“Following Asset Allocation Strategy is the Only Key” – Mr. Sankaran Naren, CIO ICICI Pru AMC

Mr. Sankaran Naren in an interview with Mr. Parimal Ade, Co- Founder, Team Yadnya

Introduction

In an insightful interview with Mr. Sankaran Naren, CIO ICICI Pru AMC, he has shared his views on current Debt Markets scenario, COVID Impact across different sectors and overall economy and importance of asset allocation in an investor’s portfolio etc. The interview is hosted by Mr. Parimal Ade, Co-Founder, Yadnya. This distinctive interaction with Mr. S Naren would be helpful to the retail investors.

Mr. Sankaran Naren is a Chief Investment Officer (CIO) of ICICI Pru Mutual Fund. Mr. Naren is hands-on fund manager too who manages various Funds of ICICI AMC. An alumnus of IIT Madras and IIM Kolkata, he has served across various roles in the financial services industry and investment management.

Interview with Mr. Sankaran Naren, CIO ICICI Pru AMC

• Mr. Parimal Ade :
  • Regarding the Economy, what exactly is going on? Is it Recession or Economic Slowdown or Depression?
  • Also, what is happening in the Indian and Global market? Is it Recovery or Euphoria?
• Mr. Sankaran Naren :
  • Post 2007, the keys of the markets have been handed over to the Global Central Banks led by Fed (Federal Reserve). The Fed wants stock markets to be positive and they don’t want big corrections in the equity markets. Whenever, there are big corrections in the equity markets, they try to soothe the markets in such a way that the US equity markets recover.
  • For Fed, the COVID-pandemic issue was something which came out of the blue- an unexpected event. Thus, COVID event event is not the one which Fed could have foreseen, because it was not an economic event, is was a medical event. And when the COVID-event hit Fed, they didn’t know what to do for this first 10-15 days. When they realised that there is a big medical event, then immediately they swung into action and they stuff the market with a great liquidity infusion. Thus, all the markets across the world have recovered.
  • So, we can say that we have the markets driven by Global Central Banks. Indian Central Bank has been much more careful that they have not done many excess measures that US Fed and other many Central Banks have done. Because if you live in a country, where the policy interest rate is zero, you will face major problems. You will see a situation, where you won’t get an interest on anything in Debt.
  • Thus, due to the zero interest rates, ample liquidity is pumped into the markets and as a result, the markets have recovered. But, the economy is not recovered yet. You will be comfortable, if you have the markets and the economy both are doing well. But, when you have markets doing extremely well but the economy is not doing well, you feel a bit uncomfortable. And that is the kind of situation we are in at this point of time.

• Mr. Parimal Ade :
  • So, what an investor should do in these times?
• Mr. Sankaran Naren :
  • We have deliberated a lot on this issue and we came to this conclusion it is almost impossible for anyone to predict what will happen, whether the Central Banks will loose the battle. If the Central Banks loose the battle, markets will come down. And it is not possible for any fund manager or AMC, to predict whether the US Fed will loose the battle or not.
  • Fund Managers can suggest better strategies to the investors. And we came to the conclusion was investors should follow the Asset Allocation Strategies. Following an Asset Allocation strategies is the only way in which to handle the current uncertain situations.
  • So, we at ICICI Prudential Mutual Fund, popularized the products like Balanced Advantage Fund in the Equity Funds space. While, we want to popularize the products like All Season Bond Funds in Debt Funds space. Also, we are trying to popularize the Global Advantage Fund of Funds for the investors who want to invest globally. And for the investors looking for the funds with debt taxation, we have Asset Allocator Fund of Fund.
  • Currently, the markets are not been driven by the fundamentals, so fund managers also don’t know, what will happen ahead. Markets are only been driven by the liquidity flows from the US Fed. So, the investors need to be only partially invested and not fully invested maid current uncertainties. SIP is the best way to play in the current environment, which is very complicated.
  • Since the recent corrections in the markets, many investors are looking for Direct Equity (Direct Stocks). But, it will be a very risky bet for the investors amid current uncertain market outlook. So, there is only one approach – Asset Allocation which will offer investors better experience in such troubled market.

