Focus on markets with long-term view for better returns: UTI AMC EVP

Markets have hit a record high on the back of very strong global liquidity infused by the global central banks and huge investment by domestic retail investors and financial institutions. The biggest investment mantra one should follow while investing is focus on the markets with long term view and aim to build a long-term portfolio. Citing the reason, V Srivatsa, EVP & Fund Manager-Equity, UTI AMC, in an exclusive interview with Bizz Buzz, says equity is a long-term investment and returns are realized only on long term basis and holding in the long run.

Markets have hit high record multiple times. What are your views on the same?

Markets have hit a record high on the back of very strong global liquidity infused by the global central banks and huge investment by domestic retail investors and financial institutions. This is also supported by hopes of strong medium-term recovery and growth in the Indian economy and consistent earnings growth. Valuations are at around 27-28x trailing earnings which is at record high and forward earnings at around 21x forward earnings are also above long-term averages. The corporate sector in the last year has been resilient on the back of better demand and strong cost control which has helped in outperforming expectations. We remain hopeful of strong earnings growth led by strong domestic recovery and ability to manage the costs in the next couple of years, however, the risks remains on the liquidity tapering off and also potential risks of third wave which can derail the earnings growth in the current year.

What are the kinds of risks involved in the market, if third wave arrives in India?

While risks of third wave are there on cards, what is important is how we manage the third wave. Two comforting points are higher vaccination for the population and higher preparedness in terms of the health infrastructure. If the third wave is repeat of the second wave leading to lockdowns and inadequate healthcare infrastructure, there could be earnings cut ahead as markets are anticipating full growth by the second half of the year. There could also be liquidity risks in the event of the FII withdrawing money if the third wave is as serious as the second wave which could weaken the markets. The probability of third wave is high given the history in other countries, however our ability to manage the crisis is the key to navigating the third wave.

What are you expecting from the market rally? How can it be beneficial for your funds?

Our key expectation from any market rally which would be beneficial for our funds is broad based rally across sectors and market cap and rally focusing and rewarding earnings growth and surprises. Any narrow market rally benefiting few sectors or companies would make funds outperforming tough in the short run.

In which sectors are you spotting opportunities in the market?

We are positive on the domestic growth in the medium term and positioned on the sectors which would benefit from the domestic growth. We are positive on banking, power and gas utilities, telecom, Industrial goods and real estate which are big beneficiaries of the domestic growth. Valuations are also reasonable in these sectors not factoring in the sharp recovery. Amongst the domestic sectors, we are underweight on consumers which would be beneficiary of domestic recovery, but valuations are at record high and huge premium to the market discounting the strong growth. We are slightly underweight on automobiles given the near-term challenges on the growth led by supply chain issues, however the valuations have corrected across the sector and they factor in the near term weakness and we would be looking to increase our exposure in the sector. We remain neutral to negative on the global oriented sectors such as Information technology and metals as they are trading at valuations higher than long term valuations and remains highly exposed to any changes in the global economy. We would be wary of metals given the record high prices across commodities and relatively higher valuations on price to book basis.

What is your checklist to build a strong portfolio?

The key checklist would be as follows – 1. Focus on companies with reasonable quality where the company is capable of earning returns higher than cost of capital. 2. Avoid companies with low terminal values or terminal risks in business. 3. Suitably diversify the portfolio by having varied sectors and companies. 4. Focus on corporate governance in companies where you invest. 5. Focus on free cash flow in companies which are trading at higher valuations.

What are investment mantras one should follow while entering in the market?

The biggest mantra is focus on the markets with long term view and aim to build a long-term portfolio as equity is long term investments and returns are realized on long term basis and holding in the long run. At the current levels, it makes sense to invest in the markets in a staggered manner over the next few months. It also pays to remain invested in the markets and increase allocations when the markets turn cheaper relative to history. Investors who have made long term returns have been invested with long term time frame and have played the market cycles well.

What have been the major contributions in the consistent performance of UTI core equity fund?

UTI core equity fund is an equity fund in the large and mid category where around 35 per cent of the equity fund is invested in large and mid cap stocks. We follow relative value approach in our investing and try to identify stocks /sectors trending below long-term valuations and below intrinsic worth. We also avoid stocks or sectors where terminal value is uncertain and cases where corporate governance is question mark. Our focused approach in identifying sectors in value in the last one year has helped us and also our approach in small caps and mid caps where we are looking at growth-oriented companies at reasonable valuations has helped us in outperforming the benchmark and peer group. Our portfolio is well diversified and spread over more than 60 stocks, which reduce the concentration risks.

What is your outlook for UTI healthcare fund for the near future? How third wave in India can affect its performance?

The healthcare sector is poised to delivery good medium- and long-term performance on account of low penetrations of medications and healthcare in the Indian economy and the attractive branded generics Indian market and huge success of exports in the pharma sector. We expect pick up in the growth for both the Indian pharma market and the emerging market which should benefit the companies in the medium term. We also expect the export markets to do well in the medium term. In the hospital segment, we remain positive on the long run given the consolidation of the sector and higher growth prospects. In terms of the UTI healthcare fund, our fund is positioned across the domestic companies, export-oriented companies and hospitals and diagnostics which should bode well for the long-term prospects of the fund.