Baroda BNP Paribas Mutual Fund has launched six NFOs in this calendar year. What is the thought process behind the move?
Baroda BNP Paribas Mutual Fund has launched a few NFOs this year to address investor needs and expand the product range. In Q1 this year, we launched two target maturity funds to help investors deploy their fixed income allocation in a low cost and tax-efficient manner. Similarly, Baroda BNP Paribas Floater Fund was launched to help investors earn market-related returns in a volatile interest rate environment.On the equity side, over the last couple of years, we have significantly strengthened our investment team, research coverage and fund management capability and have therefore been able to offer some new funds like Baroda BNP Paribas Value Fund and Baroda BNP Paribas Small Cap Fund to our investors.
In the coming year, we will look to further expand our passive fund offerings
In the current year, the AUM of the fund house surged by 21%. The surging market might have contributed. Do you have any target for AUM?
Increasing awareness and significant under-penetration of mutual funds are driving strong growth in the industry. As a fund house, we are committed to serve investors and partners in not just ‘India’, but ‘Bharat’ too. We are expanding our geographical presence and distribution network. Our investment performance and distribution network are leading to greater participation from investors.
Most Baroda BNP Paribas equity funds have failed to make it to the top even in upbeat market conditions. What is your assessment? What are your plans?
Our funds may not be the largest, but we have a good track record of performance. Baroda BNP Paribas Large Cap Fund and Baroda BNP Paribas Mid Cap Fund have over 15-years of proven track record. Baroda BNP Paribas Balanced Advantage Fund has just completed five years.
We have a well-defined investment framework, backed by a strong investment team. Our investment framework has three pillars-BMV (Business – Management – Valuation). Each of our portfolio companies must be evaluated on these three pillars- Quality and longevity of business, efficacy, and integrity of management and finally valuations must be reasonable.
We have built an investment team with seasoned professionals having complementary strengths. We have a rigorous research process and open culture. Finally, we also have a strong risk management, attribution analysis and review mechanism.
Outcome of Investing is probabilistic and not deterministic. We will continue working towards sharpening our edge and aim to deliver investment results for our investors.
Baroda BNP Paribas Mutual Fund recently launched a small cap scheme. The small cap segment has run up a lot and valuations are very rich. How do you plan to invest and create wealth for investors?
In any economic upturn, we see small cap companies growing faster than the large caps. If you look at the consensus forecast, the expected EPS growth for Nifty Small Cap 250 is 16% CAGR vs 12% CAGR for Nifty 50. Adjusted for growth I don’t think small cap is overvalued.
Also, small caps have a very broad universe and at times taking averages does not convey the true picture. I agree there are certain segments of the market that are expensive, but this is more in certain themes where the market narrative has taken the stocks significantly above their fair value. However, the key in small cap investing is having a rigorous bottom-up approach. Over the last two years, we have been expanding our research coverage and have built a strong investment universe. We find enough good companies available at attractive valuations.
The stock market continues to surprise investors with its relentless upward march. How do you view the trend?
The equity markets have rallied sharply in the last few months. However, the gains on a YTD and 12 month basis are still in single digits – well below long-term trends of growth in the Indian equity markets.
Even after the seemingly quick rally in the equity markets, the NIFTY 50 currently trades at a trailing PE of about 21; while recent 3 to 5 year averages of the trailing PE are 24 or even higher. Therefore, the markets are not overly rich from a valuation perspective. We expect the government’s infrastructure push as well as the resilience of consumption in the Indian economy could help corporate earnings continue their double-digit growth for the next few years.
The year is ending. What are your thoughts and what investors can expect? What should they watch out for?
Indian equity markets continue to be resilient reflecting the broader economic strength. India is expected to be amongst the fastest growing large economies again in 2024. This is expected to lead to continued flows into Indian equity markets – form both domestic as well as foreign investors. The interest rate cycle in India is close to its peak and high frequency data indicators like Credit growth, GST collections, corporate tax collections, etc. continue to be on an upward trajectory. Moderation in Inflation and reducing probability of recession in the advanced economies should provide further comfort.
The downside risks to the markets stem mostly from geo-political uncertainties. Also, next year is election year. Any unexpected reversal in political dispensation can cause a short-term setback to the market. On balance, we believe that the Indian equity markets stand out due to the comparatively better macroeconomic data and corporate earnings growth vis-à-vis other large markets.
Inflation and interest rates – these two topics continue to dominate conventions about the future course of the market? How do you see these two factors playing out?
Inflation moderated below 5% in October led by a favourable base. This moderation in headline and core inflation is expected to provide comfort to the RBI MPC. We expect only a gradual downtrend toward the 4% mark. We estimate FY24 CPI inflation around 5.3% y/y compared to RBI’s estimate of 5.4% y/y. We maintain our view of a prolonged pause on the repo rate by the RBI MPC and expect the RBI to actively manage liquidity to keep it tight in the near term. Nevertheless, near-term risks to inflation remain from ongoing geopolitical conflicts which could cause uncertainty on oil prices, lower Kharif foodgrain production in FY24 and uncertainty on Rabi sowing.
We believe that we are close to the end of the rate hiking cycle. Central bankers are buying time for a shift from inflation to growth. On the domestic front, both inflation and growth indicators have remained favorable for RBI. However, RBI has done a stealth rate hike by absorbing liquidity in the system. RBI is expected to stay put on rates front. Further, we expect India’s inclusion in the global bond index as well as the RBI’s softening stance on the interest rates starting FY2025 to be a positive trigger over the next 12-18 months.
What are your views on volatility in the market, and how do you see balanced advantage funds tiding the volatility?
We believe that short-term volatility is a feature of equity markets and investors should invest in equity markets and equity funds with a long-term view with clear investment goals.
Dynamic asset allocation funds or balanced advantage funds are ideally suited for investors seeking to smoothen the volatility that comes from pure equity portfolios. Baroda BNP Paribas Balanced Advantage Fund uses our proprietary asset allocation model that considers multiple valuation parameters to arrive at asset allocation. We have just completed five years and during this time the fund has provided investors participation in the upside from equity markets while reducing the downside volatility through dynamic allocation between equity and debt.
