‘There’s opportunity if you focus on the long term’

Markets will always provide scope to make money, says UTI Mutual Fund Executive VP

“In any market cycle, you will find a bunch of companies and great businesses available at very attractive valuations,” says Ajay Tyagi, Executive Vice President and Equity Fund Manager, UTI Mutual Fund. Excerpts from a telephone interview with BusinessLine:

What are your expectations from this season’s corporate results?

Results, except that of PSU banks and some pharma companies, should be strong. There has been an up-tick in the consumption sector. It is evident from the robust volumes in new vehicle sales in the past few months. On the consumer staples side, too, there was strength in the December quarter, which has continued into this quarter. Some staple companies have also made selective price hikes in the quarter. Private sector banks and NBFCs continue to show loan growth despite poor system-wide credit growth. This trend may play out across private banks, except for the bigger corporate-focussed ones that might continue to show some weakness.

For the IT sector, the results have been reasonably good. Commodity companies have also done well this quarter.

So overall, I think the areas of pain are well-known to the market. If you leave this aside, the earnings trajectory will only strengthen from the last quarter. Rising metal and crude prices may have an impact only on companies which don’t have pricing power.

Where does opportunity to make money exist in the market today?

There is always an opportunity, provided as an investor you are ready to look beyond the next few quarters and focus on the long term. One would have said that there are no opportunities in the IT sector three months back. But although the sector did underperform in the short term, we thought IT spending would continue to increase globally with the adoption of digital technologies and that Indian IT companies would continue to gain market share. That call has worked out very well for us in the past couple of quarters.

The point is, when things don’t go in favour of a sector, it goes totally off the radar, and people try to chase things which they think are having favourable tailwinds. Look at the pharma sector today. Six months or one year down the line, we could be discussing how the pharma sector languished for two years and how high-quality companies with strong balance sheets were available for cheap.

Although IT stocks have run up from a short-term perspective, from a medium-term perspective, it is still attractive. Pharma is also attractive from a short-to-medium-term perspective. Yes, I fully appreciate the fact that on an overall basis, the markets today are trading at higher-than-fair values. But in any market cycle, you will find a bunch of companies and great businesses available at very attractive valuations.

How has SEBI’s new classification norms impacted UTI MF’s funds?

It hasn’t impacted us greatly in terms of our strategies or the way we manage funds. On the equity side, our flagship, UTI Equity, is now a multi-cap fund with a growth bias. Our other flagship, UTI Opportunities, which is also a multi-cap fund, will now have a value orientation; it will be called UTI Value Opportunities. UTI Mastershare and UTI Mid Cap remain large-cap and mid-cap, respectively.

In the large- and mid-cap categories, what was earlier known as UTI Top 100 will now be UTI Core Equity. A couple of schemes have been merged to suit the broader classifications — UTI Bluechip Flexicap is merging with UTI Equity and UTI Multi Cap with UTI Value Opportunities.

The outperformance of large-cap funds over benchmarks has been narrowing; with Total Returns Index (TRI) as benchmark, it will narrow further. Will passive funds gain traction because of this?

To the extent of the dividend component getting reflected in TRI, the outperformance of funds would go down by 1.5 percentage points. This has been the difference between normal and total index returns in each of the past few years. But we cannot outright say that passive will be better than active management.

Let’s say a large-cap passive fund trades in the top 50 or 100 stocks — those that the benchmark committee or the index committee has decided to have at a point in time. At the same time, take an actively managed large-cap fund that can hold up to 20 per cent in mid-cap stocks. So while an active large-cap fund could have benefited from, say, holding a mid-or a small-cap stock that has done well over a period of time due to the stock-selection skills of a fund manager, an index fund or an ETF (exchange-traded fund) based on a large-cap index would not have had that opportunity.

Secondly, a stock could be languishing in the benchmark for 2-3 years before the benchmark committee takes a decision to replace it. But an active fund manager may be more nimble-footed.

When you say passive will do better than active, essentially what you are saying is that the index committee of these benchmarks does a smarter job compared with the investment team of an organisation in stock selection. I am not yet ready to believe that.

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