MF-Interview

MF-Interview

"A revival in the domestic investment cycle is very likely, which could result in earnings upgrade and re-rating of companies that pay full tax rate. "

Equity plays the role of a wealth creator while debt aims to offer stability to the portfolio and provides opportunities for stable and consistent returns over a longer period. Meanwhile, gold that comes with its phases of consolidation and growth, acts as a good hedge and aids in protecting the portfolio from various risks, such as inflation.




Nimesh Shah
MD & CEO, ICICI Prudential AMC


With respect to the recent announcements made by the Finance Minister regarding the corporate tax rate cut, it is safer to say that many companies would be benefiting from it. What would be its impact on overall mutual funds returns in terms of equity and debt (rise in yield)?

We believe that the cut in corporate tax rates is a major structural reform. A revival in the domestic investment cycle is very likely, which could result in earnings upgrade and re-rating of companies that pay full tax rate. This development is also expected to provide a fillip to ‘Make in India’ initiative and FDI inflows by making a way for manufacturing companies, looking to set shop in India, especially the ones that are shifting away from China. All these are positive indications for a long term mutual fund investor since these steps will certainly add to India’s economic revival.

Further, the fiscal stimulus measures by the government have resulted in an earnings revision, with the Nifty EPS gaining around 10%. This paves way for a clear near term benefit to the equity market due to a substantial rise in corporate earnings. Also, the sentiment element, which is an important factor for both, the market and the economy, has improved drastically following the event.

From a debt market perspective, the yields had discounted the marginal spike in fiscal deficit thus far. A cut in corporate tax rates is anticipated to lead to larger than expected rise in deficit. However, some amount of deficit is likely to be compensated, in case the growth returns and revenues go up or if the government proceeds with the divestment process as the equity markets have turned buoyant. This indicates that the bond market is more likely to remain range bound in the near future.

Looking at the credit events happening back to back, what is your take on this? As a fund house, what is your strategy for protecting your investors from such events?

We are of the view that NBFC crisis does not pose any systemic risk. It is important to note that the concerns, pertaining to each of the debt papers under question, is confined/limited to specific schemes within select fund houses and are not at an industry-wide level, as it is largely being perceived.

Within the industry, we were the first to institute an in-house independent risk management team, entrusted with overseeing credit evaluation and approval processes. The risk management team is independent of the investment team and does not have any return targets. The decision to onboard credit is taken after due diligence, carried out in accordance with debt investment policy. We follow the “four-eyes” concept for approval of credit investments, with the decision to invest in any debt instrument being taken after in-depth credit review and not based on the sole judgement of the fund manager. We have always believed that the credit rating is one of the inputs in investment decision and not the sole determinant. The two key tenets of our credit decision-making have been the focus on client selection and avoiding concentration. This discipline has helped us not to overly rely on credit rating and avoid potential problems. Considering that many of the currently-under-stress credits carried the highest safety rating till recently.

Owing to all these measures, we have not faced even a single-day delay in receipt of interest or principal payments on our debt investments at ICICI Prudential mutual fund during our 20 plus years of existence.

As a part of the credit due diligence, we consider a number of aspects, such as financial and operating parameters, management profile, industry outlook, competitive positioning, key risks, and mitigation. These processes have enabled us to deliver a superior investment experience to our investors .

On a long-term basis, ICICI Prudential bluechip fund has been the best in its category. However, compared to its peers, it has witnessed some sluggish performance in recent times. What factors will you attribute to such a performance?

For the most part of its existence, ICICI Prudential bluechip fund has been a top quartile performer. In equities, one should consider the performance of at least three years and above to evaluate the fund’s performance. Moreover, this is one of the few funds among large caps, which has been true to its label since its inception.

The 3-, 5-, and 10-year performance of ICICI prudential multi-asset fund has been impressive. How do you look at a multi-asset portfolio? What is your investment philosophy regarding this portfolio?

ICICI Prudential multi-asset fund is a multi-cap, diversified-across-assets scheme, which invests throughout market capitalizations and various asset classes. Equity plays the role of a wealth creator while debt aims to offer stability to the portfolio and provides opportunities for stable and consistent returns over a longer period. Meanwhile, gold that comes with its phases of consolidation and growth, acts as a good hedge and aids in protecting the portfolio from various risks, such as inflation. Through active asset allocation, the scheme has actively managed its equity levels based on the in-house model. Going forward, the scheme endeavours to continue managing the equity levels based on market valuations. The fund has been the best performer in its category over 3-, 5-, and 10-year basis, beating its peers by a wide margin.

You have a product, called “SIP Plus”, wherein you provide life insurance cover on the basis of investor’s SIP. How is this product more beneficial than having a separate term insurance plan and a SIP?

The SIP Plus facility is an optional feature, which allows a unit holder to add an insurance cover while initiating SIP in ICICI Prudential mutual fund schemes. This is an added benefit for an investor without incurring any additional cost. Nonetheless, this product does not compete with a term insurance.

We have seen a very low penetration of passive investments, such as index funds and ETFs among retail investors. What is the reason for such a low penetration? Going forward, would they be able to compete with their active counterparts?

Over long periods, active funds have been able to generate alpha for investors. As long as they continue to outperform, actively managed fund will continue to have an edge over passively managed funds. However, owing to lower expenses and near-term performance, there has been a significant amount of interest shown in passively managed funds as well.

What will be your advice to retail investors now?

In our view, equity market has reasonable valuation support in small, midcaps, and in many of the value oriented sectors of the economy. On the other hand, the near-term outlook of the quality sector stocks continues to remain positive; however, valuation-wise, these names look overvalued. A gradual shift from quality stocks to small, midcaps, and value oriented stocks is recommended over the next few years. For long term returns, asset allocation remains the key strategy. In debt, investors can consider investing in credit risk and moderate duration debt funds.

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