The MF Industry Has Adjusted Well To The New Normal

The MF Industry Has Adjusted Well To The New Normal

In this exclusive interview, George Joseph, CEO and CIO, ITI Mutual Fund, expresses his opinion about the status of the MF sector in the new scenario post the pandemic and how his fund house is strategizing future investments


George Joseph
CEO and CIO, ITI Mutual Fund

As an AMC you have been there for over a year now and presently you have a total of nine mutual fund schemes. So, what are the new schemes that we can expect in the year 2021?
We now have five equity schemes (including arbitrage fund), one balanced advantage scheme and three debt schemes. In the next six months, we are planning to launch an ultra-short-duration fund on the debt side and a mid-cap fund on the equity side. We may also look to launch a value fund as we find the ‘value’ stocks quite attractive from a risk reward perspective over the next three to five years.

The pandemic has hit almost all the business landscapes. How has it impacted the mutual fund industry in general and your fund house in particular?
The MF industry has adjusted well to the ‘new normal’ post-pandemic. The high level of digitalization across activities, be it investments, sales, customer service helped us cope with the pandemic impact quite well. However, the pandemic and related lockdowns affected the momentum in business that we had achieved in our first year of operations. With restrictions getting relaxed across most parts of the country now, we are looking to rebuild the business momentum and growth.

We have seen a divergence wherein FIIs continue to buy whereas DIIs are selling in the last couple of months. What is the reason behind such divergence?
The strong FII flows are the result of weak US dollar post the bond buying and huge liquidity injections done by the US Fed in response to the pandemic. The large liquidity so generated has found its way into risk assets such as equities (both developed and emerging markets), commodities and other ‘risk’ assets. However, the domestic MF industry is facing redemption pressure from Indian investors, resulting in MFs being net sellers in the market.

We have seen net outflow from equity-dedicated mutual funds from the past five consecutive months. What is the reason behind the same?
The motive behind redemptions from the MF industry can be profit-booking, taking advantage of the strong rally seen in the equity markets in the last few months. Some of them may not be comfortable with the high valuations of the Indian market whereas for FIIs, the low cost of funds overseas and weakening of the US dollar may increase the attractiveness of EM equities.

Key domestic equity indices are trading at their all-time high and also at stretched valuations. How should investors approach equity funds? Is it time to be in cash?
The valuations of benchmark indices viz. Nifty and Sensex are at the higher end of the historical range. However, the broader markets are not expensive. Mid-cap and small-cap stocks have underperformed the Nifty and Sensex for almost three years. Even among large-caps, the rally in the last three years has been narrow and led by a few stocks. The cyclical sectors of the market are not expensive, which gives opportunity to fund managers to pick stocks. Also, economic growth is improving as the lockdown restrictions are removed.

In our view, the Indian economy is at a cyclical bottom in FY21 and the coming years should see good economic rebound and earnings growth. Thus, we are quite constructive on the cyclical stocks sector-wise and small-cap and mid-cap stocks. Hence, we would advise investors to invest using the SIP or STP route. Lump sum investments at this juncture can be risky. Also, with headline valuations being high, the time horizon for returns should be minimum three years. The question of raising cash needs to be answered by looking into the investment pattern, age and risk profile of each investor, which is best judged by the investor or his financial advisor. There cannot be a generalised answer to this.

Recently, SEBI has introduced a new category in equity schemes – flexi-cap. Among the MF schemes, you do have a multi-cap fund. So, would you consider moving into the new category or would you remain in the multi-cap category following the changed norms?
Our multi-cap fund would remain a multi-cap fund and will be following the revised investment norms, which involve higher investment in mid-cap and small cap stocks. We are quite constructive on the mid-cap and small-cap stock space with a three-year view. They are not expensive and have underperformed large-caps. With economic growth expected to improve going ahead, these should give decent returns over the next 3-5 year period.

Historically, we have seen that actively managed large-cap funds in India do have an edge over index funds. So, from an investor’s point of view, which is more suitable – an actively managed large-cap fund or an index fund?
Actively managed funds have a decent long-term track record of outperformance versus benchmarks, after costs. Thus, investors with a minimum time horizon of three years should not have any hesitation in investing in active funds.

In the present debt market scenario, the credit yield and spreads are on the higher end and also the interest rates are likely to stay lower for prolonged period. So, according to you, would investing in credit risk funds benefit investors? What is the debt investing strategy they should adopt?
We are of the view that the open-ended and daily NAV structure of mutual fund schemes is not suited for taking credit risk. Liquidity in non-AAA corporate debt instruments is very low and virtually vanishes if the instrument gets downgraded to below investment grade. Another risk that is currently underappreciated in debt funds is the risk of inflation rising from very benign levels that we have seen over the last many years. Hence, we continue to prefer high-credit quality, low-duration short-to-medium term debt funds.

Among the nine funds of your fund house, most of the funds are managed by you. What is the structure and research process that you adopt?
All the equity and equity-oriented hybrid funds are co-managed by myself and Pradeep Gokhale, who has over 20 years of experience in equity research and fund management. The debt funds are co-managed by me and Milan Mody. The fund management team is supported by a strong eight-member research team. Four of the research analysts have 10+ years of experience while the other four have experience of between 3-7 years. Thus we have a robust investment team which can handle much large AUM across different categories. Our investment philosophy is represented by ‘SQL’ where S stands for margin of safety, Q for quality of business and management and L for low leverage. Typically, at least 80 per cent of the portfolio consists of ‘core’ stocks with decent businesses having an average return on equity of over 13 per cent over the long term. Tactical bets normally do not exceed 20 per cent of the portfolio. 

 

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