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Betting on the Domestic Story

Betting on the Domestic Story

The schemes of UTI Mutual Fund have seen an improvement in performance over the recent years. Swati Kulkarni, Vice President & Fund Manager, UTI Mutual Fund, who has spent 18 years at this fund house, shares her views with Larissa Fernand on what has led to this change. She also discusses her strategy for the coming year and her take on the market.

Do you agree that after last year’s stupendous run, 2010 will not be easy? Do you see volatility hounding the market or will there be a linear, one-way movement?
I think volatility will be moderate compared with the experience of the last two years, assuming that the expansionary policies across the globe are successful in restoring growth, even after gradual tightening. The Sensex is now quoting at a forward PE consensus estimate of 16x-mid range of what it has historically quoted. The movement on either side seems to be range bound. Market returns are expected to more or less match the earnings growth.

So what strategy are you employing for your funds this year?
I would focus on domestic orientation — the domestic consumption and infrastructure themes. The construction sector is expected to witness increased activity levels. I continue to remain positive on Infotech despite a run up in valuation, mainly due to its insensitivity to rising interest rates. The financial sector also looks attractive from a growth perspective.
Depending on the positioning of the fund, I would decide on the capitalization preference, for e.g. UTI Dividend Yield is a flexi-cap fund with about 65 per cent exposure to large caps whereas UTI Mastershare invests close to 80 per cent in large caps. Generally, the mid cap exposure comes out of value picks. I am a bit uncomfortable getting into mid cap stocks solely on the basis of growth. Because you don’t know how quickly that growth will get translated into profitable numbers. But these thoughts are at the macro level, investment calls will be taken based on the prevailing valuation and information flows that alter the capital appreciation potential.

Why is your tax saving fund lagging behind its peers from other fund houses?
The ELSS category is very diverse. The funds that fall under this classification are not the same in terms of the composition of portfolio. Some may be large cap tilted while others may be mid cap offerings. A few may also have a strong small cap bent. This composition changes frequently. Since UTI Equity Tax Savings Plan is a large cap oriented fund, it needs to be compared with funds following a similar investment style. The fund has lower volatility and its performance has improved in the recent past. The performance of funds under the Long Term Advantage Series has also improved over last 2-year and 1-year period.

UTI MNC is a very small fund. There are just two such offerings available in the industry. Don’t you think it is a dead concept?
You are right, UTI MNC is Rs 170 crore fund. At the time of launch, MNCs were perceived to be superior to Indian companies in terms of product quality, leadership position, corporate governance and deliverability of business models. Today, many Indian companies are on par.
Yet, I feel such a fund definitely has a place in investors’ portfolios. Take a look at the portfolio of UTI MNC, you will rarely find overlapping stocks with other diversified funds. So an investor can invest in a diversified equity fund and even in the UTI MNC fund and get truly different exposure. Several MNCs with strong brands are renewing their focus on India due to higher relative growth visibility. There have been additional upsides in the past, in a few cases, where MNCs opted for delisting by paying premium to the then prevailing price, for example — Syngenta, E-Serve, Rayban.

In 2009, you took a cash call that was too conservative and you missed out on the rally to some extent. What made you do that?
I had started deploying the cash by March 2009 as the valuations were at attractive levels. The markets did bounce back from the lows. I took a view that the probability of a fractured election mandate is high and I will get an opportunity to invest at lower levels post election results. Hence the cash deployment was slower. However, the investment calls post election result helped us recover lost ground.

You manage a number of funds and each has a different mandate. Do you have a common investment universe to take your pick?
We are a research oriented organization with a team of 15, consisting of experienced analysts, portfolio managers and dealers. A universe of 350 companies is tracked actively through management visits or calls and through regular analysis of financial reports. The universe is extended to include compelling investment ideas from time to time. The portfolio is largely selected out of this universe depending on the characteristics and positioning of the funds. Thus the applicable universe for a given fund is a subset of this common universe.

What has led to an improvement of performance in UTI Mutual Fund schemes over the recent past?
In the rally of 2007 to the start of 2008, we benefited out of investments in high growth stocks in Power, Capital Goods, Metals and Infrastructure. We were fortunate to lighten our exposure early enough on signs of the macro slowdown and liquidity crisis. Some of the calls that really worked well for us were our early exit from Power, Banking and Metal stocks and the decision to stay away from the Real Estate sector. During the recovery, our bets in Infotech, Automobiles, Banking worked very well for us, besides certain bottom up picks under different funds.
I think the performances are in line with our investment philosophy that emphasizes on long term consistent performance. To achieve this there has been a greater focus on investment process, fund positioning and a stable team. This also ensures that there is a consistency in investment styles used for the funds.

You said you like IT despite the run-up in valuations. Why?
Yes, valuations have risen as per our expectations. However, there is a possibility that the clients’ discretionary spending which had a complete embargo for past two years due to the economic crisis may resume soon. Growth could positively surprise and if that happens there could be more upside. We would keenly watch for the clues from leading players in the sector.

