In conversation with Vetri Subramaniam
Editor’s note: The second wave of COVID-19 is on a rampage. The active cases are rising rapidly. Have markets already factored in the second wave and nevertheless, hope for a strong broad-based recovery in FY22? Or have markets been complacent and is the rally that started a year ago heading for an ugly ending?
As many investors appear clueless about what they should do at this juncture, we invited an industry veteran, Vetri Subramaniam—group president and head of equity at UTI Mutual Fund to discuss the big picture and market fundamentals.
In a free-flowing discussion, Vetri not only touched upon market indicators and fundamentals but shared his experience of various market phases. Presenting herewith some highlights of our conversation. Read on!
Time matters, not timing, and valuations matter more, not big numbers
His opening remarks set the perfect tone for a candid discussion. According to him, the macro-economic and industry-specific indicators don’t matter much for investing success. But what do we learn, as investors, from the past mistakes matters the most.
Time is your friend, he expressed. To elaborate further on this point, he presented Sensex data for the past 22 years with dates of it achieving important milestones. The findings were quite interesting. Markets have generated 13% compounded annualized returns since 1999, factoring in dividends Sensex companies paid. And the CAGR returns from the various peaks through March 2021 have also been in double digits.
However, it’s also been observed that when investments are made at cheaper valuations, long term and short-term returns (say 10-year and 1-year returns, respectively) have always been attractive in the past. As against this, whenever investors chased expensive valuations, the long term returns were mediocre. Thus, valuations are a crucial determinant of potential returns.
Dwelling deeper on this point he explained, stock markets and economy don’t work parallelly and valuations reflect the sentiment of investors. They are more a function of greed-and-fear. Thus, it’s crucial for investors to acknowledge that any index level is just a number and doesn’t make much sense in isolation.
Similarities between investing and watching a Bollywood movie
Investing in a market is like watching a Bollywood movie. One should keep calm, be patient and never leave it halfway. The implied meaning is volatility might make investors nervous. Market volatility is just like the storyline of a high-drama movie, taking many twists and turns, but ending on a merry note.
In Vetri’s assessment, the ability of an investor to absorb shocks, i.e., handle volatility, distinguishes an intelligent investor from an ordinary investor.
3 protocols intelligent investors follow:
- Asset Allocation
- No leverage
It’s important for investors to understand the difference between Mark-to-Market (MTM) losses and permanent losses, believed Vetri. MTM loss emanate from volatility, which is a part-and-parcel of equity investing. On the other hand, permanent losses are often a result of poor stock selection and lack of diversification.
According to him, no investment strategy can look smart all the time; which essentially means, you can’t have an all-weather portfolio. You can’t predict, you can only prepare, Vetri recited the famous quote of Howard Marks! Thus, the best guard against volatility is to diversify. For chalking out an effective asset allocation plan, valuations (of equity) and the attractiveness of other asset classes should be carefully compared.
He also warned investors against using leverage since a loss on a leveraged position can be catastrophic in nature. Archegos—an American family-office, recently suffered an MTM loss which turned into a permanent loss due to its highly leveraged derivative trades.
We asked him if he has spotted any similar traits in the current rally that had taken markets to a different trajectory during the 2003-2008 boom.
In a measured response, he emphasized lower interest rates, lower tax rates and deleveraging bank balance sheets have been the pluses at present. Nonetheless, high exports, which was one of the pertinent features of the last multi-year bull market, is missing today. He thought the current market valuations offer lower margin of safety.
Vetri’s response to a question on whether the market cycles are turning shorter nowadays, and thus making a buy and hold strategy slightly ineffective, was mixed.
He concurred that the market cycles are turning shorter due to constant innovations and a fast-changing regulatory environment. He drew attention to businesses, like the auto sector, that have been seeing irreversible changes in their fundamentals, such as with respect to the Internal Combustion (IC) engine, and the impact on coal and thermal power, to name a few. Nonetheless, he opined that the buy-and-hold approach is relevant even today. The basics haven’t changed.
To answer a question on the attractiveness of Public Sector Undertakings (PSUs), he made rather a hard-hitting remark. In his view, it’s quite late to think about privatization in the case of several PSU companies. He gave an example of MTNL, which he thought should have been privatized when it was a Sensex company. And, it would be equally difficult to find a buyer for Coal India today, since ESG compliance has made coal an unattractive business in the current context, according to Vetri.
He made a crucial point at this juncture. He advised taking a bottom up approach to picking PSUs and even non-PSU stocks. To emphasize on this point further, he cited an instance of an FMCG company making it to the top 20 holdings of UTI Value Opportunities Fund. The FMCG sector, in general, is perceived as an expensive sector at present.
UTI Value Opportunities Fund: Top 20 holdings
(Source: ACE MF)
From purely the intrinsic value perspective, he found value in financials and pharmaceuticals for now.
He also believed that investors should stagger their investments to avoid the risks associated with getting caught between high valuations and runaway markets. According to Vetri, Systematic Investment Plans (SIPs) aren’t an investment tool but rather a behavioural tool which inculcates the discipline and habit of saving amongst individuals.
The key takeaways of our conversation were:
- It’s equally important to understand the difference between MTM losses and permanent losses.
- Market valuations matter the most, the index level is just a number.
- Intelligent investors follow a 3-point strategy—diversification, asset allocation and no leverage
- The ability of an investor to absorb losses and learn from the past mistakes is crucial. Staggering investments by using SIP is a way to deal with market volatility.
Important note (Please read as a disclaimer): None of the mutual fund schemes discussed in this note is a recommendation to buy, hold or redeem. So is the case with sectors and stocks that might have been referred to. Moreover, any remark with respect to the business prospects and valuations of a sector or a stock shouldn’t be construed as the outlook. Views expressed herein overtly or even otherwise are solely that of the guest and under no circumstances should be construed as those of Ventura Securities.
The only purpose of this coverage is to create awareness amongst investors.
Investing in mutual funds involves risks. Please consult your financial advisor before taking any decision pertaining to your mutual fund portfolio.
You may also like to read: In conversation with Shrinivas Rao of PGIM India Mutual Fund
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.