We are positive on chemicals and pharma and neutral on IT and auto stocks, says Ajit Menon, CEO.

You have started daily reporting of portfolios in some of your debt funds. What prompted the move? Was this a demand from investors?
Yes, it did come up in our conversations with customers because of the environment all through. I am not saying just because of the Covid crisis alone. It used to come up in our conversations with clients even before the Covid crisis. But of course after the Covid crisis and with the volatility in the markets, during the remote discussions that we were having with customers, there was definitely feedback, both from institutional customers as well as advisors about the portfolio and what we have in it. Not just as a month-end portfolio but they wanted some colour about what is happening in the portfolios even mid-month.

So when we looked at that feedback, it was largely happening only for the short-term funds. They were saying that these are our hard earned savings or individual savings and we are putting it for the next 15 days or next three months or next six months. So in these kinds of products, we want to be very sure that there is no risk in the portfolio. It’s come up in our conversations with customers and even advisors who we were talking to did say that their customers are keen to know that there is no risk in portfolios.

So we decided that since we already had very clean portfolios in all of our short-term funds since the 2018 IL&FS crisis onwards & DHFL onwards, we were very happy to release it on a transparent basis. Of course SEBI wants us to make sure that anything like that is for all and not selectively for one batch of investors. So we decided that let us do a daily declaration of the portfolios and that is how this came about. Trust is the real issue and I believe that transparency will lead to regaining that trust with our clients in such challenging times for all.

We have seen even some of the AAA-rated papers defaulting. What is the category that is best suited for risk-averse investors at this juncture and what funds should be absolutely avoided at this point?
From an investor’s perspective, we are obviously seeing investors wanting to stay safe and some are actually not investing in certain categories of fixed income funds and they want to move their money to fixed deposits or RBI bonds. I believe it is not a problem for investors who are in the lower tax bracket. It is okay to do that. But for investors who are in the higher tax brackets, I do think there are mutual funds and fixed income portfolios which can still give you a very safe risk-adjusted investment option.

Our belief is depending on the term of your money, you can stay in the shorter maturity products like the overnight, insta cash or ultra short liquid funds. AAA-rated portfolios should be good enough for investors and if investors have a two-three-year kind of money, we have been recommending the Bank PSU category where largely the papers are from public sector entities or from AAA-rated banks and very few AAA-rated corporates. But largely it is the banks and public sector units; so that is a good safe option for people to invest in. So right now the mood in the market for investors is focus on SLR and focus on safety then liquidity then returns. So returns are like the third factor. So if you look at safety, liquidity and then returns you have these absolute ultra short term funds with AAA-rated portfolios for your shorter term money but mostly people have some duration to their investment which is mostly one year; so in those situations we are recommending the Bank PSU portfolio and that is the portfolio that is also seeming to get money across the market in the last three to four months.

Some of the sophisticated investors are also migrating to dynamic bond funds and G-Sec fund portfolios because G-Sec funds offer absolute safety because they are only government securities. It could have a little bit of volatility that people are willing to hold on for some time because the benefit of decreasing interest rates over there much of a gain of course has already happened but there are some sophisticated investors who are looking at dynamic bond funds. We think the dynamic bond fund in the fund category for those sophisticated investors could be a good option alongside options like RBI bonds.

In the last two months, SIP flow into MF schemes have come down by Rs 500 crore. What could be the reasons? How is the industry trying to ensure it remains above the Rs 8000 crore-mark?
So I would say that there are two aspects to it. One is that we all know that there is definitely economic impact across households and therefore either people have faced job losses or people have faced reducing incomes because in India according to me out of 130 crore population I think the working population in India is a little over 47 crore and out of that 47 crore 83% of those people are either self-employed or casual workers. It is only 17% of people who are actually salaried class so when you look at that kind of skew and we noticed that 83% of working Indians are either self-employed or casual labourers there has definitely been an economic impact in incomes in that category so a lot of people may have stopped their SIPs or even had withdrawn some bit of the amounts from their existing SIPs and that is very natural during these times.

So what advisors are doing currently is they are not necessarily trying to push customers to keep investing, right now advisors are only wanting to connect with customers to know that they are not anxious about anything, if they have any queries those queries can be answered, if there are any operational issues they can be clarified and things like that so that is the activity that is happening. There is no major acquisition drive that is happening during these times and most of the advisors are in handholding mode with their investors.

