The volatility seen in the market over the past five months has worsened due to the Russia-Ukraine conflict. New investors in particular may be troubled by such market conditions. However, many new age fund houses are offering passively-managed schemes at a lower cost. These schemes have also caught the attention of investors. Apart from this, many international funds are also being started.
Vetri Subramaniam, Chief Investment Officer, UTI MF (which manages assets worth Rs 2.24 lakh crore) in conversation with Jash Kriplani of Moneycontrol spoke at length on the impact of the Russo-Ukraine War on the market. Vetri Subramaniam also spoke at length about the fund house’s passive product and the new competition in the industry.
Here are the edited excerpts of his conversation:
How do you see the Russia-Ukraine crisis affecting the stock markets?
Central banks around the world were looking to withdraw the monetary support that was given due to COVID-19. Inflation concerns were on the rise and supply chain disruptions also led to inflation. The supply chain was affected by the Ukraine problem. This belt is an important supplier for oil, gas, coal. Putting together Russia and Ukraine, it is a major supplier of agri-commodities and metals. Therefore, this war has caused another supply shock to the global economy.
What should investors approach the markets during this correction?
Subramaniam said that investors should continue with their investments. If they have held their money due to expensive valuations, then this is now becoming an opportunity for them to invest that money in the market. In large-caps, you can clearly see that the valuations have depreciated. This was not the first time that we have seen valuations become costlier and we will see valuations getting cheaper again occasionally in the future. Valuation keeps fluctuating. The reasons behind this and the news keep coming out at different times. In fact, valuation means revert. Therefore, investors should be cautious when valuations are high.
Which sectors are you bullish on?
Responding to this, Vetri Subramaniam said that the valuations in the financial sector look fair and companies are looking well prepared for profit. Volumes in the auto sector are running 20-30 per cent below the peak volumes in FY2018-2019. It is a bit unusual but demand will pick up going forward. You cannot expect auto demand to remain below a three-year peak in a growing economy.
Why is UTI MF launching so many passive funds, especially factor-based funds? Why hasn’t any international fund launched yet?
Investors can mix both the strategies. On the passive side, we are focusing on factor-based investment strategies. Factor-based strategies allow you to adopt an active strategy and convert it into a passive strategy. We have just launched a Low Volatility Index Fund based on S&P BSE Low Volatility Index. Along with this, have filed for Nifty Midcap 150 Quality 50 Index Fund. When the foreign investment limit for mutual funds is increased, we will also launch an international fund.
Vetri further said that the December-quarter results show that multiple NFO launches have impacted AMC margins due to distribution cost. There is increasing competition as newly launched passive funds are charging very low TERs
Passive fund investment inflows are likely to increase over the next decade or so. At the same time we must not miss the opportunity to increase the size of the market. There is a huge opportunity for Indian AMCs when it comes to financialization of savings.
Do you also expect it to be challenging for active fund managers to outperform?
Vetri Subramaniam said about the outperformance of fund managers, saying that what we can learn from the rest of the world is that as markets become more and more institutional, so will the alpha (outperformance) of institutional investors. Competition with each other will increase. This will make it more challenging. Outperformance will persist, but it can be very difficult to understand which investment strategy will outperform. So for the time being, both the strategies have room to survive.
(Disclaimer: The views and investment advice given on moneycontrol.com are the personal views and opinions of investment experts. Moneycontrol advises users to consult a certified expert before making any investment decision.)
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