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Lately, a few Tata equity funds have come under the spotlight for delivering exceptional returns. Rahul Singh, the fund house's chief investment officer of equities, sat down with us to explain the turnaround and the core philosophy driving them. During the interview, he also sheds light on why their equity funds suffered in the 2020-21 period and which sectors can potentially deliver going forward. Here is the edited transcript of the interview.
Indian equity markets have been quite subdued and moving in a very narrow range for the past few weeks. Given the concerns of a global slowdown and recession, how do you look at the markets?
The risk of a global slowdown is obviously real, as there is inflationary pressure and interest rates have risen. But thankfully, India is at a different stage in its cycle this time. Typically, when interest rates rise, countries with weak banks or a weak corporate sector experience a crisis or slowdown. The balance sheets of both the corporate sector and the banking industry in India are in good shape today. So, while this is not a problem in India, the rest of the world may be under strain. While there will be some impact on Indian markets, it won't be as bad as what other markets are experiencing.
Second, our investment cycle is resuming, and India is benefiting from the geopolitical situation because many countries want to set up factories or expand their base in India. The current situation has some advantages and disadvantages for the Indian context. It will not be a major issue if the US and global markets or the global economy slow down gradually. In that scenario, Indian markets will remain range-bound for a while longer, and returns will resume once the economy and valuations normalise. However, if there is a severe recession, everyone suffers.
Having said that, we have seen corrections in the Indian mid- and small-cap markets, and I believe now is a good time to continue investing. In the future, when the cycle shifts, mid- and small-cap companies tend to fare well. Given what's happening in the global markets, it is an excellent opportunity to build a portfolio or gain exposure to these segments, whether it is a mid-cap, small-cap, or multi-cap portfolio. I believe these portfolios will perform well over the next two to three years. In the near term, investors should also focus on asset allocation and make balanced advantage funds an important part of their strategy.
Have you altered your investment strategy in response to changing geopolitical factors?
So, while we must be aware of all these changes, our investment philosophy at Tata is growth at a reasonable price (GARP), meaning we seek growth but do not want to pay exorbitant prices. We want to find companies that are undervalued and entering a growth phase. And with interest rates rising, the market itself has become conscious of valuation, which is consistent with our philosophy. So, to be honest, our strategy has not required much adjustment in that regard, except that the fundamentals of the sectors are constantly changing, especially in IT and Banking. So far, we have been very optimistic about the financial services or banking sector. Similarly, capital goods and industrials have experienced a revival as manufacturing and investment have returned to Indian markets.
You took over as the CIO of Tata Mutual Fund in October 2018. What were the measures you undertook to improve the performance of the equity schemes?
I joined four and a half years ago, and the philosophy has stayed the same, which is one of the reasons we have been improving. During such journeys, it is normal to undergo minor process improvements, such as incorporating macro inputs or making the research analysts more accountable for their recommendations. Second, we have defined the outlines of the GARP strategy, leading to improved teamwork. Furthermore, the team has been relatively stable over the last four to five years, contributing to the steady performance of the schemes.
Most of your equity schemes slumped in 2020 and for most of 2021. Any specific reasons?
COVID and lower interest rates led to madness in the valuation of high-quality growth stocks and even IT stocks, which we typically didn't have in our portfolio due to the GARP philosophy. Second, we were overweight on banks, and many people feared the worst for them at that time. People expected banks to be saddled with bad loans, putting financial stocks under strain. However, our performances improved significantly when investors realised that banks were perfectly fine.
However, some funds (like Tata Flexi Cap Fund and Tata Midcap Fund) still lag most of their peers in the respective categories. How do you plan to stage a turnaround?
We always try to reflect on our mistakes and correct them, which is an ongoing process, but we will not deviate from our core philosophy. We need to identify the causes of failure and what stocks did not perform well. It's a never-ending process. Even when large and mid-cap funds were underperforming, we performed a similar exercise and made minor tweaks. However, we left the overall portfolio alone because we were confident in our call in the banking sector.
It isn't always necessary to do something to prove something. Yes, some funds may require additional corrective measures, and we have made significant changes in those funds in the last six months. We have added manufacturing names and reduced exposure to consumer names in some funds, and now we are just waiting for our call to play out. We are confident that some of our changes are in the right direction and will begin to improve those schemes as well. We now have a more aligned portfolio, which will be advantageous when the investment cycle recovers, resulting in better performances in banking and manufacturing sectors.
Read the full interview in the April 2023 issue of Mutual Fund Insight.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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