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WF: How is your Balanced Advantage Fund different from a regular balanced fund and your Equity Income Fund?
Nandkumar: Our Balanced Advantage Fund is going to be a true to label balanced fund in the sense that both the asset classes which is equity and fixed income will be somewhat evenly represented in the portfolio. By that I mean that we are looking at an equity exposure of 55 to 60%. Because we want to have equity taxation, we would include arbitrageto the extent of 5 to 10% of the portfolio. And 35 to 40% will be in pure fixed income.
If you look at balanced funds category average in the market, they generally have upwards of 70% in equity - which makes them more of moderate equity funds than genuinely balanced funds. Our Balanced Advantage Fund will be much closer to equal weights for equity and fixed income - hence justifying the term "Balanced".
Our Equity Income Fund's equity allocation is in the 25-35% range, with the balance 65-75% in fixed income and arbitrage. Now returns from arbitrage are more akin to fixed income, though the investments are in stocks. So, while we get the benefit of equity taxation, the effective equity market exposure is around 25% - 30% in the Equity Income Fund. Hence, both the Balanced Advantage Fund and Equity Income Fund are uniquely positioned.
Investors who want a genuinely balanced portfolio between equity and fixed income, to avail of the equity upsides while enjoying the stability of fixed income, should find our Balanced Advantage Fund a good choice.
The above chart is only for illustration and should not be construed as our recommendation.
WF: What parameters will govern the allocation between equity and fixed income?
Nandkumar: We believe that we are the early stages of a multi year equity bull market - hence equity allocation will be closer to the upper limit of 60%. When we think that valuations are getting stretched, we can cut back equity down to 50%. But, for the next few years, I do believe we will be in the 55-60% band for equity allocations.
On fixed income side, our outlook on interest rates is that over the course of next 18 months, another 75 basis points rate cut may happen in India. Based on this view, we are looking to currently play a duration strategy with a duration of between 6 to 8. Once our intended target for the 10 year GoIbonds reaches closer to 7% or 6.75%, we will have a relook at the strategy at that point of time and probably shift closer to an accrual kind of strategy at that point of time. But till the time the rate cut materializes we will continue to play a duration strategy.
WF: On the equity side, is it going to be a large cap focused strategy or will you be willing to look more at mid caps given the stability that the debt component gives the overall portfolio?
Nandkumar: Its going to be a best ideas multicap strategy on the equity side, with a 5-10% tweaking towards either large or midcaps based on relative valuations. Essentially, it will however be a multicap strategy.
WF: What does back testing data of your model suggest in terms of the performance of a truly balanced product versus a regular balanced fund?
Nandkumar: When bonds and equities do well, this strategy tends to outperform traditional balanced funds and MIPs - the period 2003 - 2004 was a case in point. When equity markets do exceptionally well, traditional balanced funds with their higher equity component do better. When equity markets wobble, a truly balanced product holds up value better. Broadly, you should expect performance to be between an MIP and a traditional balanced fund. However, in times when bonds and equities do well, this strategy actually does better than both. We believe, we are now in such a phase in the market cycle.
WF: Who would be your ideal target investor for this fund?
Nandkumar: We just did an investment summit last week and we posed a question to client advisors who were present in the audience. We asked the audience which asset class do they think will outperform in calendar year 2015 and unbelievable as it is, the audience were absolutely split down the middle: 50% of the people thought that equity market will outperform and 50% of the people thought that it will be the fixed income market. That really is the beauty of this product :true to label balanced fund, so that you don't have to stick your neck out about which asset class will do better.
Another aspect is that debt fund taxation now means an ideal holding period from a tax perspective is 3 years, however the interest rate cycle in India typically plays out within this period. Rather than being in a debt fund and equity fund separately, an allocation to our Balanced Advantage Fund means you are getting a meaningful exposure to both asset classes - both of which are looking promising at this juncture - and at the same time, getting the benefit of better taxation.
We believe, this fund is good for all investors - equity investors, debt investors, investors sitting on the fence, investors who want to play duration but are worried about exit - it's a good solution for many types of investors.
WF: Equity outlook for the near term is clouded by relatively high valuations on one part and the worry of US rate hikes and implications on global markets, on the other hand. In this context, what is your near to medium term outlook on Indian equities?
Nandkumar: Valuations in the near term may appear a bit stretched. We maintain that FY 16 is going to see a relatively modest earnings growth of 12% to 15% and that's where we see the market's performance also in line with the modest earnings growth. FY 17 is the first year when we expect that the earnings growth could be in the range of mid 20s to early 30s. We are asking investors to be patient for the next 3 to 4 quarters.
Coming to the US rate hike, our house view is that US will go in for a rate hike somewhere between June of 2015 and September of 2015. Compared to other emerging markets in the world, India's fundamentals are far better at this point of time, than they were at the time of the taper scare of 2013. A strong government at the center, strong leader at Reserve Bank of India, commodity prices sharply down - not just oil but also industrial commodity prices, current account deficit closer to 1%, substantially higher forex reserves - there's a lot that has changed for India between mid 2013 and today. India's fundamentals are far better at this point of time. Markets may react by a couple of percentage points when US rate hike is announced - but I think the fundamentals are strong enough to enable our market to stabilize within a couple of weeks.
WF: Recent spike in inflation has caused some experts to worry about a pause in the rate cut cycle, which could be bad news for the bonds bull market in the near term. How serious is this concern and what is your near to medium term outlook for Indian bond markets?
Nandkumar: There are some temporary factors that are causing this spike - we have seen unseasonal rains around India and that's where the spike in food prices inflation has come from, which has pushed CPI up recently.
But if you look at the structural side of the inflation story, minimum support prices which were increasing from 14 to 16%,have been capped at 3 to 4%. Rural wages which were growing at 14 to 16% over a 5 to 7 year period, have again been capped at 3 to 4%. And then housing which is a large part of the CPI index, that's also going through a structural correction at this point of time.
So we definitely see the food price spike as a temporary phenomenon that is not going to impact the structural story. We are maintaining that over an 18 month period, 75 basis points rate cut looks very much a possibility. We think that the 6% inflation target for Jan 2016 is definitely achievable and given sharply lower industrial commodity prices and given the fact that oil prices are range bound at this point of time, we think that compared to 6% the possibility of a down side surprise is quite high on inflation.
WF: One final question: what kind of a collection number would you be happy with in this NFO?
Nandkumar: Well, the good news is that amongst all the close ended NFOs that are there in the market, my team tells me that we are the only open ended NFO right now!The product has been put as a focus product in plenty of the counters. Given the pricing changes within the industry, which will kick in from April, this month may turn out to be a big one in terms of gross equity mobilizations.
That said, I think we will be happy with an NFO mobilization of anywhere between 250 - 300 crores for this product. It is an open ended fund, and our focus on this fund will continue going forward, beyond the NFO dates.
Source: J.P. Morgan Asset Management for all data.
Disclaimer: The opinions/ views expressed herein are the independent views of the interviewee and are not to be taken as an advice or recommendation to support an investment decision. The information included in this document has been taken from source considered as reliable; JPMorgan Asset Management India Pvt. Ltd. cannot however guarantee its accuracy and no liability in respect of any error or omission is accepted. These materials have been provided to you for information purposes only and should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein.
The information contained in this document does not constitute investment advice, or an offer to sell, or a solicitation of an offer to buy any security, investment product or service. Investment involves risk. Past performance is not indicative of future performance and investors may not get back the full amount invested. As an investor you are advised to conduct your own verification and consult your own financial advisor before investing.
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