Valuable Investing Insights by Mr. Balasubramaniam, MD & CEO Aditya Birla Sun Life Mutual Fund

Mr. Balasubramaniam in an Interview with Mr. Parimal Ade, Co- Founder, Team Yadnya

Introduction

Valuable Investing insights by Mr. Balasubramaniam – MD & CEO Aditya Birla Sun Life Mutual Fund in an interview with Team Yadnya, are discussed in this article. The interview is hosted by Mr. Parimal Ade, Co-Founder, Yadnya. This distinctive interaction with Mr. A Balasubramaniam would be helpful to the retail investors.

Interview with Mr. Balasubramaniam, MD & CEO Aditya Birla Sun Life Mutual Fund

• Mr. Parimal Ade :
  • Sir, as the chairman of AMFI, you had started the campaign of “Mutual Fund Sahi Hai” in 2017, do you feel it still holds true? Since a lot of retail investors are in a state of panic. The returns of 1 year, 3 years and even 5 years are in single digit and in some cases even negative. So, what are your thoughts on that?
• Mr. A. Balasubramaniam :
  • Thank you Parimal for remembering that. While formulating the “Mutual Fund Sahi Hai”, our main aim was to educate investors. We believe the campaign had the right impact by spreading awareness of mutual funds as a market instrument.
  • If you look at all our advertisements, they are all about why one should invest via SIPs what is the importance of SIP, how one should go about the goal based approach and how it helps to diversify the portfolio. It was never marketed in terms of return. It was a combination of multiple things.
  • My thought process was that when we have discussions over a cup of tea, we must also discuss about Mutual Funds. I am happy that it was a huge success and was able to spread awareness among so many people. Coming back to your question, I believe Mutual Fund will always remain “Sahi” due to the following reasons – Saving, Income, Wealth creation and Tax planning.
  • Therefore, when you look at Mutual Fund Sahi Hai campaign you must look at it in a holistic basis which provides you a platform to manage your money. Performance of the market, whether good or bad, should not be the sole reason for your investments in mutual reason. Thus, in my opinion Mutual Fund is Right even in these times as the purpose of investing in them has not changed.
  • Coincidentally, after 2008 Lehman Brother crisis also many people used to ask me a similar question – whether equity is good or not? But what happened after that? Markets took off after few years of the crisis. This is how it has always been; markets are sometimes low, sometimes high and sometimes flat. Thus, in long term Mutual Funds turn out to be “Sahi”.

• Mr. Parimal Ade :
  • Since you mentioned the 2008-09 crisis, do you draw any similarities between that one and this one?
• Mr. A. Balasubramaniam:
  • Only in terms of reaction. That one (2008-09) was originated in US while this one (COVID-19) was originated in China. Although Indian markets fell considerably even in 2008-09, it was restricted to mainly banking sector. The current crisis is due to health. Almost all countries have been impacted.
  • When it comes to health, your priorities change and you tend to leave all other things behind. This is why it has created a significant slow-down in economic growth; hence, this is the first time the growth has become negative which was not the case in 2008-09.
  • The reaction of policy makers has also been very different as it has been very swift and large and we can expect the impact of these policy changes within 1 – 1.5 years.

• Mr. Parimal Ade:
  • Sir, what are your thoughts on the recovery? Many people are speculating of a V-shaped recovery or a U-shaped recovery or even an L-shaped recovery, which is a new thing.
• Mr. A. Balasubramaniam:
  • Considering the fact that the huge impact the crisis has brought upon us, it is unfair to think that the recovery will be swift as a V shape since many businesses that were driving the economy were shut down.
  • However, one cannot rule out the possibility of gradual recovery gaining pace down the line. Hence, U-shaped recovery is more probable, given the fact that several banks and the government have taken many steps to help economic growth unlike the situation in 2008-09.
  • In 2021, the base numbers will look so bad that even a growth of 5% in economy, from -2%, will look like a V-shaped recovery but it will only be because of the base effect and not because of intrinsic growth in the economy.

• Mr. Parimal Ade:
  • Yes sir, on cumulative basis, it will be less, but from base, it will be at a higher side. So, looking at the support given by Government and Reserve Bank of India, what kind of Difference do you see in these supports compared to the supports provided by developed economies?
• Mr. A. Balasubramaniam:
• Frankly, huge difference. Although we generally feel that whatever is done by the government is not sufficient. Considering the constraints under which the government itself works such as maintaining the fiscal, focus on improving tax to GDP ratio, investments in infrastructure and distributing wealth by maintaining an equilibrium.
• Obviously, USA and European countries have given huge amounts to the corporations. In this scenario, we are nowhere to being compared to them.
• However, in the constraints in which our government works, I feel it has done a decent job. But having said that, we focused more on the health crisis rather than the economic crisis, the impact has been much more to us than other global players. But considering the nature of Indians and the population, when the COVID subsides and normal activities resume, we can expect an accelerated recovery.

