In the last one month or so, mutual funds got a lot of money in. This has been the case across funds from companies like Franklin Templeton and DSP Merrill Lynch in particularly, and also UTI and now Prudential ICICI, which has come in with a new fund- the equity and derivatives fund.
Chief Investment Officer of Prudential ICICI, Nilesh Shah discusses the current situation of the market in terms of inflows, valuations and the general consensus on the market.
He also says that not all companies are coming up with attractive pricing in IPOs, and advises investors to be careful while investing in IPOs.
Excerpts from CNBC - TV18's exclusive interview with Nilesh Shah:
First a quick word on what you are seeing in terms of flows into the industry. The existing funds didn't get too much money at all, but some of these new offerings are still mopping up money even as the retail mood remains quite cautious about valuations and levels. How do you explain that?
That's a real difficult thing to explain. The NFOs (New Fund Offer) do receive encouraging response from the investors, whereas the existing funds with a solid established track record in a running portfolio do not solicitate that kind of response.
Maybe there is some sort of disconnect between what we are proposing and what the investor wants to hear, and that is kind of creating a mismatch between the flows into the new funds vis-à-vis the existing funds.
What is your sense of what the retail sentiment or HNI sentiment is right now? People we speak to seem to be fairly cautious about making fresh commitments at these levels.
Definitely. Most of the people we have met during the last couple of weeks are actually praying for a correction. One positive thing is that now no one wants to argue against the long-term potential of India.
So most people do believe that over 5-10 years, the equity markets and the Index will be far higher than what it is today. Now they just need to get that sentiment or mentality where you have to jump into the swimming pool to learn the swimming.
However, the comfort zone is still missing, where if you have a 10% correction in the market, it doesn't matter. That kind of mentality is still not coming in. So people want to get in when the market has corrected rather than when the going is still good.
I believe that in the equity part of your fund, you are going to look at largecaps and IPOs. How have you read the recent performance for some these stocks that have listed?
Essentially, if we see the two distinct phases- before May and after May- most of the IPOs before May, atleast on the listing, were giving decent gains. Whereas most of the IPOs after May 2006 have not been giving those kind of return.
Somewhere, the pricing of the IPOs, atleast in a few cases, are looking far more expensive than the current stocks available. That's why you are seeing that kind of trend.
Now, the IPO market also need not provide any margin of safety and so one needs to be very careful while investing in IPOs. We are seeing a fair amount of pipeline emerging on the IPO side.
Not all the companies are coming with attractive pricing. There are many peer group companies available in the existing market at far lower valuation, so one needs to be careful while investing in IPOs.
Is the derivative power or portion primarily for hedging purposes?
Essentially what we are managing right now are all relative return funds, if the market goes up, we give good returns and if the market goes down we go down further. That's where the investor gets disconnected.
We need some sort of consistency in return and that's what this fund is trying to do. By running a relative return fund in a cheap market and a hedge fund in an expensive market, we are trying to bring some sort of consistency in the returns.
The consistencies will not come on a day-to-day basis but on a 12-18 month basis, we should have some sort of absolute return bias rather than relative return bias. We will have no excuse to offer to investors that I am down 25 per cent because the market is down 30 per cent. We will be targeting absolute positive return on a 12-18 month horizon consistently in this fund.
Your Wealth Optimiser Plan in this fund seems far more aggressive because there you kept 80 per cent option of equity-unhedged exposure, that will be more of an equity kind of product and you will take directional call there?
No, there we have determined a quantitative tool for defining the hedges.
If the market goes, say 20 times forward PE, then we will be hedging almost 100 per cent of the portfolio. In case, the market corrects from that kind of expensive valuation then this fund will outperform on the way down significantly. So there is a pre-determined hedge ratio to ensure that on the way down in an expensive market this fund will outperform significantly.
Yet it's important to understand that these kinds of products will probably underperform in a market, which is trending up very smartly, right?
Definitely, in a market that is going from fair value to bubble, this fund will underperform significantly. In a market that is crashing from fair value to say cheap valuation because of an event risk like 9/11, then also this fund will fall as much as any other fund.
The only time this fund will outperform is when the market is crashing from expensive to cheap zone, expensive to fair value zone. What we are trying to do is that in a cheap market, attractive market, this fund behaves like a normal balanced fund and in an expensive market, this fund behaves more like a hybrid fund. Using that combination, hopefully over a longer period of time we should be able to generate some sort of absolute return and some sort of consistency and limited volatility.
As a fund manager how are you expecting liquidity to flow for the next two-three months because like you said it's been status-quo for inflows but have you heard or seen redemption pressure as well?
No, fortunately there is no redemption pressure whatsoever. All investors whom we have met during the marketing of the fund are looking to invest in equity markets. And anyway from the broad data, we know that retail ownership of equity allocation is fairly low. So people are waiting with cash to invest into the market at an appropriate time.
Systematic Investment Plan is now picking up, so there is continuous inflow coming in from those kind of regular investors. Hopefully, all these people who are sitting on the fence at some point of time will gather the courage and join the bandwagon.
You described an interesting phase for the market, the market which is crashing from expensive to fair value, do you see that possibility presenting itself in the next quarter or so?
It looks difficult right now. In May 2006, market was going at 18-19 times forward earnings, today we are at 16 times forward earnings. At that time, oil was at $75 and going to $80, today oil is at $60 and is likely to go to $55. At that time, interest rate was 8.3 per cent and going to 8.5 per cent, today interest rate is 7.65 per cent and coming down to maybe 7.5 per cent or going up to 7.75 per cent.
At that time, the monsoon was below normal, today we have normal monsoons. Then there was doubt on the continuation of momentum of corporate profitability, today we are talking about first half profitability of more than 40 per cent.
At that time, the overall leverage was more than Rs 50,000 crore in Futures & Options market, a leverage from the banking system and NBFC system and broking financing into the market, today the leverage is there but its not that significant. So all these factors put together, I don't really see the market crashing quickly.
There could be mindless volatility here and there, based on some short-term pressure here and there, but the market going down 25-30 per cent looks fairly unlikely as of now.
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