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WF : Many people believe that bottom-up stock picking is the best way to generate alpha. Why are you adopting a more top-down approach in UTI Opportunities Fund?
Anoop : Indian markets increasingly driven by overseas liquidity - which is more top down than bottom up in its approach. As we go through different phases of the economic cycle, different sectors will appear relatively attractive at different points of time. If we look at the last 5 years, in the Sensex's journey from 21,000 to 8,000 levels and back up to 20,000 levels, we have seen the sector leadership baton changing several hands. We have seen cyclicals, defensives, rate sensitives and currency sensitives leading the markets during phases where the macro fundamentals were relatively aligned more in their respective favour. This causes significant divergences in sector returns. The fund aims to capture some of these sector divergences that occur in the market from time to time. UTI Opportunities Fund therefore adopts an active sector selection strategy as the key driver of alpha.
WF : Can you take us through some of these active sector strategies that you have employed in the last couple of years, which have helped add alpha?
Anoop : In 2009 UTI Opportunities fund took a very defensive stance, and did well in a down market. And since December 2010, Opportunities has been running a beta of as low as 0.6 by focusing on FMCG and by being significantly overweight on banks. Because of these two points, the volatility of Opportunities has been much lower as compared to what would have been perceived by distributors and investors. A fund which is highly concentrated theoretically should be more volatile because of the concentrated calls and how the performance would be impacted if the calls go wrong. We have been defensive for the last 18 months and the performance even in a down market has been better than most of the peers and therefore, the distinction between the two funds become a little blurred.
One big tactical change we made was in October 2011, when we were underweight on banking by 10 percentage points: we had a weight of 14 per cent versus a 24 per cent weights on banks in the benchmark. Since then we have been increasing the weight and today we have 27 per cent weight on banking. That is one of the biggest tactical changes that we made. It may not have worked as well as we expected it to but that is a clear tactical call from the way the fund was 12 months preceding October 2011 compared to the next 12 months from then.
WF : The nomenclature "Opportunities Fund" is often associated in the market with either a no-cap bias fund or a mid cap biased fund. Your UTI Opportunities Fund is sharply distinct with a clear large cap bias. Why is this?
Anoop : The Fund since its inception has followed a large cap bias with a range of 70% upwards of the portfolio allocated to large caps. Mid cap allocation is also targeted towards established names with a minimum market of 4000 Crs. The size of the fund and liquidity concerns of the underlying portfolio guides the large cap philosophy of the fund. We further define "opportunities" as situations arising out of sectoral favourability rather than opportunities arising out of capitalization rerating.
WF : How should this fund be positioned in an equity investor's portfolio?
Anoop : Often "Opportunities" funds are treated as tactical allocations around a core portfolio. UTI Opportunities Fund is however a clear contender for the core portion of any equity portfolio due to the following characteristics:
- Large cap bias
- Active sector selection strategy - which means that the investor need not take any active calls with this fund in terms of themes etc. For the investor, it is a buy-and-hold fund as the fund manager takes all the active calls
- Established track record
WF : What is your outlook on markets going forward and how are you positioning the UTI Opportunities Fund in this context?
Anoop : In the last 15 years, we have had a tech bubble and its meltdown, we had two elections - one of which caused a regime change, we had the biggest global financial meltdown and a gradual recovery from there - and despite all of these happenings around us, equities have delivered a compounded return of around 15%. That's the way we would want investors to look at equities - as a medium to generate long term wealth over genuinely long periods of time. If we look at it from that perspective, outlook for equities continues to be very good, and investors must ensure that they take adequate exposure to equities in their portfolios, in keeping with their risk profile and needs.
Now, the other way in which outlook is viewed - which is outlook specifically for 2013. It is indeed a little unfortunate that increasingly investors - not just in India, but perhaps world over - are taking shorter term calls on equity markets in an attempt to time their entry and exit. As we all know this is quite a risky bet. An outlook for 2013 is a good case that highlights exactly this risk.
As we go into 2013, we have to keep in mind that probably the biggest factor that is influencing asset prices globally continues to be very low interest rates in the developed world and abundant global liquidity. We know that excessive liquidity can lead to mispricing of assets, at least in the near term. To predict market levels when global liquidity is the key driver is always fraught with risk.
Earnings growth in India over the next 12 months is likely to remain muted as we are still trying to come out of the economic slowdown. While a lot of people are focussing on the fact that valuations are currently below our long term averages, let us also not forget that earnings growth too is below its long term average. Now, in this environment, on the backdrop of a smart rally we have seen in the last couple of months, how far this market can move ahead on the basis of valuation support is really anybody's guess. As I said, liquidity more than fundamentals is likely to be the bigger variable determining near term equity market movements.
The longer term picture is however clearly a lot more positive. We will see a more robust earnings growth momentum kicking in after the next 12-18 months. We are also seeing right now corporates working out the excesses of the 2007 boom. Corporate balance sheets will become a lot better and businesses are becoming more efficient, after working out some of these excesses. Equity markets can do well on a sustainable basis, when the earnings momentum gathers steam - which we see happening once we come out of the next 12-18 months of somewhat tepid earnings growth.
Therefore, coming back to my original point - rather than focusing on market outlook for 2013 - which could be more driven by liquidity, I will ask investors to focus on the longer term equity story which is becoming healthier. Take a 7-10 year view on your equity investments rather than an annual view - that's my humble advice to all.
With respect to the fund, we continue to retain our large cap focus which could translate into underperformance probably in the near term as mid and small caps have delivered returns higher as compared with the Nifty over the past two months. Also, there has been churning within the sectors, say from private to PSU Banks due to the valuation differential. On a longer term, the stability of the management and flexibility to perform is a far safer passport to outperformance than to time the market. PSU Banks have hardly given any returns over the longer term of 4-5 years even though you may find sporadic bursts like the current one.
We have reduced our weight on FMCG and funded our exposure to the banking sector on valuation concerns as they are trading close to 1.5 times the standard deviation of the last 5-10 year average and approaching stress points where two times the standard deviation is considered as a bubble area (according to Jeremey Grantham Model). But if you look at the way the India GDP is structured, 65% comes from consumption and hence FMCG would remain an integral part of the portfolio.
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