"We remain optimistic on equity as an asset class"
G Pradeepkumar
CEO, Union Asset Management Company Private Limited
As stated in this interview, in a scenario of rising inflation, G Pradeepkumar, Chief Executive Officer, Union Asset Management Company Private Limited, believes that investors must essentially look at funds that can offer returns to beat inflation which, he adds, is transient in nature
A few months back, Union AMC announced that it aims to double the assets under management (AUM) of the Union Mutual Fund in a year’s time. How are you positioned to achieve it and what are the factors that will help to achieve this target?
Growing support from the investor and distributor fraternity encouraged us to set this target. The robust investment process that is in place at Union Mutual Fund is also helping us to accelerate growth. Overall, we believe that we are well-placed to achieve this target which will be a milestone in our journey.
Equity-dedicated funds including hybrid funds seem to dominate the AUM of Union Mutual Fund. How do you see it going forward?
Your observation is correct. We have a higher share in the equity-oriented fund category. This could be the result of the focus we have always had on retail sales. We have been able to reach out to a large number of investors even in some of the smaller towns in the country. This is also reflected through the fact that our share of unique investors in the industry stands at around 1 per cent. However, going forward, our endeavour is to grow our institutional business along with the retail segment.
It’s almost seven months since you have launched your last NFO. Do you have any plan to come out with an NFO, especially sectoral or thematic, where you have limited presence?
We would like to launch a new product only when we believe there is differentiated value proposition that can be offered to investors. Of course, it is important for us to offer a wide choice of funds to customers, but we do not believe we have to be present in each and every category that Securities and Exchange Board of India (SEBI) has allowed. We are not a great believer in launching sector funds since we believe that the potential of generating long term value is limited in the case of sector funds. However, we would be open to launching thematic funds if we can find themes that are sustainable over the long term.
How do you see the elevated inflation globally and which category of the funds is best suited to shelter an investor’s wealth from rising inflation?
The elevated inflation remains a threat globally. This was partly contributed by the loose monetary policy adopted by central banks across the globe. The rising commodity prices have also contributed to this. We believe that the slightly higher inflation in India is transient in nature. In such a situation of higher inflation, investors are essentially looking at funds that can offer returns that can beat inflation. For investors with higher risk appetite and investment horizon of five years and above, pure equity funds remain a good choice which have the potential to deliver inflation-beating returns in the long run compared to other categories. Given the expensive valuation of the market currently, we would suggest hybrid category funds such as balanced advantage and hybrid equity which have the potential to generate long term returns with relatively lower volatility as compared to pure equity funds.
How do you see the equity market performing for the next one year, especially looking at elevated valuation?
According to our in-house valuation, markets are at a significant premium to their fair value. We have effectively borrowed some returns from the future. However, even though the prospective returns from equities have reduced, overall the scenario remains healthy on a relative basis compared with other asset classes like fixed income. Hence, we remain optimistic on equity as an asset class from a long term perspective.
Which are the sectors you are avoiding now and which are the sectors that look promising?
As a fund house we follow a bottom-up portfolio construction strategy and hence sectoral underweight and overweight are an outcome of stock selection. However, based on our current portfolio positioning, we are overweight on IT and underweight on the financial services’ sector.
Reserve Bank of India’s stability report has shown some worrisome signs. So, what are your thoughts on the same? What is your position on the banking sector?
As per the report, while the second wave of the pandemic has dented economic activity, policy support has helped the financial position of banks, thereby containing the non- performing loans and maintaining solvency and liquidity. However, we feel that the banking and NBFC sector remains vulnerable to shocks from the ongoing pandemic and hence we are underweight on the banking sector.
In the current market condition what asset allocation would you recommend to retail investors?
Asset allocation would depend upon individual risk profile and circumstances. As a general rule, younger investors should have higher equity allocation. However, it is best to take the services of a qualified advisor who can offer guidance based on individual circumstances, life stage, goals, etc. Hybrid category funds such as balanced advantage and hybrid equity have the potential to deliver long-term returns with relatively low volatility as compared to pure equity funds, and can be considered as an investment option.