As 2018 draws to a close, CNBC-TV18’s Surabhi Upadhyay caught up with Manish Gunwani, CIO-Equity at Reliance MF; Amit Tripathi, CIO-Fixed Income at Reliance MF and Sundeep Sikka, CEO, Reliance Nippon Life Asset Management who spoke on the prospects of 2019 and sectors they are bullish on.
According to Gunwani, the market is positioned well in terms of valuation and macros. “Now I think we are positioned well both in terms of valuations and macros. So if you take a two to three year perspective, you will hopefully get very healthy returns going forward," he said.
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here: Edited Excerpts: 2018 was a little more challenging, it wasn't a straight simple ride. It tested patience, we had to realise that we will also see losses in our funds. A lot of the funds are actually negative. Some of the best performing funds are also down 5-15 percent. If you look back at 2018, have there been any lessons for investors that are parking money in your funds and then how do you take it forward in 2019? Sikka: 2018 was one of the most challenging years whether you look at debt, equity, for all asset classes it was very difficult. Investors walked into 2018 very positive, getting huge returns over the last few years but effectively negative returns in largecap funds. Huge negative returns in smallcaps.
However, the key learnings have been if you were to look at from a long-term point of view, this volatility is always going to be there. In spite of that fact largecaps are almost zero return, midcap is about negative 10-15 percent return. The key learning in this is if you were to extend this beyond one year, you look at over the 5-10 year period, again the same funds are giving in an average CAGR return of 15 percent, smallcap are giving you returns of about 18-20 percent. Investors have to understand that equities are going to have volatility.
Simple throwback tells you that it has actually been a great year for ETFs. If you hadn't put money in actively managed funds, if you simply went with one of the ETFs or Sensex ETF or some of these smart beta products have actually done better. So, is this also a year of learning because we never typically would speak of ETFs when it came to retail money earlier, so is that also changing? Sikka: We have always seen ETF as a very big opportunity. From a long-term point of view, investors will always have to be given the choice. There will be investors who would like to go for active funds, there will be investors who would like to go for ETF but this was the first year where ETFs have taken the centre stage. I have always been saying this over the last many years that clearly from a largecap funds point of view because it has an expense of 200 basis points. From a long-term point of view it will become more and more difficult for active largecap funds to create the kind of alpha they have been creating and that is where ETFs are going to challenge them. You know why 2019 is also very interesting because besides the market volatility this is going to be a year when your industry is going through a massive change, the way in which mutual funds are sold, distribution model - the intermediary advisory model all of that lot of changes are happening, trail commissions which is what the regulator has not mandated, nothing upfront all trail, so just purely from a sales point of view and from a customer experience point of view what will 2019 throw up? Sikka: I just take it this way, I think as we talk today, in 2018 we saw a lot of changes but whenever we see changes we try to think that these are big changes, it is going to change the world. A lot of changes keep happening maybe when we do this show in 2029 you won't even remember these changes. Anything that is good for the investor in a long run is good for the industry.
I clearly believe whatever changes are happening I think the industry will have to face transition, the industry will have to move aligned these changes. It is very important that the entire industry, all asset managers, all distributors, all advisors have to start seeing and push in what is good for the investor. As long as that is done I clearly see today in India it is 2 percent of the population is investing in mutual funds and ETF. I think clearly it is a long way to go.
There is enough potential there is no denying that but let me ask you in 2018 the mutual fund industry also came into the lime light for a lot of other reasons. We had the whole NBFCs issues spiral out. Then even retail investors were asking that ultimately where is it getting invested, what is the underlying problem, is there a problem with debt funds and what is going on? Is the money being used to lend to certain entities? All kind of questions started coming up and not just in pink papers, in mainstream regular newspaper as well, so how do you look at some of these challenges? Sikka: That is a price you pay coming to the center stage, everything is under the scanner. But I think the way you have to see this is for the retail investor there are two key message in it. Whenever you invest there is going to be some return there is going to be volatility and there is going to be risk associated with it. Typically what happens especially before 2018, in between 2014 and 2017 investors had started thinking mutual funds can only give positive returns, great returns and there is no risk attached to it.
