This year looks challenging after two blockbuster years for the equity market. Is there a strategy that investors should follow?
Asset allocation is a timeless strategy and I fine-tune it with valuation-based asset allocation. There are two approaches. One, depending on your financial needs, risk appetite, time horizon, and cash flow cycles, do asset allocation and build a portfolio. This strategy makes markets irrelevant.
Second, when we are in an environment where many things are at extremes and whenever these imbalances correct, they can create very sharp fluctuations. So, in markets like these, my first advice is to be cautious and conservative as this is not the time to go for full-toss and sixes and instead is the time to defend by doing asset allocation through diversification.
The choice of asset classes can be fine-tuned by blending requirements of risk appetite, time horizon, financial needs, etc., with that of the market environment because there are different segments of each asset class that are in different cycles right now. For instance, in the US, S&P is down 8% in the last few months, whereas sovereign bonds are down 9%-10%. Capital loss of 10% in bonds that are meant to defend when stocks fall shows that all such advice around risk parity has gone for a toss because even interest rates are turning fairly volatile. So, I think it’s time to be prudent and continue with the right balance of asset allocation to navigate the current market conditions.
Considering that international investing, which is an important element of asset allocation, is not available for the time being, is that creating a major opportunity loss for investors?
Yes, global diversification definitely enhances the ability of portfolios to be less volatile because of the relatively weaker correlation between Indian and global markets. But, whether it is international investing or domestic investing, at the end of the day you are buying profitability of businesses and whether these businesses are in India,, the US, or in Europe is secondary to an extent. Ultimately, we are looking for companies that can generate 15% to 20% consistent ROEs companies or 10% or 20% profit growth rates. So, yes, currently one cannot invest extensively in global companies, but similar matrix businesses are available in India. In this context, I don’t think it’s a very big opportunity loss.
That said, we have a fund that can invest globally because its mandate allows it to invest in ETFs. This fund has two underlying ETFs that make up the dominant part of any global investing, which is the technology sector as global investing is mainly innovation investing as every other business, such as in healthcare, financials, etc., is present in India as well. What is unique overseas is innovation, technology, and software, and those types of businesses are available through semiconductors index and NASDAQ. So, we have a fund that can still invest in NASDAQ and the semiconductors index and give exposure to these sectors. So, in some ways, options are available, yet I would not say it’s a big opportunity loss.
You launched Value Fund that invests up to 35% of its assets in international stocks. How are you managing that fund given the stoppage on overseas flows?
We have generally kept around 30% of the assets in international funds and in that 30%, we have identified five money managers who largely follow value investing principles. The quantum of flows currently is not large enough for us to worry about maintaining that ratio of 70:30.
You’ve seen some high-profile exits over the past few years and that has caused concern among some investors. How do you mitigate that?
We’ve been around for 25 years and as a group for nearly 155 years, and the group has a very strong ability to attract new talent. For every exit that has happened in the last 25 years and not just the last two years, we’ve been able to hire a fairly talented pool of professionals with a lot of diversity as well as complementarity to what we have.
A lot of new hiring that we’ve done in the last two to three years has involved picking up talent from different segments. For instance, for our product head role, we have hired a market strategist and not a traditional product head from within the fund industry.
We’ve created a new vertical within the investment team called investment communications where we have hired two analysts who come up with timely and differentiated investment communications that are put out every month to help our investors, partners, and distributors form better investment opinions.
Gold is another commodity that has seen a revival this year, and of course, forms a part of a diversified portfolio in any kind of market. What are out thoughts on the DSP currently not having a gold ETF or gold fund?
We will soon launch a silver ETF and within the next 3-4 months, we will also launch a gold fund. The thesis for our world gold fund is that gold mining companies have operating leverage and financial leverage.
So, when the cycle is favourable, they end up generating 1.3 to 2 times the return of the gold price, and likewise, on the flip side, when the cycle is not favourable, they get penalized as well.
The last decade has been a decade of inferior gold price performance. The whole of last decade was a bear market for gold, in which the operating and financial leverage will work against the coal miners, and hence, it will not deliver superior returns to gold. But when the cycle turns, in a rising market, the numbers will be very different. So this is a fund that needs to be timed and that can be a permanent part of your portfolio.
It is a fund where you need to get in when the last five-year returns are very poor and probably get out when the last few years’ returns are very high. We are debating whether we should make some tweaks in this fund because the cyclicality is very high and a lot of times the cyclicality plays out before three years.
All international funds have debt taxation, so investors need to, by default, hold for three years. So, we are debating if the cyclicality happens within three years, do we book profits and move it to gold to make it more tax-efficient, but I will say more about it later on, once we have clarity.
Kalpen Parekh, managing director and CEO, DSP Investment Managers India Pvt Ltd.
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