• Mr. Parimal Ade :
  • Currently on economic front, for how many quarters will this recession continue?
• Mr. Sankaran Naren :
  • According to me, this will go on for some time. US markets will see some cyclical correction in upcoming 2-3 years, post which a good bull run will continue. However, when exactly the recession will hit the markets cannot be predicted. This does not seem to be a India specific or country/region specific issue. India has had an average economy for quite some time and even stock markets have not witnessed strong bull runs barring a few stocks.
  • According to my theory of cycles ,it is the US markets which are nearing a correction , which is worrisome.  And how Indian market responds when US market is going through recession will be a thing to watch for.
  • That is why I believe that a prudent asset management network which includes SIPs will help investors to fare through these cycles.

• Mr. Parimal Ade :
  • Does this cyclical effect on US markets will have a coupling effect India markets and other emerging markets as well?
• Mr. Sankaran Naren
  • The cyclical effect in US market will not necessarily impact the emerging markets. According to a global fund manager GMO, in his quarterly reports , states that it is a possibility that emerging markets will be doing better while US markets are going through correction.
  • Currently, it is difficult to correctly judge what  exactly will happen. In India, apart from 5-10 stocks, the valuations are not that scary/overvalued. Even 3,5,10 year equity returns seem justified and are not exaggerated.
  • That is why I don’t think the problem is with emerging markets or Indian markets. This is why at this point of time, it is safe to invest both in asset allocation kind of strategy and also continue with SIPs and STPs.

• Mr. Parimal Ade :
  • What is expected in debt markets in coming quarter or years and what will be the interest rate scenario in debt markets?
• Mr. Sankaran Naren
  • In debt market, it is a completely different scenario. I have always tried to convey that this is the year to invest in debt mutual funds.
  • Somehow, if we take a look at past returns, it is clear that past returns are not a function of future returns. But the problem is the prevailing interest rates are so low, so if you invest in safer investment options like liquid funds or overnight funds, the future returns will be very low. Unless you are willing to take any risk on accrual side  by investing in moderate duration products like short term plans, dynamic plans, there is a problem of low return on new investments.
  • One should remember that debt mutual funds are different from fixed deposits and the past returns on many schemes are quite attractive. I think debt mutual funds are a good investment option. However it might not provide future returns  in line with past returns.
  • Future returns are expected to be much lower. But even fixed deposits are offering lower returns. So investors should keep this point in mind before setting their return expectations. If investors look at debt mutual funds with the return expectation of how they have performed in the past, it will lead to their disappointment.

• Mr. Parimal Ade :
  • From mutual fund industry or advisor’s point of view, what kind of communication should happen to debt fund investors?
  • Is AMFI planning any investor education initiatives specifically for debt fund investors? Because until and unless our debt market is developed, we cannot see a complete development of capital markets.
• Mr. Sankaran Naren
  • I do not know currently if there will be any such initiative. But I feel, if investors start selling debt funds or Gilt funds based on 1 year or 3 year returns, it will be a problem.
  • Today YTM on AAA rated funds is really low and the return you will get will be YTM – Expense ratio, which is quite low. Investors understand this. But the problem is how investors accept this reality and if they want to accept this, at first place. It is similar to how I find it difficult to explain people, how US Fed putting $3 trillion dollars  liquidity in world economy is the main reason behind this global bull market rally across all asset classes, despite weak earnings.
  • So ultimately these are the reality checks that we should keep communicating to investors. But it happens that they listen to what they wish to listen.
  • Sometimes in investing, the right thing might not prove to be right immediately, but will be proved justified in coming times. For example, we avoided bank perpetuals (Yes Bank) in our schemes, at that time many people said why did you avoid these as we did not earn higher interest rate. But later, in 2019-20 , the decision proved to be great.
  • Sometimes, one can get an exit from a bad investment despite being invested in a riskier class. As against sometimes one can get trapped in bad investment even after invested in a less risky asset class.

• Mr. Parimal Ade :
  • Sir, Have you seen some kind of outflows from your Debt schemes also?
• Mr. Sankaran Naren
  • We did see fair amount of outflows in April’20  and May’20. That is a sad part as I was keen on getting inflows at that point of time. Investors who would have invested at that time would have reaped benefits.