• Mr. Parimal Ade:
  • Yes sir I agree with you, once this crisis subside people will spend more. Now, regarding Monetary Policy, what kind of Rate Cuts do you foresee in coming 6-9 months?
• Mr. A. Balasubramaniam:
  • The rate cut of 75 basis points on 27^th March is quite substantial. I feel that a total of 1.5% rate cut and further reduction on those repo rate should have an impact on the lending market and subsequently the credit growth will pick up.
  • Until these impacts are not seen, the RBI will keep high focus on keeping the liquidity high and the rates low. Probably, they would not need to go for the rate cut if equal reaction comes from the banking sector ass well so that borrowers can freely borrow money and only then will recovery start.

• Mr. Parimal Ade:
  • So basically rate cut transmission is the most important part for the banking. If that happens, things should start automatically improving. Now, moving ahead, a lot of problems in Debt Mutual Funds occurred (although interest rates are going down) and the impact of Franklin Templeton Crisis was huge across the Debt Categories. What is your take on this?
• Mr. A. Balasubramaniam:
  • One has to keep in mind the principle in which it (bonds) operates. Suppose if you invest in an 8% bond, you get 8% interest. It also depends on monetary policies. Thirdly, it depends on the rating of the bond.
  • If the rating of the bond goes up, borrowing cost of such companies goes lower and therefore you gain and viz-a-viz if the rating goes down, borrowing rate goes up and therefore the price will go down. Finally, it depends on defaults.
  • The component of default is least significant out of all the other components. While 2018-19 was a bad year for default if you look at the component of default, it is only limited. Sometimes in the investment world, a small problem is blown out of proportion and generalized. In 2018-19 also the issue lasted only for one year and this time also it is temporary.

• Mr. Parimal Ade:
  • Okay, so after Franklin Issue, you might have seen a redemption pressure for Credit Risk Funds & Medium Term Funds. Aditya Birla Mutual Fund stopped new inflows into Credit Risk Funds & Medium Term Funds. What was the major reason behind this decision?
• Mr. A. Balasubramaniam:
  • We had a choice to either keep taking money and carry forward the benefit that came in the portfolio on the basis of the recovery and keep growing the size or stop the growth and give the benefit to the existing investors.
  • We felt that we should go with the second option where someone who stays with the fund, as the investment has gone bad and the prospects of recovery goes up, the NAV is likely to go up, as the NAV goes up, the benefit will go to the investors who stay with the fund. Thus, keeping in mind the interest of the investors we stopped new inflows into Credit Risk Funds & Medium Term Funds.

• Mr. Parimal Ade:
  • Are you going to open up those schemes in coming months/quarters?
• Mr. A. Balasubramaniam:
  • We would probably wait for some more time. There are about 3-4 investments that we have made in the schemes where the value was brought down significantly such as the IL&FS assets where the Supreme Court has now put our assets in green and their interest has started to come in and some other investments as well whose assets are being sold and we will probably see success.
  • Also, since COVID has brought a slowdown, we will wait for another 6 months and maybe by December we will review whether to as to what must be the next action plan – whether to continue the halt in the inflow or to resume the inflow.

• Mr. Parimal Ade:
  • Okay, because Franklin started it but you took it to another level which made people believe that it was the end of Credit Risk & Medium Term categories.
•  Mr. A. Balasubramaniam:
  • No, I feel it will come back, because I myself being with the AMC for last 25 years, we are extremely committed to increasing the customer base and help in expansion of mutual fund industry in terms of the 4 principles – savings, income generation, tax planning and wealth creations.

•  Mr. Parimal Ade:
  • Yes, in a way we still feel that people are still unaware of this, debt category, they compare it with FDs.
• Mr. A. Balasubramaniam:
  • I agree with you. I feel the investors must be aware of the 4 components (interest rate, monetary policy, rating and default). Aditya Birla Sun Life Income Plus Fund is a 25-year-old fund (Inception: 1995). And in its entire life time, it has seen credit risk defaults, interest rates moving up and down and NAVs falling sharply but despite all these things, the fund has managed to give a CAGR of 8.3%.
• Mr. Parimal Ade:
  • And I think they are majorly investing into government securities.
• Mr. A. Balasubramaniam:
  • No, it’s a mix of govt. securities, corporate bonds, credit and others; the fund has adopted multiple studies.

