This year promises to be difficult after two good years for the equity market. Is there a strategy investors should follow?
Asset allocation is a timeless strategy and I refine it with valuation-based asset allocation. There are two approaches. First, based on your financial needs, risk appetite, time horizon, and cash flow cycles, do an asset allocation and build a portfolio. This strategy makes markets irrelevant.
Secondly, when we are in an environment where a lot of things are extreme and each time these imbalances correct themselves, they can create very strong swings. So in markets like these my first piece of advice is to be careful and cautious because now is not the time to go for the draw and the sixes but rather the time to defend yourself by making a asset allocation through diversification.
The choice of asset classes can be refined by mixing the requirements of risk appetite, time horizon, financial needs, etc., with those of the market environment, as there are different segments of each class assets that are currently in different cycles. For example, in the United States, the S&P is down 8% in recent months, while sovereign bonds are down 9% to 10%. A 10% capital loss on bonds that are supposed to defend when stocks fall shows that all that risk parity advice has been abandoned, as even interest rates are getting quite volatile. So I think it’s time to be cautious and continue with the right balance of asset allocation to navigate the current market conditions.
Considering that international investment, which is an important part of asset allocation, is not available at the moment, does this create a major loss of opportunity for investors?
Yes, global diversification definitely improves the ability of portfolios to be less volatile due to the relatively lower correlation between Indian and global markets. But, whether it is international or domestic investment, ultimately you are buying the profitability of the companies and whether those companies are in India, the US or Europe is secondary to some extent. Ultimately, we’re looking for companies that can generate consistent 15% to 20% company ROEs or 10% or 20% earnings growth rates. So yes, currently one cannot invest heavily in global companies but similar matrix companies are available in India. In this context, I don’t think it’s a very big loss of opportunity.
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 which are the dominant part of any global investment, which is the technology sector, because global investing is primarily an investment in innovation, because all other businesses, such as healthcare , finance, etc. are also present in India. . What is unique overseas is innovation, technology and software, and these types of companies are available through the semiconductor index and NASDAQ. So we have a fund that can still invest in the NASDAQ and the semiconductor index and give exposure to those sectors. So in some ways options are available, but I wouldn’t say it’s a big waste of opportunity.
You launched Value Fund which invests up to 35% of its assets in international equities. How do you manage this fund given the stoppage of flows abroad?
We have typically kept about 30% of assets in international funds and within that 30% we have identified five fund managers who largely follow value investing principles. The quantum of flows is currently not large enough for us to worry about maintaining this 70:30 ratio.
You’ve seen high-profile exits over the past few years and that has raised concerns among some investors. How do you mitigate that?
We have been around for 25 years and as a group for almost 155 years, and the group has a very strong ability to attract new talent. For every release that’s happened in the last 25 years and not just the last two years, we’ve been able to hire a pretty talented pool of professionals with a lot of diversity and complementarity with what we have.
A lot of the new hires we’ve done over the last two or three years have been to recruit talent from different segments. For example, for our product manager role, we hired a market strategist and not a traditional product manager from the fund industry.
We have created a new vertical within the investment team called investment communications where we have hired two analysts who deliver timely and differentiated investment communications that are released monthly to help our investors, partners and distributors form a better investment opinion.
Gold is another commodity that has seen a revival this year and, of course, is part of a diversified portfolio in any type of market. What are your thoughts on the DSP that currently has no gold ETFs or funds?
We will soon be launching a silver ETF and in the next 3-4 months we will also be launching a gold fund. The thesis of our global gold fund is that gold mining companies have operating leverage and financial leverage.
So, when the cycle is favorable, they end up generating 1.3 to 2 times the return of the price of gold, and similarly, conversely, when the cycle is not favorable, they are also penalized.
The past decade has been a decade of underperforming gold prices. The whole of the past decade has been a bear market for gold, in which operational and financial leverage will work against coal miners, and therefore it will not offer returns superior to gold . But when the cycle turns around, in a rising market, the numbers will be very different. It is therefore a fund that must be timed and can be an integral part of your portfolio.
This is a fund that you should enter when returns over the past five years are very low and probably exit when returns over the past few years are very high. We are debating whether we should make some adjustments to this fund because the cyclicality is very high and often the cyclicality plays out before three years.
All international funds have debt taxation, so investors must, by default, hold for three years. So we’re debating if the cyclicality happens within three years, should we book the profits and shift them to gold to make it more tax efficient, but I’ll say more later once we we will have more clarity.
Kalpen Parekh, Managing Director and CEO, DSP Investment Managers India Pvt Ltd.
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