• Mr. Parimal Ade :
  • Which sectors will be the front runners in the upcoming Economic Revival?
• Mr. Sankaran Naren :
  • Clearly, the sectors that are least affected are Telecom, Pharma, Power and Consumer staples. While the sectors that were badly affected are malls, multiplexes, aviation, hospitality. So these will be the last to recover.
  • The other remaining sectors will be somewhere between this spectrum of least affected and badly affected.

• Mr. Parimal Ade :
  • Considering the shift of preference towards personal mobility during COVID pandemic, do you see automobile sector will have a good time in coming quarters?
• Mr. Sankaran Naren :
  • There is definitely a possibility that people will switch to personal mobility in view of what has happened in COVID. If this becomes a trend, it will definitely benefit automobile sector.
  • Currently, we are in a situation where we are converting what was being done to travel by telecom. I believe, there will be a combination of personal mobility and telecom. People would chose to spend on personal mobility vs telecom would take away lot of things that one would do otherwise through travel.

• Mr. Parimal Ade :
  • What are your views about NBFC sector?
• Mr. Sankaran Naren :
  • We always believe that corporate sector backed NBFCs will have a much better chance at succeeding after 2018 debacle in IL&FS and DHFL.
  • This is because, to feel comfortable lending to an NBFC, there should be a backup from many businesses. Barring a few very well established financial services group in the country, rest of NBFCs should be backed by solid business houses for them to succeed.

• Mr. Parimal Ade :
  • So lot of consolidation is expected in NBFC and private bank sector?
• Mr. Sankaran Naren :
  • Yes, that is what we think will happen in NBFC sector.
  • Some of the private banks are not doing well currently. But I think most of the top private banks will gain market share in long term. It is difficult to predict the near term outlook due to various parameters like EMI moratorium, etc.
  • For a 5 year view, the outlook on top private banks in the country looks pretty good.

• Mr. Parimal Ade :
  • What about the small finance and micro finance institutions?
• Mr. Sankaran Naren :
  • They will have to prove their mettle in next 1-2 years. Then out of small finance, micro finance and regional banks, whoever succeeds in next 2 years, I think they will perform well in next 5 years.
  • There will be some small finance banks and micro finance institutions, which will fall out due to mismanagement and remaining will succeed in these two years.
  • Consolidation will also happen in this sector.

• Mr. Parimal Ade :
  • What is your view on PSUs?
• Mr. Sankaran Naren :
  • I have been very positive on PSUs , particularly PSUs operating in those sectors where there is less presence of private sector companies. They have all become sustainable dividend yield companies.
  • Secondly, these PSUs can very easily borrow money at cheaper interest rates even in current economic conditions as against private sector companies. This is because lenders are comfortable giving money to PSUs due to better credibility. If you look at how PSUs are dealt in debt market, they are considered the best blue chip companies in India. This comparative advantage will benefit a lot to the PSUs
  •  Sustainable dividend yield PSUs with decent management and employee capability will do well in the future. Currently, these PSUs are deeply undervalued and provides a better opportunity to invest in them.

• Mr. Parimal Ade :
  • What is your view on Fiscal Deficit and current account deficit?
• Mr. Sankaran Naren :
  • There’s an economist Richard Wolf who taught me that in any economy, if people and companies are saving, then government has to  spend. For example, if I save Rs.2 and ICICI saves Rs.2, then government has to spend Rs.4. This is what we call as triple entry.
  • Today, we are in a position where we shall not worry about fiscal deficit till economy stabilizes. This is because neither am I allowed to spend nor are companies allowed to spend so the government has to spend the excess savings. So in this year, fiscal deficit is not an issue. It might be an issue in upcoming times.
  • Current account deficit is again not an issue in current times. In fact, we will be in surplus this year mainly because of significant lower crude oil demand, dramatic drop in debt deficit, etc.
  • So, for the current year, there is not much to worry about current account and fiscal account. Fiscal account will be in deficit this year ,ad current account in surplus. But if I take a 3 year view, it is a major task for government to keep fiscal deficit under control.

• Mr. Parimal Ade :
  • Since fiscal deficit and current account deficit has an impact on the currency movement, what is your view on USD – INR equation?
• Mr. Sankaran Naren :
  • Currently, we are not worried as there is good potential for USD – INR to do fine. But we will have to keep everything under check over next 3 years, otherwise rupee is much likely to depreciate against USD.
  • Currently, foreign exchange reserves are zooming as RBI is buying dollars. Due to this, rupee is stable. Otherwise rupee will be appreciating. So that is why today we are not worried about the USD-INR situation.

