The year is ending in a few days. How do you look back? Anything striking about the year?
The discussion was around inflation and interest rates at the start of the year. And at the beginning of the year, we had this episode where one of the regional banks in the US was facing pressure on account of rising interest rates in their mark to market bond books. It did lead to a failure of a few banks. And that set panic in the global market on the damage that interest rates can cause to financial institutions across the globe. Thankfully, that was very contained. And we got reassured around the continued impact being very limited. I would remember 2023 as a year where there was anxiety around significantly high interest rates, anxiety around the second order impact that these interest rates would have on financial institutions and banks, and expectations around inflation coming down. The year is ending on a positive note as inflation is under control across most western economies. Interest rates certainly seem to have peaked. The magnitude of fall in the coming year is still being debated. Suffice to say that we’ve seen peak interest rates already. And this year is ending on a positive note. Money will start flowing into emerging markets at a pace better than what it was the last almost two years.
Most equity mutual fund investors had a fabulous year in 2023. From a fund manager perspective, was it an easy year or did it challenge you?
It depends on the position that fund managers have taken, while the year as a whole has been very strong for the Indian equity markets. But it’s also been a very polarised market. We’ve seen basically small caps have done very well. Mid caps also did very well, but large caps, you know, pretty much languished. You can call this year as a year of the year for mid cap and small cap.
Fund managers who have been purely on the large cap side, it has been a bit of a disappointing year. Equally the value part of the market has done exceedingly well, but the growth part of the market hasn’t done well. So again, if you have positioned your portfolio in the growth quadrant, then you may have suffered. And that’s true of many portfolio managers who follow the growth style. So, yes, it depends on what the mandate is and how you are running your fund.Though UTI equity schemes offered good returns in 2023, several schemes underperformed their benchmarks. What was the reason behind the underperformance?
Shall I start by saying that some of our schemes have done very well this year. Our large & mid scheme, our hybrid scheme, our opportunities fund … have done very well over the last one year and three years. I believe that these are the schemes which are following the value side. Some schemes which are following the growth style have certainly struggled. Because obviously, like I said, the stocks which are typically perceived as growth oriented stocks have not done well in the last two years, and also in the last one year. So yes, what we look at is how do we want to present our entire bouquet of offerings to our investors. We don’t want to be following any one particular style across our entire offering. We basically want to be present across the entire spectrum of growth, value and in between blends as well. So that, you know, our investors are on a composite basis, on a portfolio basis, able to capitalise on every part of the market, and on an aggregate level keep their risks low. So, this is something which we would expect in any given year, you know, there will be years when one particular segment or one particular market cap bucket will do well, or maybe one particular style will do that.
UTI Mutual Fund came up with 14 NFOs in 2023, especially in the index space. What’s the thought process?
The answer to that is that again to pick up from the previous question that you had asked, and I was commenting about UTI being a full forward asset manager trying to address investor needs across the board. And we have realised that the investor interest and the market is also now moving towards passives. And while we don’t control the investor interest, we have to be present in the market if there is a conscious interest and a conscious tilt of the investors portfolio or if not tilt there is a conscious allocation of the investor portfolio towards passives. And recognizing this need, we’ve actually been launching quite a few smart beta funds on our passive site. In fact, UTI is one of the largest AMC when it comes to passive, we have very strong shares in ETFs, and index funds. And we wanted to capitalise on that. And we also realised that there was a genuine need of the investor. Investor does want to allocate some part of his or her portfolio into passive. Having said that, we also launched, you know, a couple of active funds, we launched our balanced advantage fund in this financial year, we also launched a very differentiated product called the Innovation Fund, which is basically on the active side once again, and this product is basically invest into company linked to the innovation theme and this innovation theme are not necessarily the only technology companies, they can even be chemical companies, they can even be companies on the biotech side. They can even be fintech companies. So we’ve seen that over the coming decades there will be some great success stories from India on the innovation fund across the spectrum. Yeah, there will be conscious launching of products on the active side, and also on the passive side.
Though the market is hovering around its historical peak, many uncertainties are haunting the market. For example, higher global interest rates, geopolitical tensions, sticky inflation…. What’s your view? Will the market continue its upward march in 2024?
