AMC Ltd

Shashikant Singh
/ Categories: Mutual Fund, Interviews
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In conversation with Mahesh Patil, Chief Investment Officer of Aditya Birla Sun Life AMC Ltd

1.       What are your thoughts on current market volatility and how investors should approach it? 

  Over the past few weeks, we have seen a sharp rise in new COVID cases in India, which has impacted market sentiments and led to higher volatility. However, investors should bear in mind that the fatality rate in India at 1.1 per cent is still very low. Also, vaccinations are on track at around 3.4 million doses per day and a large part of the population, who are 45+, are mostly at risk; so, they should get vaccinated as soon as possible. Lockdowns this time around are localised and the Central Government is not looking to impose a pan-India lockdown like last year. So, the overall impact on the economy due to this second wave is expected to be much lower and last only for 2-3 months. Hence, we are seeing that markets are holding up reasonably well and witnessing only a minor 8-10 per cent correction from the peak. Investors should use this correction as an opportunity to add to their equity exposure as India's economic recovery should be back on track in a few months and markets should see a smart recovery in response. 

  2.     Technology theme has rewarded the investors last year. How it is likely to perform in 2021? 

  Technology is a long-term theme as digital is now impacting every aspect of our lives. Globally, corporates are looking at accelerating their digital transformation, upgrading their core IT infrastructure, and adopting new technologies like cloud & AI. Even in our personal lives, we are now comfortable using technology for ordering our food, for e-commerce and payments, as well as for entertainment & education. The above factors should benefit companies in the IT and digital space. However, after the rally in technology stocks over the past year, current valuations factor in a large part of this growth, and returns may normalise in 2021. The IT companies may benefit from any further rupee depreciation, which could provide some upside. 

  3.     What are your thoughts on the banking sector and how should investors be investing in them, via mutual funds or direct stocks? 

  We continue to be positive on the private banks as it is a long-term growth story. Over the past two decades, we have observed that private banks have gained significant market share from PSU banks both in deposits and loan growth. They are also better capitalised and have better access to funding. The concerns on their NPAs also seem to be overblown and should be manageable. As the economic recovery takes shape, credit growth is expected to normalise and private banks should continue to increase their market share and profitability. It is recommended that investors take exposure to this sector via diversified funds or thematic/sectoral funds focussed on banking, as analysing all the banks and selecting the best ones may not be easy for retail investors given the dynamic environment. 

  4.      You recently launched Aditya Birla Sun Life Multi-Cap Fund. What made you launch this fund at the current juncture?  

  After SEBI introduced the new flexi-cap category, existing multi-cap funds recategorised themselves as flexi-cap funds. So, the multi-cap category is a white space and in terms of positioning on the basis of risk-reward, it fits in nicely between the flexi-cap category as well as the mid-cap & small-cap categories. We would like to be the pioneers in this space as we expect this to become a large category in itself. In terms of timing, we have launched the fund now, as the ongoing correction in the markets should give this new fund, a good opportunity to deploy the funds at reasonable valuations and benefit from the gains once the economy and markets recover. 

  5.       How is your multi-cap fund likely to benefit investors? 

  Aditya Birla Sun Life Multicap Fund will invest a minimum of 25 per cent each in large-cap, mid-cap, and small-cap stocks. So, it provides exposure to the stability of large-caps along with the growth potential of mid and small-caps in one portfolio. We will be following a bottom-up stock picking approach, where we select only our highest conviction of 15-20 stocks from each of the large-cap, mid-cap, and small-cap categories for this portfolio. So, it would be similar to having focussed large-cap, focussed mid-cap, and focussed small-cap portfolios in one fund. Investors can benefit from this ‘power of 3’ as the portfolio will be oriented towards secular growth opportunities from across the market spectrum. In addition, given our positive view on the Indian economy in the medium to long-term and consequently, the expectation that mid and small-caps could outperform large-caps over the next 3-5 years, we would have a slightly aggressive allocation (i.e. 60 per cent-65 per cent)  to mid and small-cap stocks in this portfolio. This would be an ideal positioning to deliver outperformance. 

  6.       We have even seen the value theme performing well. Which investing style do you prefer-value or growth and why? 

  We follow a ‘growth at reasonable price (GARP) investing style’ since it combines the best of both worlds. We have identified themes that provide secular growth opportunities such as private banks, unorganised to organised, speciality chemicals, manufacturing in India, and technology/digital. At the same time, we follow a bottom-up stock picking approach, where valuations of individual stocks are also an important factor under consideration since it becomes challenging to get good returns if we enter at high valuations wherein, the margin of safety is low. We select only those stocks, which give us high conviction based on both their sustainable growth prospects as well as their valuation.

7.       You do offer financial planning fund of funds (FoF). How they are likely to benefit investors specifically those who have a financial plan in place? 

It is important for investors to understand that asset allocation is a key determinant of their overall portfolio’s risk-adjusted returns over the medium to long-term as diversification across asset classes reduces portfolio volatility. However, getting the right asset allocation in place and then doing periodic rebalancing when there are thousands of mutual funds and ETFs to choose from, is a pain point for most retail investors. As a solution, we offer financial planning fund-of-funds (FoF), which takes care of asset allocation by providing exposure to four key asset classes viz. domestic equity, international equity, fixed income, and gold through mutual funds and ETFs. In addition, a dedicated portfolio manager chooses the funds and ETFs in each asset class, monitors the market conditions as well as the performance of the underlying funds & ETFs, and does regular rebalancing. So the investors’ chances of getting better risk-adjusted returns improve and their experience also becomes streamlined as they just need to invest in one FoF and track its performance. We offer FoFs suitable for aggressive, moderate, and conservative investors. 

  8.       In current market conditions, what asset allocation will you suggest to investors? 

In spite of concerns regarding increasing COVID cases and rising bond yields, equity markets are holding up reasonably well. Although short-term upside may be limited, any correction would be temporary & minor and can be used as an opportunity to increase equity exposure. Amidst strong economic recovery prospects and progress of vaccinations, strong earnings growth, a continuing environment of low rates and high liquidity, favourable relative valuations, and strong FPI flows, we maintain our constructive stance on equities. Returns from fixed income would be depressed as interest rates are expected to remain low for some time. Gold is seeing some upside due to the rising COVID cases but given the expectations of gradual global economic growth and rising inflation, which would result in higher bond yields, returns from gold would be moderate. In the case of real estate, returns have been depressed over the past five years as prices have been flat. We expect only a gradual recovery in prices over the next couple of years due to high inventory levels. 

Hence, in the current environment, we would maintain an overweight on equities as the risk-reward for equities look relatively attractive as compared to other asset classes like fixed income, gold, and real estate in the medium to long-term. Our stance is reflected in our Aditya Birla Sun Life Asset Allocator FoF wherein, we have a higher-than-median allocation of 60-65 per cent to equities, 8.5 per cent to gold, and the remaining to fixed income. 

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