29th Nov 2011

WF : While most fund managers talk about the long term story, concerns around the near and medium term continue to rise - with deteriorating domestic macro data flow and increasing uncertainity about global events.. What is your equity market outlook over the next 12 months? How do you see global and local factors panning out over the next 12 months?

Aashish : We believe that for the next 6 months the market may remain range bound with 10% to 15% sharp movements on both sides. A staggered entry into markets is most advisable. There is a negative impact of high inflation which is kicking in now along with sustained high interest rates. Domestic demand across most sectors is tripping along with already weak external demand. The recent sharp decline in rupee, weakening perception of our economic strength and fiscal conditions is not adding to confidence. Political turmoil as being witnessed through the last 1 year running up to the current parliamentary session is also an overhang on the sentiment. A lot has been accounted for by recent market corrections but further near term corrections and volatility based on news flow should not be ruled out. It's a little early to talk too much about valuation becoming attractive because earnings are being downgraded significantly.

For a country like India, the long term outlook is always positive. From these levels, an 18 to 24 months outlook too one can invest into equity markets with good results but with some likely pain in the next 6 months. Whatever the long term strong conviction of the advisor may be, from any level a 10% downside in markets is always possible in the near term and the sentiment is not helping our case at all.

WF : How should advisors ask their clients to position their equity portfolios in the current market?

Aashish : Advisors should ensure that clients maintain their equity allocation in the current scenario. By maintaining allocation I mean to say that over the last 3 months, with market declines if the equity allocation has dropped below the ideal allocation, then advisors should add more equity systematically and ensure that the equity allocation is not kept underweight.

WF : ICICI Prudential has been recommending systematic investments into the infrastructure sector for experienced equity investors. Advisors are facing objections from investors who are worried about continued weak performance of the sector. How would you suggest advisors deal with these objections effectively and give clients the confidence about the longer term prospects for this sector?

Aashish : On hindsight one can say that the sector has suffered over the last 3 years on account of overvaluation in 2007-08 and subsequent policy thrust. There has been complete apathy and lack of hope or interest in the sector in the last 2 years especially. But one must not forget that in 2007-08 when Infrastructure was seen to be the sector that could do no wrong. At that time, the recent favorites like Consumer, Pharma and Auto were being treated the way Infrastructure is being treated today. At that time, the market behaved as if only roads will be made and automobiles will never be sold, today the market is behaving as if only automobiles will be sold and roads will never be made. Both situations are exaggerated. Even if there is no belief in equity fundamentals, just by sheer mean reversion, Infrastructure is set to outperform going forward. Recent positive noises emerging out of the policy set up with regards to project awards in roads and power and efforts to clear land acquisition and mining bills are adding to confidence at the margins.

Advisors have stopped completely recommending Infrastructure Funds. Our advice would be not to discount it but to increase allocations systematically. There is potential to surprise over the next year or two.

WF : In debt markets, advisors seem to be hesitant to recommend any duration plays due to sticky inflation and uncertainty about when the cycle will actually turn. There seems to be a preference for FMPs and short term funds, in this context. What is your reading on fixed income markets? Where do you see the best opportunities to invest?

Aashish : The last one year situation has been similar to the early part of 2008 when it was believed that interest rates were peaking out. Investors and advisors alike took some exposures only to find out that inflation remained high and interest rates were tight for longer than anticipated. This was because of global uncertainty as Indian corporates had to borrow locally to replace foreign debt that could not be rolled over. I think at the peak of an economic growth cycle it does become difficult to predict how long the growth will last and when would rates exactly peak out. In 2008 too just before rates peaked out, the larger flows were in favour of short term bond funds and FMPs.

Today again the situation is similar where we are seeing flows into FMPs and Short Term Funds but there is lack of conviction for investment at the longer end. We believe that in the current scenario one should make allocations depending upon investors' time horizon of investment, risk tolerance and return expectations. While deciding upon the time horizon the impact of any likely enactment of DTC should also be taken into account. Minus the global financial crisis and the Lehman collapse, as far as interest rates are concerned we are in a situation similar to July-August - September 2008.

There is a golden opportunity for investment into fixed income funds in the next 3-4 months. Any fund one picks, with a 1 year plus investment horizon, one just can't go wrong. As the increasingly bleak outlook on economic growth materializes and inflation peaks out, interest rates can be expected to peak out over the next 3 to 6 months. Having said this we are currently advising investment into funds like our Short Term Plan and our Regular Savings Fund. We would like to watch the fiscal deficit situation and government finances before firming up on exposure to the long end.

Additionally, keeping the total scenario in mind; equity and debt, our strongest recommendation today is to park money into hybrid funds like our Capital Protection Oriented Fund, Multiple Yield Fund or any of our MIPs. We have been diligently launching series after series of closed ended debt funds since May 2011 because we are convinced that with short term interest rates at historic highs and equity markets in corrective mode, hybrid funds are set to deliver spectacular returns to investors. They should not be bogged down by last 1 year return of hybrid funds; this is all set to change in next 1 year.

WF : We saw a period between 2001 and 2003, where debt funds were the major driver of the industry, on the back of superior returns over a weak equity market. Are we likely to see a similar situation in the next 1-2 years? Should advisors incrementally focus their attention on this side of the business?

