Canara Robeco Equity Hybrid Fund has managed to offer double-digit returns of 11.52% in a challenging year like the last year. What was the strategy that worked for the fund?
Focus shouldn’t be on what happened in a particular year’s performance. While we had a great year, we are focused on generating medium-term optimal risk-adjusted returns for our investors. This is where our core philosophy of focusing on underlying businesses comes in. We are relentlessly focused on Quality of Business, Management and Intrinsic Valuation of the business (BMV). Besides, the funds strategy of focusing on mix of compounders and alpha generators helped in the outcome. In terms of sectors, Healthcare, FMCG, Gas value chain, Private lenders and non-lending financial institution, engineering worked for us during last year.
Aggressive hybrid schemes have seen net outflow recently from them. What do you make of the trend? Is it likely to continue?
We have actually gained market share in this category and have also seen inflows. The outflow that you see in this category is a outcome of, 1) Miss selling of product during FY17/18 on dividend promises by several industry participants and 2) Suboptimal returns as a function of very high weightages in mid/small caps as well as credit papers on debt side of portfolio. I think it’s a wonderful product for conservative investors since, 1) the product allows natural asset allocation and 2) captures most part of upside of equity with much lower risk due to ~30% debt portion. I think the category has a huge potential, provided it is sold as a low risk compounding return product.
Mutual fund advisors say investors are selling their investments because they are dissatisfied with the return given by aggressive hybrid schemes. They believe that they are as risky as pure equity schemes, but never give as high returns as them. What would you tell these investors?
Frankly its contrary. This category has generated equity like or higher returns over last 3/5/10 years with just 70-75% equity proportion. This perception is an outcome of several houses not sticking to core fund objective and going very aggressive on mid/small caps and even taking high risk credit papers on debt side. So these funds have suffered on both side and delivered suboptimal returns. All schemes which have stuck to core scheme objective have done fairly well for the investors.
Best of both equity and debt – that was the USP of aggressive hybrid schemes. Many conservative investors liked the investment rationale. Do you think this still holds true?
Yes, its completely true from 3-5 years perspective. This category has generated equity like or higher returns over last 3/5/10 years with just 70-75% equity proportion.
Failure of aggressive hybrid schemes to declare regular dividends has angered many retirees, who used to bank on these schemes for regular income. Do you think these investors should rethink their strategy?
Very high dividend promises by sellers and expectations from investors has led to this outcome. It’s a wonderful product for someone who is realistic about his return and dividend expectations, given 70/30 mix of equity/debt.
What is in store for aggressive hybrid schemes in 2020 – at a time when prospects of both equity debt look muted?
As I said in earlier question also, looking at things from a short-term perspective would not help investors. I think the category has very good prospects in 2020 and beyond.
Who should invest in these schemes and what should they keep in mind?
This product is for relatively conservative investors. The investors who want to have natural asset allocation and protect downside, but at the same time want to participate in equity upside, should consider this product from three to five years perspective. Also, investors above 60 years of age who invest in these schemes should keep their dividend expectations realistic.