• Mr. Parimal Ade :
  • Do you feel the kind of rally and euphoria we are seeing currently in healthcare and pharma sector is justified?
• Mr. Sankaran Naren :
  • We have to remember that we are seeing this rally after 4 years of lower valuations in pharma. So this rally seems justified as it has made the pharma sector fairly valued, which was otherwise deeply undervalued.
  • India has good amount of potential for pharmaceuticals production, so I would say that this rally is definitely justified.

• Mr. Parimal Ade :
  • What about telecom sector?
• Mr. Sankaran Naren :
  • We are very positive on the telecom sector and we think there is still a lot of scope for telecom to keep doing better in upcoming times. It has become a very essential part of our lives, as basic as consumer staples and healthcare.
  •  Since the price war is over now, there should not be many challenges in this sector.

• Mr. Parimal Ade :
  • Since March’20, there has been a fall in SIP inflows. Are you facing any kind of pressure regarding SIP collection?
• Mr. Sankaran Naren :
  • I don’t have any exact answer to that, but I think if SIP inflows do not come during market corrections, there is no point in doing SIPs. If SIP inflows will come only when markets are booming, the returns will not be attractive.
  • For SIPs to deliver good returns, SIPs should be done during market corrections. So the SIP installments in the months of March, April and May are crucial for good returns.

• Mr. Parimal Ade :
  • From valuation perspective, which category do you feel is undervalued?
• Mr. Sankaran Naren :
  • Value category across the small, mid and large cap spectrum is really undervalued at this point of time.
  • Many of these sectors like infrastructure, power, large banks did well in 2002-2007. However, currently they are meaningfully undervalued.

• Mr. Parimal Ade :
  • From valuation point of view, which parameters do you use to decide if the stock is undervalued or overvalued?
• Mr. Sankaran Naren :
  • I have mainly used trailing PE and trailing PB as valuation parameters along with RoE.
  • But, some exceptions to these parameters are consumer staples sector. Here the valuations are inching higher every day.
  • So while I do believe in these parameters but they have not genuinely worked as well as I thought it would. My experience with using these parameters for last few decades where it has worked. But in last 3-4 years it has not worked.

• Mr. Parimal Ade :
• Which approach do you use – bottom up or top down?
• Mr. Sankaran Naren :
• I use both – top down as well as bottom up approach.

• Mr. Parimal Ade :
  • Any message for retail investors?
• Mr. Sankaran Naren :
  • In my opinion, markets are going to be turbulent in the upcoming 2-3 years. Turbulent does not necessarily mean that markets will fall. It can be what has happened  recently wherein market has rallied significantly. Turbulent also does not mean that market will not increase substantially from here also.
  • The only way in which retail investors can handle this is by practicing prudent asset allocation strategies. Also I feel it is important to continue with you SIPs. In case if market zooms , there is a need for profit booking in equities at 11,000-12,000 NIFTY levels.
  • I believe that markets will continue to be volatile and if you are sitting on too much profit, certain amount of  profit booking should be done. Unless all your funds are invested in asset allocation kind of funds, then profit booking is automatic. But if your portfolio is spread across equity funds in particular, I think periodic profit booking is required as markets zoom forward.
  • I think it’s a very interesting period and those investors who invested at 8000 NIFTY level, it is  a great decision.
  • Those who invested in debt funds in 2018-19, it is a great investment decision. In my opinion, debt funds have a huge role to play in every investor’s portfolio. But I would not recommend choosing extremely safe debt funds like overnight funds and liquid funds in these times. This is because extremely safe debt funds would yield lower returns. I would much rather choose asset allocation funds over debt funds.

• Mr. Parimal Ade :
  • What type of asset allocation do you focus on, constant weight or tactical?
• Mr. Sankaran Naren :
  • I believe in both types.

• Mr. Parimal Ade :
  • As an investor, what is the asset allocation in your portfolio?
• Mr. Sankaran Naren :
  • I’m somewhere in the middle right now. In 2011-13 cycle, I moved to zero real estate. Recently I sold off entire US equities holding in my portfolio.
  • Other than that I’m allocated  in both equity and debt and I’m very much allocated to categories like Credit Risk at this point of time.