S Naren, ED & CIO, ICICI Prudential AMC, is well known for offering the right investment choices to investors every year. What is his choice this year? Shivani Bazaz of ETMutualFunds caught up with Naren to find out his reading of the market scenario. “On valuation basis, Indian equity market is no longer cheap. But, at all point in time there will be pockets where there is value. For example: In 1999, old economy stocks were the value pockets while in 2007, there was value in technology, pharma and FMCG, says Naren. Edited interview.
The current year was memorable for mutual fund investors. As a fund manager, how do you look back?
The liquidity support unleashed by global central banks, coupled with very low cost of capital in most parts of the world, has played a big role in ensuring that equity markets remain resilient. Most of the calls we had said for the last year have played out well such as change in market cycle, market rally becoming more broad-based in nature, RBI pausing rate cuts, emerging and developed markets facing higher inflation and the potential speeding up of tapering program by the US Fed. Keeping in view these likely developments, we had launched two actively-managed schemes – ICICI Prudential Business Cycle Fund and ICICI Prudential Flexicap Fund – both were well accepted by the investors.
There are many uncertainties to deal with in the new year. How will the year unfold?
We believe, in 2022, a combination of active management and multi asset strategies are likely to provide better outcome as the period of easy money making across asset classes is over. Given the one-way rally seen over the last 18 months, our medium-term view has turned cautious due to valuations moving higher while the long-term view on equity remains positive. We believe the market volatility could spike in 2022 as and when the US Fed starts to taper down its bond purchase and hike rates. Another risk remains in terms of impact and severity of Covid variants. Owing to these reasons, we have been recommending multi asset strategies, such that the investors are relatively insulated in case of equity market volatility.
However, the positive here is that Indian business cycle is on a relatively strong footing. The economy is on the verge of capex recovery led by government policy and expenditure push which shall give impetus to private capex and consumption demand by creating employment. The only problem right now is at the bottom level of the pyramid where we need to see more income coming in.
You are known to offer realistic investments options to investors. Are you still asking them to stick to dynamic allocation funds or balanced advantage funds?
2021 was a year of unprecedented stimulus measures. The current scenario is such that markets may be volatile due to dynamically changing macros. On the domestic front, the starting point – that is, valuations currently seem to be high. We have been recommending investors to invest in asset allocation schemes and other such schemes which have the flexibility to invest across different asset classes, marketcap and themes.
Valuations across asset classes remain elevated when compared to their respective long term averages. Historically, whenever any asset class is fully valued they tend to become volatile. Hence, we believe at this juncture, multi asset approach is what is required. Through multi asset strategy, an investor gets access to diverse asset classes such as equity, debt, gold and international equities, all within a single fund.
We recently launched ICICI Prudential Passive Multi-Asset Fund of Funds which provides exposure to all of the asset classes mentioned. Since this is a passively managed offering investments across asset classes shall be through ETFs/ Index Funds. The Scheme is capable to invest in any ETFs/ Index Fund launched by any other mutual fund in India. For international equity exposure, the universe consists of 30 global ETFs that invest across globe/country specific and theme specific ETFs. Through this fund our aim is to offer a simple investment solution providing a blend of various asset classes.
Investors seem to be in love with flexi cap funds. Are they ideal for all sorts of investors?
Investing in a flexicap fund is the easiest way to access all the market cap segments of the equity market. In case you are an investor unsure about whether to invest in a large, mid or small cap, then that dilemma can be solved by investing in a flexi cap category fund. The fund manager here has the flexibility to move between various market-caps efficiently (a feature not available in any other equity mutual categories) and take advantage of the valuation differentials between the market cap segments. At a time when market is no longer cheap, instead of staying on the side-lines, investors can opt for this category wherein the fund manager, in line with the changing market condition can manoeuvre portfolio allocation with ease.
What is your take on large cap funds. Many investors believe that these funds are unlikely to generate alpha.
Since Jan 2018, a narrow set of 10 stocks from the Nifty 50 universe led most of the rally which made it difficult for several large cap funds to beat the benchmark. However, over the last one year, the rally has been fairly broad-based which has helped improve the performance of the category funds as well.
You are a renowned value investor. What is your take on the valuations in the market?
On valuation basis, Indian equity market is no longer cheap. But, at all point in time there will be pockets where there is value. For example: In 1999, old economy stocks were the value pockets while in 2007, there was value in technology, pharma and FMCG.
In today’s times, quality, new age businesses and IPOs in general are the areas where Indian market seems to be overvalued. There is deep value in two-wheeler industry and value in auto banks, PSUs and healthcare industry.
Value funds have staged a smart recovery this year. Can investors bank on these schemes to meet their long-time goals?
Until September 2020, value was out of favour which was also the case even during 1988-89 and 2007-2008.
In value style, we have seen that investments made in 1999 did very well because at that point in time markets were largely focused on technology stocks. Similar was the case in 2007 when infrastructure was in focus. Hence, we believe that value investing at a time when market is elevated tends to do well as value focuses on investing in sectors which are out of favour but have potential to deliver over long term. Therefore, one can consider value funds to meet their long term goals.
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