You Need To Have The Right Allocation

G Pradeep Kumar
Chief Executive Officer
Union Asset Management Company Pvt. Ltd

Given the current buoyancy in the stock market, G Pradeep Kumar, Chief Executive Officer of Union Asset Management Company Private Limited, replies to queries about the future performance of the equity and mutual fund markets and the factors triggering the current rally along with a peek into the funds one must look out for 

The year 2021 has begun on a buoyant note.How do you look at the mutual fund business industry for this year in terms of performance and flows?

Economic recovery is now clearly visible and the third quarter results were better than expected. We expect this trend to continue and believe that corporate performance will show further improvement in the coming months. This is also likely to have a rub-off effect on the markets. With this rally there has been a certain level of profit-booking in mutual funds, which is not necessarily a bad thing. Those going out with a positive experience are also likely to come back when valuations are more reasonable. At the same time, the number of folios has been constantly increasing with a rise of about 8 per cent over the last 12 months. We expect more money to come into mutual funds whenever there is a correction in the market. We also expect SIP flows to pick up further. Also, a significant amount of money may come into asset allocation products such as balanced advantage funds (BAFs).

Liquidity has pumped the market quite a bit now. So, do you believe that the markets are overheated? How do you look at the current rally in the stock markets?

We evaluate stocks and markets based on their intrinsic fair value and in our view the markets are above their fair value at present. The availability of cheap money across the world has played a significant role in this rally. The market being overvalued means that we have borrowed some returns from the future and hence we should expect moderate returns from here on. However, the medium to long-term prospect of the markets remains robust and equities should be able to outperform other asset classes.

Though your small-cap fund was launched in the year 2014, what made you step into the mid-cap space in the year 2020? And how you look at mid-caps in the year 2021?

As a ‘full service’ fund house, it is our endeavour to offer products from different categories to our investors. In the year 2014 we had launched Union Small and Mid-Cap Fund, but post the SEBI circular on categorisation and rationalisation of mutual fund schemes this fund was categorised by us as a small-cap fund. So we had a vacuum in the mid-cap category which we filled up with Union Mid-Cap Fund. Mid-cap funds would form an integral part of the portfolio for most investors. It is like spice in food. You need to have the right allocation. While the mid-cap stocks in our investment universe are trading above their fair value, they have the potential to offer relatively better returns over the next 3-5 years’ period. Of course, they would be intrinsically more volatile than large-caps.

You have been consistently launching new funds since the year 2017. What are the categories you want to mark your presence in for the year 2021?

Our goal is to offer a complete bouquet of products to our investors. Hence, we have launched funds which we believe would offer differentiated value propositions. However, we do not intend to be present in every category that SEBI has allowed. For example, while the regulator has allowed fund houses to launch funds in around 36 categories, we are present in only half of them. From now on our product launches are going to be fewer. For example, in this quarter we are not looking to launching any fund. However, there are certain differentiated categories, including retirement funds and funds investing in international markets, that we intend to launch in the near future.

You had recently launched the Union Hybrid Equity Fund which is an aggressive hybrid fund. You were successful in getting AUM of Rs 454 crore. What strategy did you adopt to get such a type of AUM?

Over the last three years or so we have been working very actively to expand our distribution beyond our parent bank network and increasingly we are getting good traction with mutual fund distributors (MFDs). Also, Union Bank of India (UBI) itself has an expanded network post amalgamation with Corporation Bank and Andhra Bank where the number of customers and branches has nearly doubled. Both these factors helped us a lot in generating higher sales. In the recent NFO of Union Hybrid Fund around 43 per cent of the applications came from outside the Union Bank network. Since the beginning of this financial year we have put in place a dedicated sales force to service the MFDs. The results have been remarkably good. Contributions through non-associate distributors have doubled between March 2020 and December 2020.

ESG was the theme for the year 2020.with quite a bit of fund launches. What is your take on the overall ESG theme and are you looking to launch funds in this category?

We have a robust investment process and the ESG factors would indirectly be factored in the process anyway. At this stage, we believe there could be significant overlap between a dedicated ESG fund and some of our other equity funds. However, this is a theme that seems to be gaining popularity in developed markets and we may consider it sometime in the future.

Factor-based investing kind of eliminates any human intervention in decision-making. So, what are your thoughts on smart beta investing?

We think investing is a blend of art and science. As a fund house we have a certain investment process which has worked very well for us. We would continue to religiously follow it in managing our funds.For the debt market, it is believed that the year 2021 would be a modest year in terms of returns. How do you look at this market in 2021 and what debt asset allocation should investors prefer? In the current year, given the large borrowing programme of the government, the Reserve Bank of India is expected to lean towards a softer interest rate regime. We also believe that in the year 2021, with inflation expected to be in the target range of the RBI between 4 – 6 per cent, any upward pressure on interest rates is unlikely. But the scope for further fall in interest rates across the board is also limited compared to what we saw in the last two years or so. We believe that the spread between short and medium duration instruments are well above their long-term averages and this spread could come down. As the spread compression starts, there could be room to make gains. We recommend corporate bond funds and medium duration funds. It is advisable to be in this space with great emphasis on credit quality of the portfolios. Investors should be mindful that the kind of returns witnessed in the past couple of years may not be sustained.

What is your advice to retail investors at the current juncture?

Equity markets are currently trading at a premium to their fair value. Investors making lump sum investment into pure equity funds should have a minimum investment horizon of five years. People who like to take lower risk are better off with asset allocation products such as balanced advantage funds and hybrid equity funds. BAFs, in particular, with their dynamic allocation to equity depending on market valuation, offer the potential to generate reasonable returns with lower volatility. They also help investors to avoid the trouble of trying to time the market. Of course, SIPs remain as attractive as ever for regular investment.