Aashish : In the next 3-6 months; yes; this seems to be the case. In order to improve investor experience we suggest investing into ultra short term or short term debt and then switching into equity. It's one thing to be convinced on equity from an investment professional's perspective and yet another to get the investor to see the story in the same way when he is venturing his money in; on the back of some bad experiences.

We are investment professionals and to the best of our abilities we invest based on future expectations. We cannot time the bottom but with a few leads and lags we try to make sense of where market is expected to head. Investors understand this but they derive comfort from return on their previous investments and recent returns of schemes. Let's face it, today's report card says last 1 year return on equity funds is negative, 2 year return is near zero, and 5 years return is more like a fixed income return number. SIP returns are not looking good either. On investing into equity, they have this unstated expectation; the day after they invest, market should start going up. Hence when we investment professionals feel is the best time to invest, psychologically from investors perspective may not be the best time to invest. In times like today with very poor conviction, it's not a bad deal to give up the first 10% of a turn around and allow the investor to invest when he finds it comfortable to invest and can sleep at peace.

I meet highly successful advisors who say, "I am an equity player". In today's market if one were to walk up to an investor and enact the "equity player" role, the conversation for the next 1 hour would be all about the situation in Europe and USA and our political conditions and why the market is where it is etc. etc. There are innocent people out there who do not know where Greece is on the world map, they are now spending sleepless nights worrying whether Mr. Sarkozy and Ms. Merkel will do enough to stop Greece from going under!!! It is our duty to clarify their doubts, but when it comes to deploying funds we should give them a better experience.

With short term rates at historic highs and the need to improve investing experience, smartness lies in garnering as much assets under management as possible into any type of fixed income fund. Having done this, one can say it can be moved to equity at the right time.

Contrary to normal perception fixed income funds today remunerate at acceptable levels and the gap between equity and fixed income funds on that account has drastically declined. I think advisors should study all aspects closely and refresh their information on all types of fixed income funds before ignoring a particular category of funds.

WF : Sales momentum in the industry is slowing down very considerably. What would you suggest that AMCs and distributors do, to revive sales momentum? How can mutual funds become more relevant in an average saver's life?

Aashish : To explain this I need to narrate a situation which I believe plays out every time an advisor visits his / her mutual fund investor. The average mutual fund investor is in the range of 40-45 years of age and has been investing into mutual funds over the last 5-6 years. They may be having some ongoing SIPs and once in a while they cut out a lump sum cheque into some scheme recommended by their advisor. Prior to taking exposure to mutual funds, these investors would invest into small savings, bank deposits, PF, PPF, insurance, fixed deposits etc. most likely through this very same advisor.

Every time our advisor meets his / her investor, it would be to increase the SIP or to collect some lumpsum accumulated in the savings bank of the investor. This is where my biggest quarrel with our situation is. We propagate theories about asset allocation and financial planning etc. But how many times does it happen that instead of the savings account balance, an investor has actually given us a major re-allocation arising from withdrawals of small savings or the PF or the PPF balance or similar other sources? Are we supposed to do asset allocation on the corpus that has been given to us out of savings account balances? When will we genuinely get access to the large "investment account" or "non savings account" balances lying into variety of fixed income alternatives? My experience tells me that when:

• we come back with a Rs. 3,000/- new SIP or a cheque of Rs 50,000

• from the savings balance of a 45 year old

• who has been investing somewhere or the other since last 20 years

• and has started investing in MFs only in the last 5 years

every time we are coming back with Rs 3,000 a month or Rs 50,000 from a person who has a financial saving balance of not less than 20 to 30 lacs of rupees.

If we keep promoting only equity funds, we will only get the risk capital; the savings balance. If we promote fixed income funds we will capture the so called "investment accounts" or "non savings balance" where risk perception has to be low. And what better time to start this other than when a 1 year Bank CD is delivering 9.75% on an average!!!

If all our advisors do not set a personal target to capture the "non-savings balance" of their investors in the next 3-4 months, we would have lost a golden opportunity to get money into mutual funds. This is the money which could have been then moved to equity by practicing true asset allocation. If we are practicing asset allocation on our investors' savings account balances, then I don't think we are aiming at the right target.

To answer your question directly, FIXED INCOME FUNDS ARE MORE RELEVANT TO THE AVERAGE SAVER. Distributors should lead with this category always irrespective of where the equity market is.

ICICI Prudential has always been a big advocate of promoting fixed income funds in the retail space. Hence, I am reproducing what I have mentioned in a similar interview on your forum in November 2010:

My biggest learning in the last 3 years came when I was reading this book called "Bonds - The Unbeaten Path to Secure Investment Growth" by Hildey Richelson & Stan Richelson (published by Bloomberg). The book makes an interesting case for Bonds by saying that any historic data shows equity has outperformed debt over long periods of time. This looks very convincing especially when one plots a graph of how equity index has moved over the last 20, 50 or 100 years and how CAGR returns of 10% to 20% have come about. But what is the average investor's experience of investing into equity? More often than not they invest when market is catching frenzy and they exit out of sheer disappointment when values are halved. So in the practical world of retail investors experience, it is more often than not the bond or fixed income investment that has made money over a period of time and equity has lost. The simplest benefit of investing in a bond is that when rates go up, capital values may fall, but the next morning accrual happens at a higher rate!!! And if you have not made a hash of picking the credit no one can deny you the 8%, 9% or 10% whatever you picked as opposed to the -50% to +50% range on equity coupled with the risk of entry and exit at inopportune times!!!