Again this was more a feeling in debt because the yields were moving in one way. Last year was very interesting, the 10 Year started at 7.30 went all the way to 8 plus and came down again to 7.30. The advice for the retail investor is it is very important not to get carried away with the returns. Also, look at the risk appetite and the research capability. There is a very old saying, the more due diligence you do the more luckier you get. It is important for investors to understand fixed income will also have risk.
2018, I am sure you must have had pretty tight evenings, sleepless nights, volatility. 2019, what is the first thought that comes to your mind? Gunwani: The way I look at 2018 last year was a bit of a catch up of this spectacular 2017 we had. Now I think we are positioned well both in terms of valuation and macros. If you take a 2-3 year perspective you will hopefully get very healthy returns going forward. The point I am making is on a slightly sustained basis. We have not done too much, and now with currency being very competitive, with oil falling to $55 per barrel which means your current account deficit and inflation being very benign I think we are set for a good run. Actually emerging markets in general will do well versus developed markets. This year is actually ETFs that have really done well, what is that mean for you and for managing largecap money first of all? Gunwani: You guys are talking about one year but if you go back five years the alpha is really good. I do think that active fund managers and let me be objective. The last decade you had a scenario where active funds were beating Nifty by 10-15 percent that is not going to happen. We have to be realistic about the alpha we can generate and it is unlikely I can never say never again, but it is unlikely that that kind of alpha will happen. What is a realistic expectation to have if someone is putting in money now for the next 5-6 years at least what is the additional he will get in the largecap fund vis-à-vis a simple plain vanilla index ETF? Gunwani: It is a bit subjective. In my sense, 2-5 percent is good alpha. The other question in people's mind is they are sitting with midcap and smallcap funds which are down 20-30 percent but it is also very lucrative. They ask this question that is this the time for midcaps what does your sense tells you? Gunwani: Clearly, at the end of 2017 we had a situation where the valuation gap was a lot between largecaps and midcaps. In 2018, that has got corrected both in terms of time a bit and price a lot. Today, we think that multi cap and midcap funds make more sense versus largecap funds incrementally. I think the asset allocation should directionally move more towards multicap funds and midcap funds versus only largecap funds. Sikka: That said is very important, especially when you saw 2018, because the midcaps were negative, a lot of largecaps came back to the flavour. Three years before that it was almost smallcaps. I think it is important to have a right portfolio. So it is important that largecap is not going to be so volatile but the kind of alpha that you can create is going to be the 200 basis point -500 basis point.
The smallcap can generate much more alpha, but the volatility is going to be much more. So it is important for investors to understand both these while they are equity, but they are very different animals and as long as the investors is willing to take that extra and willing to look at volatility, the kind of alpha that can be generated in smallcap is going to be huge.
