'High US bond yield not a reason to be negative on Indian equities'

From a bottom-up perspective, there are more opportunities across the market given the challenging period that the market and economy have been through over the past two years, said Vetri Subramaniam.

As specialised investment funds (SIFs) gain more muscle, the real litmus test for them will be whether they provide differentiated risk-reward positioning and improved investor experience, rather than only creating another product category to compete for the same pool of investments, said Mumbai-based Vetri Subramaniam, MD & CEO, UTI Asset Management Company in an email interview with Puneet Wadhwa. Edited excerpts:

 

To what extent are markets currently pricing in domestic and global concerns?

 

Markets don’t price all risks equally and there is significant dispersion in valuations across market capitalisation and sectors. Valuations are a measure of earnings growth expectations and the trajectory for interest rates, and this is the risk that can be managed. 

 

 

The earnings environment in India remains quite constructive given the pickup in inflation and nominal growth that was visible in the Q1 GDP numbers. There is reasonable valuation comfort in the large-caps given their current valuations relative to historical trends. On the other hand, aggregate valuations remain a lot more demanding in the mid-and small-caps, though their current year earnings momentum is strong. 

 

From a bottom-up perspective there are more opportunities across the market given the challenging period that the market and economy have been through over the past 2 years. However, large-caps may appear relatively better positioned, when viewed through a risk management lens. 

 

The US 30-year Treasury yield has shot above 5 per cent. How does a higher-for-longer global yield environment affect Indian equity valuations and investor sentiment?

 

Higher US yields can influence allocations by global investors. Higher yields can also pressure equity valuations because investors may be less willing to pay high prices for future growth. However, it is important to note that global bond investors are aware of the fiscal and other pressures that are contributing to this rise in US yields. Further they are concerned that the underlying structural factors are not being addressed. For the record Emerging Market bonds have handsomely outperformed US & Developed Market bonds over 1, 3 and 5 years. 

 

I would not see higher US yields as a reason to be negative on Indian equities. The more important question is how India’s own economy and companies are performing. If earnings, cash flows and investment remain strong, they can help offset some of the pressure from higher global rates. What is critical is that India remain fiscally prudent and maintain its macro-economic stability.

 

Small-and mid-cap funds continue to attract strong flows despite elevated valuations. Are investors underestimating the importance of stock selection and margin of safety?

 

The answer depends largely on the investor's asset allocation and risk appetite. Further for those investing through SIP- it is best that they maintain the discipline of regular investment. Risk management can be implemented through periodic rebalancing not just between asset classes but also between market segments based on their financial goals. Our suggestion to investors would always be to adopt a margin of safety approach in portfolio construction.

 

How do you see the emergence of Specialised Investment Funds (SIFs)?

 

The real litmus test of SIFs will be whether they provide differentiated risk-reward positioning and improved investor experience, rather than only creating another product category to compete for the same pool of investments. 

 

What is one investment belief that has changed for you over the years that you’ve spent managing money?

 

A belief that has become stronger over the years has been that investment success is less about making big decisions and more about having an investment process. I have become more forgiving of my own mistakes because mistakes are inevitable. I rely on my risk management framework to help me mitigate the impact.

 

While successful investors offer valuable lessons, their outcomes can also reflect survivorship bias and, at times, favourable circumstances. Ultimately, the most effective investment approach is one that aligns with an investor's temperament, risk tolerance, and decision-making style. Your emotional quotient is your investing superpower.

 

SIP flows are at record levels, increasingly through small-, mid-cap and thematic funds. Are retail investors taking more equity risks than they realise?

 

The main goal should be to use SIPs as means of building long term wealth, while ensuring that the investment portfolio itself is appropriately diversified and aligned with the investor’s horizon and risk tolerance. Starting an SIP does not make a small-cap fund less risky or a thematic fund less cyclical. SIP changes the way an investor enters the market by expanding investments over time. This is particularly important for younger investors. It is imperative to have long term investment horizon which gives investors greater capacity to take equity risks. But this also does not mean that every form of investment is suitable. 

 

At the core of portfolio, we suggest diversified funds that invest across the market spectrum. Alternatively, one could invest across different market caps and adopt a suitable rebalancing approach. Investing only in mid-and small funds and thematic funds could result in a portfolio that carries higher risk than appropriate to meet your financial goals.

 

How can an asset manager continue to grow AUM without compromising margins amid fee compression? What are the most important levers—distribution, products, technology or investment performance?

 

All four matter, but they do not matter equally at every point in time.  Investment performance creates credibility, distribution creates reach, products create relevance and technology creates scalability. Only pursuing AUM growth at any cost in a fee-compressed environment is not necessarily the right strategy. It is important to create operating leverage for a more sustainable model as the organisation grows. 

 

Implementation of technology can change the cost of distribution and service, but it cannot compensate for poor investment outcomes. Similarly, product innovation cannot compensate for a lack of investment credibility. Therefore, the balanced route to growth is to earn the right to manage more money and then build the operating infrastructure to manage it efficiently. The objective is to meet the needs of the investor.