Do you see a lot of opportunity Tier II IT companies?
I am cautious in this space as the valuation gap between them and the large cap companies has reduced. In the past, some mid cap companies have garnered business through aggressive pricing and they were aggressive on currency management too. As a result, the bottom lines were very volatile and unpredictable. The operating margins of mid-cap IT companies are generally lower and highly sensitive to currency fluctuations. So I am very selective in this space.

You have not mentioned Infrastructure. Does the theme still have potential?
Yes, though there is a lull right now, I expect momentum on the order flows to pick up from second half of this calendar year. We need to watch out for the aggression in bidding, rising interest rates and the execution capabilities to find better companies. The sector has underperformed post election results and there seems to be good growth potential over the next two years.

A lot of fund managers seem to be betting on Real Estate again. Are you?
Not really. Transparency and quality of earnings is an issue to be dealt with if the sector has to find investor favour. In the commercial and retail space, there is an oversupply. So there is not going to be any pricing power for a while. Residential demand is quite good but the overall margins of the developers are falling because this segment is moving towards ‘affordable housing’. Also, part of land may have been acquired in 2007-2008 at high rates which is now getting constructed. Execution delays are putting strain on working capital. I would rather play the allied industries like housing finance, paint industries or consumer durables than a direct bet on real estate companies.

Between public sector and private sector banks, do you have any preference?
Exposure in Financial Services is well spread over commercial banks and housing, infrastructure and power finance companies. I believe that private sector banks have improved their liability franchise and are well poised to grow. For the PSU banks, treasury performance could be an issue in the short term in a rising interest scenario. Currently, the portfolio has a higher allocation to private sector companies.

>How do you think the roll-back in stimulus will affect the Auto industry?
Excise duty concession roll-back of 2 per cent was lower than the expected 4 per cent. In the 2-wheeler category there is steady demand growth. The revision of the tax slabs will lead to higher disposable income with the individuals. Hence, gradual withdrawal may not be an issue. But, I am not too sure about the 4-wheeler industry because last year’s high volume growth numbers create a high base. Competition is intensifying with many models getting introduced with committed production facilities in India.

Where do you think we are placed on the Metals cycle? Do you think the better part of the rally has been spent?
Metals’ prices are driven by global demand supply dynamics. China has been the major demand driver for e.g. its steel demand for consumption and restocking is at an all time high. China has been tightening liquidity. The global capacity utilization level is still at 70 per cent. So it’s a call that would have to be taken on how China would consume in the future and how fast the rest of the world recovers, which is a bit tricky at this point of time.
Raw material prices — iron ore and coking coal, have risen close to $115/ton over the past year. This cost push could be an issue if companies are not able to pass it on, putting a strain on the margins. I have betted on the resource players rather than the value added players and preferred diversified metal plays. By and large, I am a bit cautious on this sector.

What’s the reason for the poor response to IPOs? Earlier it was NTPC. The latest, Emmbi Polyarns Ltd and DB Realty Ltd (DBRL) also received a poor response.
With the improvement in sentiment, a lot of promoters are approaching the capital market, not just private sector but even the government. Investors have become choosy as shrinking liquidity is a constraint. They may prefer existing business models over those debuting, unless there is decent value on the table.

Do you believe that India will remain among the most sought after destinations for its strong fundamentals? How do you see FII flows this year?
India is uniquely placed for its demographics — the growing population under the working age group. This is what will sustain demand. Government’s focus of fiscal policies on inclusive growth through spending on rural infrastructure, employment guarantee programs, and health and education outlays as also infrastructure spending will ensure higher productivity. This will eventually put economic growth on to a higher trajectory of 9 per cent plus.

These structural positives will definitely attract long term money in India, whether as part of portfolio flows or FDI flows.
In the short term though, markets will focus on the delivery of the proposed financial consolidation and the speed of economic recovery post stimulus withdrawal. The selling could be more from a tactical perspective depending on the market levels. I do not see that as a trend reversal unless there is some global or geo political shock. Portfolio flows may be a tad lower than what we received in 2009, because valuations have caught up and global tightening has commenced. Pick up in FDI may be witnessed due to planned 3G off take and possible policy reforms.

What are the major headwinds the economy is facing?
The current growth momentum is largely driven by government spending. A pick up in private spending is required to sustain the trend. As far as the long term view is concerned, I don’t have a doubt. But the road towards that big, long-term picture may have some hiccups. We need to create jobs for the working age group hence quick roll out of infrastructure projects is crucial. Dependence on private sector in infrastructure and other capital intensive sectors is increasing. To facilitate commitments on large investments from them we need faster clearances, a more conducive environment and policy reforms.

Do you view inflation as a threat?
I think the expectation of rising inflation already exists and the market has discounted it. If inflation moves much above the expected level, it will be a deterrent and can have a destabilizing effect on the economy. As long as demand is strong, some amount of inflation is good for the equity market. But if inflation goes above expectations and demand is weak, there would be an adverse impact on the economy and earnings growth.

MNC: Multinational Corporation / ELSS: Equity Linked Savings Scheme / FII: Foreign Institutional Investor / FDI: Foreign Direct Investment / CASA: Current & Savings Account / IPO: Initial Public Offering