Value Investing May Make A Comeback

Harsha Upadhyaya
President and CIO (Equity), Kotak Mahindra Asset Management Company

September 2020 is the third month when we have witnessed a continuous net outflow from equity-dedicated funds. What is your view on such moderation in inflows and when can we expect equity investors to return?

The net outflow from equity funds in September 2020 was lesser than what we had witnessed in August 2020. There were a couple of new fund offers (NFOs) during September which raised fresh money from investors. This resulted in an overall slower pace of outflows as compared to the previous month. However, the trend in gross redemptions didn’t change much during the month. As economic activity improves and confidence returns to normal levels, we can expect equity flows to also normalise.

What are your thoughts on the current change in fund mandate by SEBI for multi-cap funds? What impact will this have on existing funds and investors invested in the fund?

We will consider various options to ensure managing and protecting our unit holders’ interest with full compliance of SEBI regulations and guidelines. SEBI is also currently evaluating some of the suggestions put forth by the industry body. Once clarity emerges on this front, we will choose our next course of action and communicate to our unit holders.

We have seen a trend where a lot of index funds and ETFs are getting launched. How do you look at the future of index investing?

Index funds are mutual funds or ETFs whose portfolio mirrors that of a designated index, aiming to match its performance. These are simple to understand and are an inexpensive way of investing. This passive way of investing has gained momentum largely driven by institutional investors. We expect both passive and active funds to coexist.

We have observed that most of your assets in equitydedicated funds are dedicated towards financials, energy, technology and FMCG sectors. What led you to be bullish on these sectors?

These are sectors with a larger exposure in the portfolios but not necessarily with overweight exposures across funds. Currently, with the pandemic still in progression and the dependant pace of economic recovery being still uncertain, we have decided to have a mix of resilient (IT, FMCG) and cyclical (financials, energy) sectors in our portfolios.

The Indian economy is going to contract by almost 10 per cent in the current fiscal, yet the frontline indices are trading in terms of PE at two standard deviations above its last 20-year average. What explains this dichotomy?

At various points of time, equity markets may lead or lag the economic reality rather than fairly representing it. The current scenario is also one such phase in the market where the equity markets seem to be well discounting the expected economic recovery in a post-pandemic phase. There seems to be more focus on likely earnings recovery in FY22 and beyond rather than the decline expected in the immediate term. In case this expectation gets disrupted again, then we could witness downside volatility in the market.

Historically, value has outperformed growth stocks. Nonetheless, in the last decade we have seen growth outperforming value. What explains this and going ahead do you see value returning with vengeance?

Over the last decade, especially in a post-global financial crisis world, we have seen significant monetary easing and lower interest rates across the globe. Generally, growth stocks perform better in a falling interest rate environment when corporate earnings keep on rising. Value investing may make a comeback if there is sustained economic downturn and if we witness visible changes in management approach and/or monetisation of inefficient or non-core assets in those set of stocks.

Looking at the current valuation of equity market and bond yield, what would be your advice to a moderate risk-taking retail investor in terms of asset allocation?

Volatility is inherent to equity markets, and there is unpredictability in the short term. However, long-term investors across markets and market cycles have generally gained from better returns. A Reg. and disciplined investing approach overcomes the ill-effects of market volatility. Prudent asset allocation, long-term focus and Reg. investments are the three important tenets of sustainable wealth creation. At this point of time, we suggest neutral exposure to equities.