DSIJ Mindshare

Interview With Nimesh Shah, MD and CEO, ICICI Prudential AMC

Volatility Is Here To Stay

Nimesh Shah, MD and CEO, ICICI Prudential AMC, tells Saikat Mitra that while fixed income and physical assets have been outperforming for some time now, financial assets are fast gaining favour with long-term investors. Harnessing volatility and value investing can work very well for equity investors in these challenging times, he says

What is your take on the present investment climate?

Huge capacities are underutilised in many sectors of the economy, and there are some projects which are incomplete. We would want to see such projects being completed. The investment cycle will improve only after higher utilisation of the existing capacities is achieved.

What should be important for investors today – growth or safety of capital?

India offers a good investment opportunity in fixed income because the interest rates are high as against the global scenario, where the returns on safe investments are negligible. Hence, high grade fixed income is an attractive opportunity in the Indian context. However, there are also various parts of the economy where growth is undervalued.

The volatility levels of the markets have been humongous of late. What do you think is the reason for this?

Our near-term view is that the markets will continue to remain volatile since we are in a pre-election period, as also on account of global factors.

How do you rate the FII activity over the recent past?

Even today, foreign investors see India as a good long-term structural story. This is also probably the reason why we see such flows at varying points of time in the market. In addition, the recent drop in the trade deficit means that our CAD is under control. These factors have been instrumental in FIIs being positive on the Indian markets in the last few months.

Why haven’t Indian mutual funds been able to come up to a position where they can suppress the pressures exerted by their foreign counterparts?

Well, Indian retail investors have benefited from attractive fixed income opportunities in the past few years. In addition, during the 2007-2013 era, physical assets like real estate and gold offered good investment opportunities. However, we believe that in the next five years, Indian investors will increase their presence in financial assets.

The government balance sheet has been the biggest worry for the markets. Do you see the situation improving anytime soon? If not, how can it be brought back in shape and how much time before it gets back in shape?

In India, the sustainable fiscal deficit is much higher because of encouraging demographics and a healthy growth rate. This is a cause for worry in certain western countries with deteriorating demographics.

Does ‘buy and hold’ still hold true, particularly in the present macro-economic environment?

We believe that funds which benefit from volatility are the best at this point of time. Over the long term, the returns from the ‘buy and hold’ strategy will be higher.

What is your take on the present valuations of the Indian markets?

Over the past four years, only a few select stocks have seen appreciation primarily based on FII interest, while most of the others are offering value in terms of low price-to-earnings or price-to-book value. Generally, equities provide healthy returns when bought during periods of low GDP growth, and we believe we are close to the bottom in that respect.

What is your take on the Q2FY14 results?

The Q2FY14 results have been better than our expectations. 

Which are the sectors that you are currently betting upon?

We have been overweight on shipping stocks, which are cheap in terms of both price-to-earnings and price-to-book value. We have been proven correct in our analysis, as these stocks have been outperformers. Another example is textile stocks, which have also performed well. The recent rupee movement has benefited large-cap technology and pharma stocks. This has been clearly recognised by the market.

However, there are a number of low-to-medium market-cap companies in the exports and import substitution spaces that have also benefited from the rupee movement, and we are positive about these stocks. They offer very attractive value investment opportunities now.

What is your call on the regulatory framework and the changes that the mutual fund industry has gone through in recent times?

The regulations under which mutual funds function are oriented towards investor interest, which inevitably helps the industry grow. Even my personal funds are invested in mutual funds. Not only that, I strongly recommend investing in mutual funds to my family, friends and the public at large.

Let’s consider the case of a restaurant. How would you feel if the owner of the restaurant were to say that he had his meals in his own restaurant? Wouldn't that give you an immense feeling of assurance? Similarly, when the stakeholders of an AMC categorically state that they invest in mutual funds too, it is a clear indication of their confidence in what they are offering to investors at large.

I strongly believe that the mutual funds industry is structured very efficiently and works towards the benefit of the investor. When I hear people stating that the number of investors in equity funds is falling, my contention is that mutual funds are derivatives of primary investments – equity and debt. Our success is a derivative of the success at the macro level. Clearly, if there is economic growth, we will grow too.

At ICICI Prudential AMC, our endeavour is to serve the interests of the final investor no matter what the economic conditions. In fact, when the economy goes through a rough patch, we step up our efforts to protect our investors’ interests. We can proudly state that all our equity funds have outperformed their benchmark indices over the medium and long term. This is the clear intent of any actively managed fund. If the fund manager cannot perform better than the benchmark, the investor would be better off investing in passive funds.

Our corporate culture encourages and compels each employee to have the interests of the investors topmost on their mind. Investors have recognised this, and we have seen the result in a higher number of folios within our family of funds.

Could you spell out the challenges that the mutual funds industry is currently facing?

The noticeable challenge is that the ‘equity cult’ seems to be much smaller, and investors have been focusing on physical assets like real estate and gold. However, it is our belief that physical assets cannot continue to outperform financial assets over long periods of time.

In our opinion, we are currently at the stage where financial assets have become extremely attractive from the long-term investing perspective. The attractive returns clocked by many equity mutual funds over the last two years are a very healthy development for the long-term future of the industry.

What advice would you like to give retail investors at this juncture?

Volatility is here to stay. We believe that it is volatility that prevents investors from entering the markets. Hence, we need to find ways to not just control volatility but also to make it work to our advantage. Investors may be better off looking at a set of products that focus on harnessing volatility – products that use volatility to their advantage and therefore deliver the benefits of asset allocation.

Over the past few years, we have been promoting volatility management products as an important asset class. Two of our key volatility management products are ICICI Prudential Balanced Advantage Fund (the erstwhile Volatility Advantage Fund) and ICICI Prudential Dynamic Plan. Due to the nature of such products and the success that they have achieved in the past few years of market volatility, we are finally seeing significant interest in such products from investors and advisors.

The other interesting opportunity lies in value investing, which we believe is a far bigger theme than any other opportunity in India in the prevailing market situation. This is mainly on account of four factors, viz. (1) sharp valuation dispersion among sectors and market cap segments, (2) a number of 'under-noticed' value opportunities thrown up due to currency volatility, (3) earnings upsides through incrementally higher capacity utilisation across many sectors, and (4) investing at a cyclical low in terms of GDP growth.

Besides these four reasons, domestic challenges, the most compelling one of which is continuation of the reforms process, will crystallise post the 2014 union elections. The positive aspect to the elections in terms of reforms is that both parties, the current ruling government and the opposition, have understood that reforms have to continue in order for the country to retain and nurture foreign interest in the form of FDI and other investment inflows. Hence, using the value strategy in the current scenario makes further compelling sense.

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