The phase of excess returns by funds is over: Mahesh Patil

Interview with Co-Chief Investment Officer (Equities), Birla Sun Life Mutual Fund

The market will continue to remain volatile and outperforming will be a challenge for fund managers, says Mahesh Patil, co-chief investment officer (equities) at Birla Sun Life Mutual Fund. The market still offers a lot of bottom-up opportunities, he tells Chandan Kishore Kant. Edited excerpts from the interview:

Mutual funds have turned net sellers since March. Why?

It could be due to profit-taking as the markets rallied. There would be some individual stocks which reached a certain price and investors might be booking gains. Further, we have seen that inflows have tapered a bit. The selling, however, isn’t very large.

What is the earnings growth expectation for the current financial year?

We assume the year will see 15 per cent growth in earnings. The market, to some extent, is factoring that in. If that growth really transpires, that will give a boost to the market.

Will the current rally continue?

The past two months' rally is in line with global risk-on. We have seen a rally across emerging markets. Stocks were oversold, so they just moved up. We have seen the dollar weakening, which has given a push to commodities. On whether it will be a secular run on the global front, it's too early. Globally, there are still some headwinds but the outlook has turned slightly better. However, it is not like you are getting into a secular run. The short-term volatility will continue and be driven by liquidity and what happens globally.

Will it be challenging for fund managers to outperform the markets?

That is true. If you look at the outperformance of funds against the benchmarks, it has come down. In 2014, the outperformance against the benchmarks was huge. A lot of funds outperformed the benchmarks and some generated an alpha of as high as 30 per cent. That phase is now out. But, if you are able to identify companies and spot the early opportunities, the market still offers enough bottom-up stock picking opportunities.

The Initial Public Offering (IPO) market is seeing a lot of action. Are you enthused by recent IPOs?

The IPO market is starting to open up. A lot of sectors are not represented. There are IPOs in spaces like health care diagnostics, the hospital sector and small banks. These are growth sectors and opportunities to participate. You will see a lot of emerging sectors entering the market.

The pharmaceuticals sector has underperformed since March. What’s the outlook there, since mutual funds are big buyers?

We are a bit worried in terms of the way we look at some of these companies. There are some setbacks for a couple of large pharma names. But, at the same time, we are seeing some kind of maturity coming in the companies. It is a transition phase that some of these companies are going through. This will probably set them back by a year and a half but that does not impact the long-term value creation we have seen in some of these names.

What makes you bullish on media, cement and automobiles in FY17?

The earnings growth is looking good for next year for these sectors. Each has different drivers. In media, for instance, there has been some pick-up in ad revenue and subscription growth, especially for broadcasters. In cement, it is primarily because of better volume growth and pricing improvement.

On the cost side, too, cement companies are benefiting because of lower fuel costs. In automobiles, it is mainly the car segment and commercial vehicles where we see a volume pick-up and some kind of operating leverage.