Obviously because of all of these reasons the flow into the market has also reduced which is why we are seeing the numbers of SIPs also go down but I do think that eventually these numbers will begin to rise again because in India we have been seeing this trend of financialization of assets and as more and more people get aware about saving smartly, I think there will be more and more money that will come into good quality mutual funds and obviously it is a temporary lull as far as the market place is concerned. When confidence returns, when economic activity returns, when incomes have a lot more stability I think that the growth we will go back on to the growth path for SIPs once again.

What do you think will be the post Covid world for money managers? Do you see MF houses adopting and continuing WFH or hybrid models?
You are right in thinking that there is a possibility of a hybrid model that comes beyond this. Even in our firm, we have obviously experienced that work from home does not have any loss of productivity and we are making sure that we are taking care of our responsibilities. The area that is getting impacted is where we want to meet new clients or acquire new clients or meet new clients. I think that is the area that is getting impacted the most. Clearly doing that over a mobile phone call or just a video call does not suffice and we will also have to see the overall opening up of various companies and people coming into work and things like that. So those are still unpredictable at this point of time.

In India, we are internally checking with our employees and asking them whether they would probably as a permanent solution want to work from home at least one day of the week or two days of the week going forward and I think it is on everyone’s mind. So there will be some flexibility that we will need to do. We are also thinking about staggered office timings because many people may not want to come by public transport. They may want to come early and leave early. So I do see some definite changes in the way that we work.

PGIM globally is also seeing this happen not just in our own business but across businesses where people do think that staying in congested cities versus staying closer to the suburbs or into the suburbs is probably a safer option. So a bit of suburbanisation is likely to take place which will also prompt companies to think about how to organise themselves in terms of their offices and infrastructure. So there will definitely be these kinds of changes that we are expecting into the future.

Maruti’s chairman recently said that the problem for him is not demand but supply chain as he depends on 370 small vendors for parts and each of them are important. Others also have similar problems. In times when small companies are finding it difficult to survive, how do you think bigger companies will negotiate this problem?

Let me give you a couple of aspects to it. One is an aspect that 90% of Fortune 1000 companies either have a tier-1 supplier or a tier-2 supplier in a country like China with low visibility on their financial capability to weather a storm like this. One view that we have therefore at a global level, which I think will be applicable to India as well, for large companies or medium size companies is instead of “just-in-time” inventories, people will think about “just-in-case” inventories. What that means is that companies may want certain critical component vendors and suppliers to be closer to their manufacturing facilities rather than far away from their manufacturing facilities. This might actually increase costs for some companies but I think people who are watching these companies or analysing these companies will take that as a positive because it is essentially to try and reduce business downside in any crisis. Doing things to ensure downside protection is going to be a new normal for a lot of companies, especially in the essential services spaces and those areas, globally as well as in India. So I think those are the two aspects that I see.

The third aspect I see which is important here is to realise that India is actually 29 different little countries because there are 29 different states and each state is obviously dealing with the crisis in its own way. We have seen states like Kerala and Karnataka do much better than probably states like Maharashtra or Gujarat or Punjab. And I think these differences that have cropped up in how states and internal state administrations are managing the crisis of this sort will also have an impact on business and supply chains going forward. Where your business is based, where your facilities are based could potentially have some influence on the overall results that a company can achieve. I think however that while we are talking about this, it is still early days to think about any drastic changes that might happen. I think all changes that might happen will probably be changes on the margin to be better-prepared for these kinds of crises in the future.

There is no question that the economy will contract this year. It is just a matter of how much percentage. Do you think the MF industry will remain immune to the economic shock? What kind of impact could it see?
Much of the spending will really be done by the government and individual households or corporates are unlikely to spend too much in an uncertain environment. What does it mean according to me is probably higher savings that will potentially happen for quite some time. It is natural for people to feel anxious about this kind of unpredictable volatility which affects their lives, their livelihoods and therefore I do think that there is the possibility that people will start saving more and corporates may not do too much of capex spending immediately for the near future. Therefore whatever cash flow they get will also be saved. Now from that perspective, I do think that the mutual fund industry stands a chance to necessarily be the conduit for managing those additional savings of course. A good portion of this will continue to go to banks as the penetration of mutual funds is still not high as far as India is concerned and people’s familiarity of the product and how it works is slowly growing.

Therefore for the mutual fund industry as a sector, I do expect that from a medium to long term perspective, there is a huge opportunity to manage this incremental savings. On the equity side, while the economic downturn is reflecting in terms of how some sectors and companies within those sectors are performing, equity markets might tend to discount the futures into prices right now. So while the economy may take a longer time to come back to normal, the equity markets could potentially normalise faster.

