‘Focus on Asset Allocation & Look at Valuation’

In an interview to Outlook Money, Amit Premchandani, the Senior Vice-Presdent and Fund Manager (Equity) at UTI AMC Ltd, talks about the recent inflows into the equity market, and expresses cautious optimism about the space, going forward

Equity mutual funds witnessed inflows in March, after eight months of outflow. Which factors led to this trend reversal?

It’s too early to call this reversal a change in trend. Two reasons which could have driven this positive flow are — March is the month when tax saving related investments pick up, hence retail investors’ flow picks up during this month; and, as the market has corrected approximately by 5% from peak levels, some investors may have used this opportunity to enter/re-enter the market or increase allocations. Some of the latter could be investors allocating cash raised over the last 8-9 months of redemption back into equity.

What should be the retail investor’s course of action when it comes to investing in equity mutual funds?

Investors should focus on asset allocation, and, after the sharp market rally, allocation to equity should be realigned to reflect individual risk appetite.
Investors should avoid timing the market and focus on giving time to markets for their investments to bear results.  
Large part of the equity allocation should be in diversified funds in various market cap categories. Sector fund allocations should be limited, as it involves carrying asymmetric risks.
Retail investors should not focus too much on market levels, but should look at valuation to arrive at asset allocation decisions. For the second quarter running, earning growth has surprised. With estimates for the financial year 2021-22 moving up post third quarter earnings, earning growth is likely to be a key driver of market returns going forward.

Despite pandemic, any major positive clues the market is anticipating in the coming times?

Vaccine rollouts are comforting, as it reduces the sense of anxiety and helps in our endeavor to move back to normalcy as soon as a large section of the population is vaccinated. It’s a desirable way to create herd immunity, which has much lower costs. As vaccination picks up pace, service sector, which is severely impacted by the pandemic, may start normalising.  
The recent sharp pick up in cases and increase in number of deaths is very unfortunate. This has forced many state governments to impose local lockdowns, which are disruptive to economic activities. Pace of vaccination needs to pick up for it to have meaningful impact on normalisation of economic activity.
Valuation is in the upper end of the trading range. Pockets of opportunity are still available in the market. In UTI Value Opportunity Fund, we have been adding exposure to companies which are cash rich and available at reasonable valuations. Focus is to look for survivors as well as franchises which have the capability to grow as cyclical revival gains momentum. At the sectoral level, we have added exposure to banking, financial services and insurance (BFSI) over last few quarters, as asset quality outcomes were better than expected, most large banks are well capitalised, and growth is getting concentrated. They are likely to be beneficiaries of any cyclical recovery.
The automobile sector had a challenging phase during 2018-20. Growth has revived in the second half of 2020. Most of the players in this space are cash rich and valuations are relatively reasonable. We have exposures across pure play OEMs in the personal vehicle/two-wheeler/tractor space. We believe penetration levels are low and personal mobility may see a comeback.
Interest rates are at a multi-decadal low, while real estate prices have seen time correction over the last decade. This has increased affordability, which may lead to a revival in demand for residential real estate; hence we’ve added exposure to the broader construction space.
Pharma is the largest Offer Wanted in the UTI Value Opportunity Fund. We have built a contrarian position over calendar year 2019, as valuations were close to a 10-year low on price/sale or price/bound volume, even a year back. Pricing pressure in US generics has abated and growth is likely to be driven by new launches in specialty segment, while domestic market continues to show resilience in this environment.