What does your own mix look like right now? If you were parking or doing your fresh allocation for your money between largecap, midcap, multicap, smallcap how would your pie break up? Sikka: All my investments are only in Reliance Mutual Funds so that is number one. Number two for me because I invest for longterm I am more into the midcap and the smallcap and banking fund is one of my favourites. Banking, everything has happened in the last 3-4 months October onwards, the NBFCs crisis, credit markets, interest rates being so volatile what do you see ahead for the financial services sector and the kind of stocks that you are comfortable with right now? Gunwani: Banking in general from a slightly long term perspective is generally credit grows faster than nominal GDP. So, that is the kind of sectors which typically compound well. The second point is in any part of economic stability or recovery process banking is a very central part of that theme. If you look at India now versus one year back I think there has been a host of improvements on the macro sides whether you take inflation, current account deficit growth outlook so if our economy has to do well banking will be an integral part of that. The banking fund which is just positive for the year gone by which is not bad considering how a lot of the sectoral funds have been negative 10-15 percent, so what will the mix increasingly look like? There are a lot of moving parts, the question is whether you will follow private sector banks, whether corporate banks now that we are coming out of NPA mess, whether they will start doing better, do you like them more and of course there is this wide world of NBFCs, so in this kind of a fund and overall in your funds when you are picking financials, what are you comfortable with? Gunwani: One of the attractions of the banking fund is instead of it just being a beta play on the Indian economy, now with asset managers, general insurance, life insurance, it is a much more richer landscape to play in. At this point we think the large corporate banks with high CASA, good retail liabilities and lending franchise and some NBFCs which are in niches because it is unfair to paint all NBFCs with the same brush. I think there are spaces where banks will not be able to reach whether it is geographical, whether it is segment wise and those are spaces where we are overweight in banking. Let us layer it out from the most to the least - the stuff that you will stay away from if you investing money in the markets this year? Gunwani: This time more than a sector, I think style is what is more interesting because if you look at 2011-2017, typically growth style outperformed but where there is an attraction in the value kind of stocks. So, if you look at a lot of asset based stocks -- utility, cement, hotels, hospitals, real estate -- I think there are a lot of these segments which are quite cheap.
From a global perspective, there is a huge question mark on growth. The US, China, Japan, Europe, everyone is slowing down. So, you want to be very careful of these very high PE stocks which can disappoint on growth.
I segment it two ways, one is value versus growth and other I would prefer domestic facing businesses versus businesses having an international presence.
Where do you think more money is going to be made in 2019 -- in the stock market in financial assets like mutual funds or in physical real estate? Sikka: If you look at gold and real estate, I think the story is over. For gold, a lot of people are saying so much risk aversion, gold might do really well. Sikka: That is for capital protection but you cannot create wealth through gold. On one side you will see more and more money coming into financial saving, you will see more money coming into capital markets, you will see money moving away from gold, real estate and bank deposits into mutual fund industry and you will see more money coming into equity markets through SIPs, so that is the trend I see for 2019. Where does consumption fit in all of this because it is never coming at a cheap value in our markets? Despite all kinds of corrections, multiples are where they are. You also have a consumption fund, it is a small size now but I am guessing you are looking at growing that, what is the thought? Gunwani: Consumption is 60 percent of the GDP, so obviously there will be a lot of stories, businesses out there which are doing well and we will have a lot of exposure to consumption. However, at the margin today if you have to invest money, value stocks seem to make more sense. Secondly, a lot of nascent industries or segments are there which can grow for 10-20 years. It is okay to pay high PE or high EV to EBITDA for those kind of businesses but I also think that there are a lot of high PE or high EV to EBITDA companies which can face disruption, which can face competitive intensity. So, you do not want to pay top dollar and keep buying the same stocks again and again? Gunwani: Yes. You are looking for value, are you in the camp that believes that there is a cyclical uptick that is underway and we are seeing the first real economic greenshoots, do you believe that? Gunwani: The domestic macro is perfectly placed. The real question marks today are on global growth. If you have a massive deceleration in global growth even domestic growth will get affected. That is why the value strategy makes sense but at the same time, it is such a short cycle economies globally today that at any time if Fed turns, if some other central bank turns then I think the real absolute return will come through. Your market has hogged all the headlines of 2018 such as the IL&FS crisis. Whether there is any risk involved in debt mutual funds what would you say are the learnings for retail investors and what is the first message you would like to give to people who want to park money in your funds? Tripathi: The first message is for the debt markets as a whole which is that we have definitely turned the corner in September and we are definitely looking at a much better 2019 than 2018. Having said that specially when it comes to retail investors most of them are looking at investment horizons of one year to three years and sometime beyond that stick to a particular philosophy as far as your investments are concerned, stick to people and schemes that you are comfortable with.
