Investors could continue to allocate to equity funds, says UTI AMC CIO

Investors should be guided by valuations in determining risk and allocation rather than events that cannot be predicted, said Vetri Subramaniam

After sharp pull-back in markets from their recent lows, VETRI SUBRAMANIAM, chief investment officer, UTI Asset Management Company, in conversation with Puneet Wadhwa says he recommends investing in a staggered manner, given that markets are dealing with probabilities (not certainties). Edited excerpts:

How vulnerable are global equity markets to a meaningful correction?

The thing about geopolitical risk is that you never know when and where it might erupt or spread. It is best for investors to presume that such threats will appear intermittently.

The commodity price spike has receded, and the narrative has pivoted to the threat to growth from rising interest rates. Markets are vulnerable as the US Federal Reserve (Fed) is being increasingly forced by the data to push rates higher, and this also raises the risk of policy errors.

Investors should be guided by valuations in determining risk and allocation rather than events that cannot be predicted.

Are Indian markets out of the woods?

I don’t know what the market may do in the next few quarters. Our investing process does not rely on forecasts of market direction. From an asset allocation perspective, an array of valuation metrics are in the comfort zone, although less attractive after the recent rally.

India’s economic macro parameters are also in the comfort zone, and we face fewer challenges than other developing/developed economies.

We must safeguard against inflation which is outside the target zone while maintaining fiscal discipline.

The current account deficit is an area of concern, but foreign exchange reserves, low foreign debt, and the Reserve Bank of India’s proactive steps are helping mitigate that risk.

Which sectors/stocks offer good entry points at this juncture?

With valuations in the comfort zone, investors could continue to allocate to equity funds. I would recommend investment in a staggered manner as we are dealing with probabilities (not certainties). The time to be aggressive in asset allocation is at valuations which are at extremes - and that is not the case right now.

In buying individual stocks, what you buy is more important than market timing because of the idiosyncratic risk associated with an individual stock.

Taking into consideration valuations and growth prospects, I find banking, automotive, and pharmaceutical sectors attractive.

What has been your strategy thus far?

All our strategies are underpinned by our investment process called UTI Score Alpha. Each strategy has guardrails with metrics that define its strategy and philosophy. It is not a one-size-fits-all approach and there are significant differences between schemes.

What is the one investment strategy that has worked well for you so far this year, and the one that was a total miss?
The big miss would be the performance of gold. In the face of a surge in global inflation, the price-performance has been rather disappointing. In rupee terms, the returns from gold are boosted by the fall in the value of the rupee and thus Indian investors in gold have done well over the past year.

The UTI Transportation and Logistics Fund has done well this year. We were positive about this fund in late 2021, given the cyclical set-up combining bad news and attractive valuations.

How much cash (on average across portfolios) are you sitting on?

Changes to the portfolio are driven by valuations of individual stocks and sectors. Market forecasts are not part of the investment process, and this is reflected in our low portfolio turnover ratio across strategies versus the industry.

We do not use cash to manage market volatility – our cash positions in actively managed equity schemes are typically in a very tight band of 1-3 per cent. 

We manage a multi-asset scheme, where the asset allocation is determined by valuations. This fund had net long exposure to equity of about 43-45 per cent in December 2021. This increased to nearly 68 per cent in mid-June after market correction. Due to the recent rally, the model has reduced equity exposure (net long) to 57.5 per cent in August.

The valuation model that drives the equity allocation for this scheme can shift the net long equity allocation in a range of 40-77.5 per cent. The current position of 57.5 per cent indicates neutral standing.

What’s your reading on foreign investor flows?

India has always attracted steady and stable flows from long-term investors due to the availability of the quality and preponderance of attractive opportunities. Such flows will dominate in the medium to long term.

India’s attractiveness among foreign institutional investors had dimmed on account of valuations, but this is a self-correcting mechanism. This is also reflected in the rising trend of inflows from private equity funds and venture capitalists in India’s start-ups and growth enterprises.

There is an overlay of capital flows that are more volatile – hedge funds and exchange-traded funds that would tend to move in and out swiftly. These will remain sensitive to the trajectory of the Fed policy and rates and volatility correlations.