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If you are not sure how to navigate the current market, taking a leaf out of the books of the country’s leading equity fund managers would be a good idea.
Here’s how these investing wizards, featured last week in the ET Wealth-Morningstar Best Fund Manager 2017 rankings, plan to ride the market uncertainty.
The fund managers are quick to admit that at this juncture, the risk-reward scenario does not appear favourable for investors. However, even though Indian markets are trading at a significant premium to historical valuations, fund managers remain positive on the potential of the Indian equity markets.
“The Indian market has several long term drivers which, coupled with structural reforms, can provide attractive and sustainable earnings growth potential over the medium term,” says Roshi Jain, Vice-President and Portfolio Manager, Equity, Franklin Templeton Mutual Fund.
Moderate inflation levels, low fiscal and current account deficits and policy reform measures to enhance efficiency and productivity of the economy provide a favourable macro backdrop for corporate India, Jain adds.
Abundant liquidity has been the single biggest driver of the sharp market uptick. The influx of money into equities belies the ground reality of corporate earnings and has distorted valuations in several pockets. While this liquidity deluge has surprised many fund managers, they have not been swept away by it.
S. Krishnakumar, CIO, Equity, Sundaram Mutual Fund, points out, “In the current market environment, where liquidity is abundant and has been the tailwind for equities, one should not get carried away by the outperformance of certain poor quality businesses, even though there could be performance pressure, as it could prove detrimental when the tide turns.”
While liquidity cannot be predicted, monitoring liquidity, its continuation or otherwise, and factors affecting it are important, says Sohini Andani, Fund Manager, SBI Mutual Fund.
Many fund managers also admit to encountering difficulties in finding investment opportunities at reasonable prices and ensuring the fund’s portfolio remains in a good shape.
“The challenge for professional investors is to generate satisfactory returns in such a fully valued market environment. The portfolio construction needs to ensure that valuation as well as quality of the portfolio businesses remains within acceptable band,” says Janakiraman Rengaraju, Vice-President and Portfolio Manager, Equity, Franklin Templeton Mutual Fund.
Janakiraman’s perspective is that the portfolio risk increases when, on account of high valuations of good businesses, fundamentally weaker businesses, at cheaper valuation, find way into a fund’s holdings.
“The portfolio construction needs to ensure that valuation as well as quality of businesses in the portfolio remain within acceptable band.” says, Janakiraman Rengaraju, Vice-President and Portfolio Manager, Equity, Franklin Templeton Mutual Fund
Navigating the market requires fund managers to address both the valuation as well as quality concerns. “Finding valuations that are attractive at an absolute level has become more challenging. Unfortunately, that means relying more on relative valuations,” says Chirag Setalvad, Senior Fund Manager, Equity, HDFC Mutual Fund.
“We are looking closely at sectors and companies which are facing temporary challenges and, as a result, their valuations have become more sensible. Some of the issues may be temporary or cyclical in nature. They may normalise over time and could provide an interesting investment opportunity,” he adds.
“We are looking closely at sectors and companies which are facing temporary challenges and, as a result, their valuations have become more sensible.”, says Chirag Setalvad, Senior Fund Manager, Equity, HDFC Mutual Fund
Most fund managers have chosen to stick to businesses backed by quality fundamentals— proven business models with sustainable earnings growth capabilities. This is the mantra they will work on going forward as well.
“History proves, post liquidity normalising in the economy, stock markets realigns with the fundamentals. Irrespective of the market environment, our investment philosophy is to invest in quality companies operating in India with strong moats,” says Ajay Garg, Senior Fund Manager, Aditya Birla Sun Life Mutual Fund.
This requires rigorous analysis and deliberation, to separate the wheat from the chaff. Garg emphasises on management strength, company’s product range, consumer and customer feedback, market share, free cash flows and corporate governance, apart from valuations.
“Irrespective of the market environment, our investment philosophy is to invest in quality companies operating in India with strong moats.” says, Ajay Garg, Senior Fund Manager, Aditya Birla Sun Life Mutual Fund
Most of the successful fund managers have stressed upon rigorous research and are preparing to burn the midnight oil far longer in order to avoid making costly mistakes. “Irrespective of the market environment, our approach remains the same: Strengthen the primary research. We have a team-based approach, which is focused on stock selection through rigorous research,” asserts Neelesh Surana, CIO, Equities, Mirae Asset Mutual Fund.
Surana’s keen eye for detail has helped both the funds under his watch—Emerging Bluechip and India Opportunities—to consistently feature among the top performers in their respective categories over the past five years. They have helped him earn the top spot in our best fund managers’ ranking.
The need for a proper homework and deeper deliberation is even greater in the mid- and small-cap segment, where skyrocketing valuations have made it far trickier for fund managers to manoeuvre their portfolios.
S. Krishnakumar, who has established a healthy track record managing mid-cap mandates, says, “Sticking to quality helps in creating and protecting investors’ wealth in the long term. Disciplined investing is bound to provide adequate and good returns even during a consolidation phase in the market.”
Pankaj Tibrewal, Senior Vice-President and Equity Fund Manager, Kotak Mutual Fund, also contends that, going forward, a disciplined investment approach is the key to delivering healthy returns in this space. He plans to navigate the mid- and small-cap terrain by investing in quality, capital-efficient and scalable businesses which offer sustainable growth and are run by passionate managements.
Vinit Sambre, Senior Vice-President and Fund Manager, DSP BlackRock Mutual Fund, was among the ones who spotted strong but relatively lesser known businesses quite early on in the market rally and built a solid portfolio in his DSP BlackRock Micro Cap Fund which benefited from the sharp uptick in this segment.
Now the segment has become even more challenging, but this hasn’t swayed his investment philosophy. “We are trying to cut a lot of market noise and stick to our core approach of looking at fundamentally strong companies which have the potential to create value over the longer term,” says Sambre.
“We are trying to cut the market noise and stick to our core approach of looking at fundamentally strong companies which have the potential to create value over the longer term.” says, Vinit Sambre, Senior Vice-President and Fund Manager, DSP Blackrock Mutual Fund
Mrinal Singh, Deputy CIO, Equity, ICICI Prudential Mutual Fund, who plies a strict value-driven approach, believes value investing is one theme that can play out for a patient investor over the next five years. “As a value investor, the best way to navigate a market is by adhering to the value investing principles, investing in companies which offer relatively high margin of safety and keeping away from value traps.”
This is not as easy, but Singh has adjusted his portfolios to the market reality without compromising on his philosophy, and is willing to wait and allow his bets to play out. Finally, as market valuations inch up further, a higher degree of volatility may be expected. These fund managers are geared to take advantage of any such volatility by investing more aggressively during meaningful corrections.
Why you should listen to these fund managers
The largest funds in the top 10 fund managers’ kitty have a collective AUM of more than Rs 85,000 crore.
Source: Morningstar. Data as on 31 Jul 2017