Because ultimately returns can move up and down but we need to be very comfortable with your investments and once you stick to a particular kind of a framework in terms of your decision making choose those funds houses which are true to label in terms of positioning.
In between there was also some concern about the kind of entities in which money is being ultimately parked in, whether it is NBFCs, or NBFCs in turn lend to real estate,or about certain top promoters of the country and their funding process is happening through the mutual fund route, it is all legitimate, it is all legal but nonetheless these are questions that came up. So, as a fixed income manager how do you answer these? Tripathi: At the end of the day NBFCs are intermediaries like banks. As banks do onward lending when they collect money from depositors, NBFCs also do onward lending when they collect money from the wholesale markets. While the source of funding might be different - retail or wholesale, ultimately it is onward lending for both of the entities. To that extent, NBFCs have done lending based on fair practises and in terms of a proper risk management framework, whether it is a retail NBFC, or wholesale NBFC or housing finance company, ultimately for me as a credit guy, when I am looking at any NBFC, I do a very bottom-up kind of a analysis and see that irrespective of which asset class that NBFC is typically is lending to, are they doing a good job out of that or not. Since you mentioned housing finance companies and it became a bit of a bad word towards the end of 2018. Have you changed your stance? Are you not investing in securities that are issues by some of these entities or are you still taking a wholistic view? Are there any specific sectors that let us say you are staying away from or certain types of entities that you are staying away from after the IL&FS episode? Tripathi: If I were to just step back and look at credit as an overall piece, I think credit as an overall piece is always about bottoms-up approach, it is never about taking a sectoral approach or taking a subsectoral approach saying housing finance is bad, construction is bad etc etc. It is always about an entity and how that is carrying on its business.
Coming specifically to housing finance, the issue was no with regards to the retail piece of their business, any which ways mortgage is still regarded as the most valuable underlying security against which you can lend. So, it was not the retail piece, it is the wholesale piece or wholesale part of their balance sheet which was being more focused in terms of what the market was focusing on.
I guess as long as one gets the overall comfort that both in terms of allocation, the retail is still a predominant part of housing finance companies balance sheets and second the wholesale either is predominantly cash flow backed as in commercial properties in LRD format or the general underwriting standards of that wholesale is very good, which again is a very bottom-up approach when it comes to entity to entity, I think we would be very happy to look at these entities and keep on lending. As long as we have the overall comfort in terms risk management practises, the way the business is carried out, I think mortgage still remains one of the best asset classes to lend against in India.
If someone wants to park money for let us say 3 years because that is where the tax advantage kicks in, that is where your benefit of indexation comes in, then what would you say? Duration funds, they play on bonds but interest rates have gone all over the place from 8 percent plus to sub 7.5 percent and then there is credit risk, so how would you sort of advice on this? Tripathi: Our overall view on rates is reasonably positive for 2019. We are in some kind of a sweet spot as far as the broader macro is concerned and everything has been moving in the right direction so to say as far as interest rates are concerned. Having said that if one is looking at a three year plus kind of a time horizon and we are talking about retail investors who may not have too much of appetite for day to day kind of volatility, the simplest products to look at are the neutral duration products in fixed income. When I say neutral duration I am essentially talking about products that have 2.5 year kind of a duration profile, short term bond funds if you are looking at high grade products, which is typically AAA oriented or accrual or credit funds if you looking at high yield funds. So, while I as a portfolio manager or as a risk guy will always tell you that I am very comfortable with my credit risk fund. Is that where you would park your money as well? Tripathi: I already have parked my money in my credit risk fund. A quick rapid fire round - your favourite fund out of your own universe where you would park let us say the maximum amount of your money next year? Gunwani: Reliance Multi-cap Fund. Sikka: Reliance Banking Fund. If we overall talk about resolutions, 2019 for you? Gunwani: Health. Sikka: Health and take care of your financials also and for that keep looking at Money Money Money. Tripathi: More delegation…. let my team work harder and let me take more rest.