Blue chip indices for a while have been consolidating in a narrow range. At the same time, small and midcaps have come into their own — a clear shift in allocation of money is seen.Are you going with the trend and pouring more money in broader markets?
I agree with you that in the last 3 months and 6 months, Nifty midcap 150 index and Nifty small cap 100 index have outperformed the Nifty index. But even after this move, both these indices are underperforming Nifty50 on a 2-year timeframe. However, within these indices, performance has been skewed and only a select few stocks contribute a large part of the gains. From a fund perspective, we select stocks based on fund mandate and style.
Further, stock selection is a bottom-up approach based on company fundamentals and longer-term outlook. Therefore, exposure to market cap is the outcome of stock selection. Having said that, in the last 6 months (from Feb 2020 to August 2020), UTI Transportation and Logistics Fund’s (UTI T&L Fund) allocation to the largecap stocks has increased from 64% to 71%.
SIPs in general, and especially in your logistics fund, has not delivered any returns in the last five years, yet the mutual fund community swears by it. How would you convince an investor who has lost money in your fund?
Both 3 and 5-year SIP returns for the fund are negative, but the 10-year outcome is still strong and better than Nifty50. UTI T&L Fund is a sector fund and allocation to Auto and Auto ancillaries companies is ~85%. In the last 3 and 5 years, BSE Auto index has given negative returns. Last few years, especially FY20, have been challenging for the sector. In FY20, the auto Industry including 2-wheelers, passenger vehicles and M&HCVs has seen the sharpest decline in volume in the last four decades. However, amidst near term concerns, the longer-term growth trajectory for the auto sector remains intact as India’s per capita income increases with improvement in GDP. Furthermore, as auto demand marches towards long-term averages, growth rate in the industry should catch up. In that case, not only are volumes expected to improve for the players, but operating leverage would also come into play, resulting in improving profit, cashflows and return ratios.
Problem with thematic funds is that they perform in phases. NBFC/bank focussed funds were rising in 2017; 2018-19 saw IT-focussed funds outperforming; pharma is soaring in 2020. It seems you have to be invested in flavour of the year to make any money, which goes against the rules of ‘not timing the market’. How should a common investor navigate this problem?
Sector selection requires skill and time and outcomes are uncertain. At the same time, 10-year annualized returns (for a period ending 30th August 2020) for NSE Bank, NSE Pharma, NSE IT and NSE Auto was 9.23%, 11.16%, 13.8% and 8.63% respectively v/s Nifty Index annualized return of 9.31% during same period. Therefore, it has been a mixed outcome and even underperformance in Banking Index and Auto index has been after accounting for steep underperformance in the recent timeframe as pointed out by you.
“While selecting the sector fund, investors should pay more attention to the longer term growth potential in the sector and should not be swayed by the market trends.”
Instead of trying to time the market, my advice to the investor is to focus on asset allocation and stick to the plan. Having made asset allocation, investors may choose to allocate a certain percentage to sector funds, where longer term growth outlook is strong and valuation does not factor in the true potential of that growth. Having said that, a larger part of equity allocation should be towards diversified funds.
Recently an auto executive said high taxes on cars were not conducive to expanding their business. But the government has limited legroom to cut taxes because of its own fiscal math. Do you think there is a perfect recipe for demand to spiral downward? How can the government keep taxes high yet not hurt demand?
Tax structure for the industry has been largely stable post introduction of GST. Stability of tax structure is important, but any cut is also welcome. However, from the auto industry perspective, the real problem is slower individual income growth and rising cost for end vehicles. Costs have gone up due to factors like change in emission norms, and safety standards. Incremental pressures have also come from factors like hardening of lending norms by financial institutions, uncertainty regarding validity of registration of BS4 vehicles and expectation for cut in GST rates which resulted in buyers postponing decisions. Over a period of time, as individual income growth picks up, stable pricing should result in an improved demand environment for the sector.
For the last five months, equity inflows have been falling — last two months showing outflows. This shows a clear trend of decreasing love for mutual funds from investors. What do you think is the problem there — low returns, lack of innovation in products, constant underperformance to benchmarks or all of them? What can industry do to win them back?
It is true that overall inflows into the equity side of mutual funds have faced pressure in the last few months. Even inflows through SIPs have slowed down but the SIP route should be the preferred one for the retail investors as it helps them reduce market timing risk. But when we look at a longer term picture, overall AUM growth for Industry between end FY13 to end September 2019 was 19% CAGR. On a matrix like MF AUM as percentage to GDP, India stands close to 12.5% (end FY19), which is below world averages of ~55% and way below markets like USA which is more than 100%. Further, Mutual fund penetration in smaller cities is even lower. To improve the penetration level, industry needs to improve awareness among investors and continue to educate them so that they make appropriate choices.
I am a 30-year old risk taking investor and want to be invested in equities only, with a horizon of 3-5 years. In what sectors should I invest? Will your advice change if the time horizon is extended?
My advice to the investor is that first he/she should firm up the asset allocation plan based on end goal and resources. Having firmed up the allocation, one should stick to it and make regular reviews of the same. Within the equity portion, a large part of the investment should go towards diversified funds. Ideally, allocation towards sector funds should not be more than 15 to 20% and that too considering the risk profile of the investor. While selecting the sector fund, investors should pay more attention to the longer term growth potential in the sector and should not be swayed by the market trends.