In fact one of the studies that was done by PGIM in 2018 going back about 68 years looked at instances where markets and economy went down more than 9%, 10% and in some instances almost to 20-25%. One observation was that on average, equity markets tend to normalise in a seven-eight month time frame and that is an average. So one must be careful using an average but one other outcome I can also add to this is that whenever economies have contracted more than 20-25% and there has been sharp contraction in the economy, what you see in the next three to five years is very high innovation across sectors because people have the ingenuity to come out of these problems.

Business models will change, technology will change, new formulations will happen in chemicals, in pharma and in every area there will be innovation that will take over and if you want to leverage all of that innovation and make profits out of it, you could actually leverage it through the equity market because eventually those innovations will be reflected in companies’ share prices as they get market share and as they improve their business models over a period of time. Therefore, we do believe that equities will be an ultimate asset class in the overall asset allocation because of innovation that will be over the next three to five years. So in equity mutual funds, while there might be a temporary lull, it will definitely come back.

Some say the market would become biased towards largecaps for sometime. What are your views?
It is very natural that there will be a tendency to move towards largecaps because largecaps by nature are less volatile than the rest of the marketcap segmentation. So therefore there will be a tendency to migrate towards lower volatility segments of the market, which is potentially largecaps. But we do think that in the broader market, there are opportunities across market capitalisation segments both in largecap, midcap and smallcap. So our recommendations have always been for investors to remain in a diversified equity portfolio and if they are ultra conservative then of course largecap portfolios definitely work for them.

Our investment process has helped us a lot during this downturn and the portfolios were very resilient into the downturn and suddenly our funds have obviously begun to showcase its good performance and this is largely because we follow a strong investment process where our equity universe is dependent on companies with low debt equity and strong positive cash flow. Those are the two key factors which we consider. While we construct portfolios these kinds of portfolios and companies have been extremely resilient even in this downturn. Now we find that companies are available with low debt equity and strong cash flow in the largecap space, midcap space and in the smallcap space. So for us as fund managers, our job will be to continue to look at good companies across the marketcap segments and my advice is always for investors to go through a diversified equity fund.

If the pain in the banking and financials are to last longer, won’t it also keep Nifty depressed for long as these stocks have huge weightage in the index?
True, I agree with you. The Nifty will be depressed because the banking segment and the financial sector have 35% plus weightage in the index. But as a fund manager obviously we are looking at the broader market and earlier we are seeing good companies across the marketcap segments. We do like some companies within the space and within the banking space as well. Take financials for instance, as you mentioned, some insurance companies are not represented in the index. Going into the downturn we were actually very low in our weightage towards banking and financials and therefore that helped our portfolios a lot when we went into this crisis. Of course there are some sectors like insurance which we like and think are good places to be in selectively. So that is how we are managing.

Rural consumption is one theme which has been resilient to Covid’s impact. Fertilizer stocks have been hitting 52-week highs. Do you think the sector could be the flag bearer of the next rally?

No, we do not think so because fertiliser is an extremely small sector in the overall picture. Even if you take the best company in that sector, it may be like a midcap stock.

Rural consumption as a whole theme: what do you see?
I agree completely with you that rural consumption is going to be the silver lining to all the dark clouds that we are seeing. Currently 70% of people in India are dependent on the agriculture sector and they have not been impacted during this crisis compared to people who are staying in crowded cities. The government measures also for this segment will help. The last crop cycle has been good and rural incomes will be good and therefore rural consumption will definitely pick up and that overall will support the economy even though agriculture per se as a sector to the GDP has a small weightage.

Within that when we talk about things like fertilisers. This also will have a lot of government influence and therefore that will have to be watched for in terms of how the government influences certain sectors and fertilisers could be one of them for sure. So we are sort of neutral as far as that is concerned. We do see the opportunity that this theme will be a silver lining to the dark clouds.

What sectors do you think could be the leaders of the rally whenever it comes?
Right now we are more or less positive on sectors like chemicals, utilities and definitely for pharma and very selective companies; we cannot take energy as a whole. We will take one company within that. We are more or less neutral on sectors like IT and auto at this point of time and right now we have a negative bias towards things like banking sector as we mentioned earlier as well as things like consumer staples for instance because of some stretched valuations in that segment. So that is the overall picture we have right now.







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