Equity hybrid is a great product for conservative investors who want flavour of equity returns but do not like too much volatility

BFSI Industry Interview
On: May 21, 2019 | From: Advisorkhoj Team
BFSI Industry Interview in Advisorkhoj - Equity hybrid is a great product for conservative investors who want flavour of equity returns but do not like too much volatility

Rahul Baijal is a Senior Fund Manager – Equity at Sundaram Mutual. He has a PGDM(MBA) from IIM Calcutta and is an engineering graduate of Delhi College of Engineering, Delhi. Rahul joined Sundaram Mutual in July 2016 as Fund Manager – Equity.

Rahul has a rich experience spanning over 19 years in Equity Research and Fund Management. His prior experience includes working with Bharti AXA Life Insurance, TVF Capital, HSBC Securities, Credit Suisse Securities & Standard Chartered Bank.

At Bharti AXA, as Fund Manager Rahul was responsible for managing the “Growth Opportunity” fund series of equity ULIPs (AUM ~$US 75mn). The fund delivered an average annualized alpha of ~5% over 2013-15. This fund followed a diversified, multicap investing style with a large cap bias.

Prior to that with TVF Capital (India dedicated fund with AUM of $US 200mn) Rahul was involved in various roles initially as an Investment Analyst and later as Co-Fund Manager/ Director. The fund followed a concentrated style of investing with a bottom up fundamental approach focusing on high conviction ideas in the large and mid-cap space in India.

Earlier as Equity Research analyst with Credit Suisse Securities, Rahul was part of the team ranked number 1 in both Consumer and Strategy in India by Asia money in 2001. The report on “India Consumer and Retail Sectors” titled “Jumbo Retail” in 2005 at HSBC Securities was one of the first detailed reports from the sell-side on the emerging Indian organized retailing industry.

He manages Sundaram Select Focus, Sundaram Equity Hybrid Fund and Sundaram TOP 100 (Series VI-VII). He is also the Co-Fund Manager of Sundaram Services Fund and Sundaram Financial Services Opportunities Fund.

We are approaching end of the election season. Though exit polls seem to suggest a decisive verdict, there are concerns about high stock valuations in the pre-results rally. What is your view on valuations? Should investors be worried about price correction once the dust settles on this election?

I think valuations are neither expensive nor cheap for the market – they are somewhere in the middle. There is good potential to do bottom up fundamental stock picking across the market cap curve with a medium to long term perspective. Markets would like to have visibility on a stable, reformist government. Many investors have been sitting on the sidelines for the last many months (both local and foreign) awaiting clarity on the election outcome.We have already seen a pre-result rally which began in early March(on the back of strong FII inflows) and is likely to continue on confirmation of the event, in my view.

For the benefit of investors, please share your views on the global economic situation, particularly fears of recession in the US. What will the impact of global macros on Indian stocks?

I think there is broad consensus now that US will have a slowdown in the economy in CY2019 vs CY2018. I think a slowdown is likely and chances of a recession look low as of now. The US Fed has changed its monetary policy stance over the last few months and is now waiting and watching the situation to take steps ahead. A measured slowdown in the US and EU may be a good thing for emerging markets like India – as it attracts more global flows to emerging markets(EMs). However, a US recession would be bad news for all equity markets – including Ems - in my view.

What is your Rupee and interest rate outlook?

I think if the current government comes back, their approach to policy making will be to keep property and food inflation low. And if inflation remains low structurally, this should create more headroom to cut more rates in India and it could serve as a good monetary stimulus in the current domestic environment of slowing growth and tight liquidity. The global environment is also more favorable towards a low rate environment vs a few months back due to more dovish central bank stances.

What is your asset allocation strategy in Sundaram Equity Hybrid Fund in the current situation?

As you know, post the re-categorisation last year, the equity hybrids can hold between 65% to 80% in equity allocation (vs.65% to 75% earlier) and 20-35% in debt. On an average, I run about 70-75% allocation in equity and about 25% in high quality fixed income bonds and this is expected to be in this range in the coming months too. We will be staying around 45% to 60% of the overall allocation in large caps and about 5% to 35% range in the mid and small caps.

What is your broad market cap strategy in the equity portion of your fund’s portfolio? Do you see attractive investment opportunities in the midcap and small cap segments of the market?

I run an optimally diversified portfolio of about 45 stocks and follow a multi cap style with a large cap bias. We even specify the range along the market cap curve. Large cap range: 45% - 60%;mid& small cap range: 5% - 35% (as a % of total AUM). Bottom up – the investing style is growth oriented with a GARP bias and it’s a diversified portfolio across market cap and sectors with a focus to generate consistent and steady returns over time.

One of the main reasons the fund was a first quartile performer in FY19 was that it’s mid & small cap allocations were at a lower end of the range (about 15%-18%) and that helped. Early this year, we’ve increased the mid cap allocations by about 4%. Current allocation is ~ 50% large caps and ~ 23% mid-small caps.

For the benefit of investors and financial advisors, please describe in brief your stock selection strategy in Sundaram Equity Hybrid Fund?

The stock selection is based on bottom up stock picking using in-house research and fund manager’s conviction, with a strong emphasis on the following qualities 1) good quality businesses run by capable and competent management teams 2) sound balance sheet and ability to generate sustainable free cash flows 3) attractive valuations.

In the last few months, there have been many articles about credit risk in the media. For the benefit of retail investors, please describe in brief the credit risk strategy, risk appraisal and credit risk management processes you have in place for Sundaram Equity Hybrid Fund. What is your fixed income strategy for Sundaram Equity Hybrid Fund? In the current interest scenario, do you have a duration or accrual strategy for your fixed income portfolio?

We follow a conservative approach to invest on the debt side. The strategy is to invest mainly in AAA and AA rated corporate bonds. The objective is basically to provide an attractive yield with a high grade quality portfolio and typically the maturity of these bonds is between two to four years. We follow an accrual strategy for this scheme and the fixed income team decides which bonds to pick for this part of the portfolio. We are very comfortable with the current investments on the debt side and see no concerns with respect to what is being talked about in the media.

You have been paying regular monthly dividends since the end of 2015. Your dividend yield was quite high in the last 12 months or so. Our concern is that investors may get used to such high payout rates which may or may not be sustainable in the future. Please share your views?

Sustainability of high dividend yield (say ~12%) is a function of how well the fund performs over a medium to long term. I think the product has potential to deliver 12% long term compounding and thus a similar magnitude of dividend yield can be sustained as well (if the fund is managed well consistently). But then one has to do good stock picking, manage market cycles reasonably well along the market cap curve, do regular profit booking and a void any credit accidents on the debt side and focus on delivering consistent returns.

What should be the minimum investment tenure of investors, who want to invest in Sundaram Equity Hybrid Fund? What is your advice for retail investors with moderate to moderately high risk appetites who are looking for good returns? How should they approach their investments?

The typical investment horizon for equity oriented mutual funds is about at least 5-7 years. The same time horizon applies to equity hybrids too. I think if managed well they have potential to deliver 3-4% better returns than fixed deposits and with much lower volatility than other pure equity funds. It’s a great product for conservative investors who want a flavor of equity returns but don’t like too much volatility and also good for those investors who want regular income (through the dividend option).