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‘Infra is multi-decade stock opportunity’

While the consensus is on consumption stocks,our conviction is on infrastructure:ICICI Pru.

Written by Ritu Kant Ojha |
December 13, 2010 1:47:07 am

Chief Investment Officer of ICICI Prudential Asset Management Company,Sankaran Naren remains bullish on Infrastructure story despite ICICI Pru Infrastructure fund remaining an underperformer last year. In conversation with Ritu Kant Ojha of The Indian Express he says that currently while the consensus is on consumption our conviction is on infrastructure which he believes is a multi-decadal opportunity in India. “We believe that the Indian equity market in 2011 is expected to remain volatile on account of global economic issues. We therefore strongly believe that given the expected volatility,investing in asset allocation funds in the current environment will be ideal for investors from the risk adjusted return perspective”,he says. Excerpts:

What kind of emotional factors and personal biases come into play when you as a fund manager are creating/changing portfolio which can impact investment of thousands of people?

Emotional factors and personal biases are natural human traits and will also be a part of every fund managers’ experience curve. However,efficient and active fund management is about effectively leveraging these biases with the support of factual data and research. For instance it is this blend that helped us be overweight in pharma and technology and underweight in infrastructure in the year 2007 which we saw play out beneficially in the market correction of 2008. In the recent past,being overweight in telecom 6 months back and being under weight in banking 2 months back played out well for us. Currently while the consensus is on consumption our conviction is on infrastructure which we believe in India is a multi-decadal opportunity. In our opinion 2011 to 2014 will be a golden period for infrastructure. Given the global economic downtrend of 2008,the government had to support consumption to give fillip to the economy and sustain growth. However,given the recovery and the fact that corporate profitability and growth is on track,the government is now expected to realign its focus on infrastructure spending

You are considered a conservative fund manager who took a contrarian call in 2007 and then in 2009 by not going after the “hot’’ stocks? Did the strategy pay off eventually?

Infrastructure Fund we were conservatively placed and it did hurt for some time. But the strategy is to generate returns in the long term as mutual funds are the vehicle for long term investing. In case of big bear phase we picked up stocks that will generate good returns for the investors in long term.

To create wealth in long term through mutual funds do you recommend the Equity Index Fund route or Equity Diversified Fund route?

In India,fund managers have historically been outperforming Index Funds through active fund management. There is therefore a strong case for investors to invest through diversified equity mutual funds with the objective of long term wealth creation.

Some of the mid caps are available at a much reasonable valuations. Do you recommend cherry picking in the mid cap space?

Yes,with the recent correction there are mid cap stocks available at attractive valuations providing an opportunity for cherry picking. However,for retail investors ,it is better to invest through mid cap mutual funds like the ICICI Prudential Discovery Fund since investing through mutual funds will help them gain access to research backed mid cap stock picks with the benefit of diversification that will help mitigate risks . Investors should ideally invest in mid caps through SIP to effectively tide volatility and gain risk adjusted returns.

Which sectors you recommend for the time horizon of 2 or more years?

Infrastructure is a clear choice for 2 or more years perpective. Sectors based on exports and consumption related stories would be the next choice. For the average investors startegy would be proper asset allocation and staying invested for long term. Prudent strategy would be to avoid basing investment decisions on market volatility.

Asset allocation is something which is important but few investors actually do it. What are your suggestions and tips for average investors?

Asst allocation we believe is the most crucial part of financial planning. Following proper asset allocation would have meant that investors would have been booking profits in equity in 2007 and investing through the 2008 correction which would have significantly contributed in wealth creation.

Investors can look at following asset allocation based on their risk profile in a number of ways. Firstly,investing through SIP itself will facilitate asset allocation. By averaging cost and reducing risk. The other ideal option is that investors should consider investing in dynamic asset allocation funds that have the ability to mitigate downside risks and manage volatility. We believe that the Indian equity market in 2011 is expected to remain volatile on account of global economic issues like as scene in Ireland recently. We therefore strongly believe that given the expected volatility investing in asset allocation funds in the current environment will be ideal for investors from the risk adjusted return perspective.

This apart,we believe that investors should also consider investing in debt funds. From the perspective of asset allocation debt funds have not yet been entirely leveraged by retail investors. We continue to believe that debt mutual funds offer an attractive investment opportunity for investors and investors should also look at tapping this potential of this segment for wealth creation as well.

What is your recommendation to investors on ELSS funds post enforcement of Chi DTC in April 2012.

ELSS investments of investors are not set to become redundant after DTC comes into effect. The tax benefits applicable to ELSS is are received by the investor in the year of investment and hence what happen to ELSS after 2 years is off little significance right now. Investors will do well to look at ELSS in the current environment as the first choice for equity investments. As mentioned earlier, all the benefit of tax concessions for ELSS is front ended in the year of investments so the DTC does not effect attractive of ELSS as investments.

Number of distributors are exiting the mutual fund business. What is the industry in general doing to keep them interested in the business?

The regulatory changes have helped mutual funds become attractive investment options for investors and one of the most affordable as well. We therefore believe that not withstanding short term blips , over the long term demand for mutual funds will continue to increase as they add value to investor’s portfolio. However there is a need to simultaneously support channel partners through various initiatives that will help the function as advisors and planners for investors and hence reconfigure their business models accordingly. In line with this thought we have started working closely with IFAs to keep them updated on market developments and what to talk to investors in this challenging scenario. Apart from this we are encouraging all our distribution partners to engage investors on as large a scale as possible.

This apart the industry is also working towards creating better category awareness that will help create better understanding and pull for mutual funds thereby helping distributors. For instance,we are talking to investors on platform provided by our distributors on how they should participate in the market today and how they should review their existing investment if any. We feel handholding of investors and demonstration to our distribution channels about our seriousness towards business is key to imparting a lot of confidence to all involved.

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