Sure, absolutely hit the nail on the head. Markets are certainly very richly valued. And if you can break up the market into segments, let’s say large or small, I would say in fact that’s the data which is speaking for itself. Small caps are trading at a significant premium to their long term average. So is the case with mid caps.They look at maybe a slightly different from small caps, but if I were to club both of them together, both small and mid are trading at a significant premium to their long term averages we have more hesitation and anxiety around small caps because these investment models are certainly not as robust as those of companies in the mid capitalization market. So our anxiety and therefore, caution, around small caps is the highest. But we are also cautious about the mid caps as well. When it comes to large caps, I can’t make a statement that they are cheap. But when I look at the valuations, I will just say that, in the context of where the overall broader market is, we are relatively safer in large caps, they are trading at about 10 to 15% premium to the long term average, which is not a very significant premium. So, having said this, it just makes us believe that 2024 Or FY 25, will be a year of consolidation while the economy is doing very well. But like you said, there are certain factors globally, which need to be watched out, although I must say that interest rates seem to be coming down, which is a very big positive factor for equity markets and is a very positive factor for flows into emerging markets. So there is cautious optimism on the global front as well. On the Indian side, things seem to be going very strong, whether it’s GDP, whether it’s our interest rates, whether it’s either inflation, where it’s geo political stability, whether it’s, you know, the spend that the government is doing in infrastructure, so most of the things have been falling in place, the only negative is valuation. And that just makes us believe that we may go into a sideways market, or very low returns over the next 12 months.
The RBI rate action is dominating conversations these days after the apex bank has signalled the rate cut will be delayed because of the stickiness of inflation. How do you view the scenario?
RBI is going to wait and watch and would start to reduce only when they see the Fed is starting to reduce rates. The big factor here, of course, is defending the country and if we start to reduce interest rates faster than what’s happening in the US, then there will be consequences on our currency. So, while our own inflation environment is, I would say, very much under control. And therefore, there is an elbow room that RBI has to reduce interest rates, but they will watch out what other central banks are doing before pulling the trigger. And that’s where I feel that maybe sometime towards the middle of next year as well, possibly you could see some rate cuts.
Many new investors are entering the mutual fund market every day. Advisors say these investors are getting into risky investments like mid cap, small cap, sector schemes. What is your impression and what would you tell these investors?
A very relevant question at this juncture. All I would say is that, unfortunately, retail investors are rearview investors. They always look in the rearview mirror, and look at what has performed, what’s not performed. And on that basis, they make their investments. So when we look at the returns of the last one year, and we realise that small caps have given return, many times over what large caps have given, we are making this obvious choice that small caps are possibly going to continue performing. And therefore it makes sense to increase allocation towards small caps. But unfortunately, markets always mean reverting.
Markets don’t look at what’s happened in the past, markets are more driven by, you know, in the future. And this is where, given where the starting valuations are, we are cautious about small caps. And like I explained earlier, even towards mid caps, and that is where our suggestion to investors would be that the right time to reallocate your portfolio and increase exposure to large caps reduce exposure into small and mid caps. We are not saying that you exit small and mid caps completely because nobody can time the market. So we definitely don’t want to tell investors to do that, but purely on the basis of mark to market movements. The investors portfolio would now have a lower proportion of large caps and a higher proportion of the mid and small caps, there should be a conscious effort to basically adjust and realign this portfolio once again. Bye. Increasing exposure in large caps which can only be done when you attend and reduce exposure in mid and small caps.
What can investors expect from their equity investments in 2024? Do you have any advice for investors?
First advice to investors will be that equity is really an investment that you make for the medium to long term. I know people watch out their portfolios and the performance of their portfolios over six months, one year. And of course, two and three years. But, you know, what we firmly believe is that you must be looking at equity returns only from a longer term perspective, may be a five, seven or 10- year perspective. And once you start doing that, it really doesn’t, it really should not matter to you what the returns will be over the next six months and 12 months. And that’s the advice that you want to give investors that, you know, looking at your returns at shorter intervals can sometimes make you too excited. And sometimes actually it can frustrate you to the extent of either exiting equities or reducing its exposure to equities. And that’s actually absolutely wrong behaviour.
I know that there is a lot of excitement today. Amongst investors, there is a fear of missing out. Investors are, of course, putting money into equities, which is a good thing. But I hope that they are putting money which can be parked for the next five or 10 years and which is not there to make a quick buck, and then exit. So that is my advice. Don’t get disappointed if the market remains sideways this year. It is very normal for markets to take a pause before they start moving up again. Thankfully, our economy is doing very well. Our businesses are doing very well. And therefore there’s a very strong long term case for equities. But that doesn’t mean that equities will generate returns every other year.