• Mr. Parimal Ade:
  • Which Sectors will be the Front Runners in the upcoming Economic Recovery?
• Mr. A. Balasubramaniam:
  • We as a fund house have done a lot of work on various sectors where we could see the recovery coming back soon. Clearly, one of the sectors such as pharmaceuticals remains in a good state. We can also see telecom Industry getting revived substantially and we can also expect FMCG and consumer staple Industry to improve.
  • Also, 2 wheeler industry can be expected to pick up as well once the lock down is lifted and the rural economy comes back to normal, we will probably see the spending to increase. We have also seen during this pandemic that people have started to adopt personal vehicle model instead of public transport. Industries that will remain impacted will probably be Malls, Multiplexes, Aviation and Tourism.

• Mr. Parimal Ade:
  • Sir, Pharmaceuticals & Healthcare stocks are up by almost 50-60%. My question is that are we done with the upside move in the Pharma sector or there is a huge upside still available?
• Mr. A. Balasubramaniam:
  • I wouldn’t say there’s huge upside. This sector, for the last 5 years has gone through a down turn, thanks to the FDA related issues and in general price controls.
  • I think the health related issues that have come front due to COVID has brought the sector in radar for many people. Hence, decent returns can be expected from the sector mainly because the FDA issue have gone down and the balance sheets are as strong as ever.
• Mr. Parimal Ade: 
  • So, what kind of earnings growth do you foresee in Pharma sector in coming 3-5 years?
• Mr. A. Balasubramaniam:
  • Anywhere between 15-18% growth is possible. Given the fact that these companies have high ROE, high cash surplus and dividend yield has also been good, I think the combination of all these things should keep this sector as a part of your portfolio.

• Mr. Parimal Ade:
  • In Telecom sector, do you foresee the duopoly coming into the picture?
• Mr. A. Balasubramaniam:
  • I believe there are 4 players in the Industry, 3 private and one government – BSNL. This industry has gone through a major consolidation and pending Supreme Court judgement, I think the Industry will see a good period going ahead. I think these 3 players will consolidate in themselves which will lead to the pricing power coming back.
  • In the same time the general the usage that the COVID-19 has increased the importance of telecom players and the OTT players which are basically offering extra services. Even government of India must keep the sector in good state since they also need money for their fiscal purpose for which they will be auctioning 5G spectrum.

• Mr. Parimal Ade:
  • In FMCG sector, the kind of Valuations we are seeing, Price to Earnings multiples of some companies are at 80-90 levels, few are at 50-60. So, what is the right valuation for FMCG sector?
• Mr. A. Balasubramaniam:
  • One of the parameters which we do not speak much is the PEG which is the PE Growth and if you see FMCG companies, they have been able to grow at 11-12% and some small companies at even 18-20%.
  • These companies will always show 40-50 PE numbers. Secondly, if you look at all these companies, they are free cash flow generating companies and also these are asset light companies and the brand also matter a lot, the good will value that these companies create is very high.
  • Hence, I feel that this is one sector which has a huge good will valuation which we can never measure, only market can. 
• Mr. Parimal Ade:
  • So, can we compare FMCG sector with the fixed income securities in US due to the certainty of returns?
• Mr. A. Balasubramaniam:
  • I think it’s purely the free cash flow it generates and the sustainability of the business as the product they offer has a long lasting nature and are not easily disrupted. Whether you like it or not, you buy a majority of HUL’s and Nestlé’s product as they are essential in our everyday lives.
  • Therefore, in this sector, one should not get carried away by the valuations; one must look at it as a secular long term story. Every 3 years you’ll make money and every 3 years you will not. This is the nature of the sector.

• Mr. Parimal Ade:
  • Sir, what are your views on Gold – as an asset class?
• Mr. A. Balasubramaniam:
  • It is interesting to watch gold now. I think USA is getting into the trap, in the sense, most of the global investors now perceive gold as a better instrument.
  • Firstly, they believe it’s equivalent of investing in dollar plus you are also getting real return which is higher than the returns you get in fixed income schemes. Thus the demand of gold among global investors will remain high. This should not impact us.

• Mr. Parimal Ade:
  • There are 3 types of Investors – Conservative, Moderate & Aggressive. What kind of Allocation people should have for Gold as an asset class in their portfolios?
• Mr. A. Balasubramaniam:
  • 5-10% should be good. From an Indian investor’s perspective, one should allocate money in 2 asset classes – Gold and liquid Mutual Fund (which is for a lazy investor).
  • If you draw a chart of last 20 years, liquid funds have outperformed gold. It would have given you 7-8% returns annually against 3-4% of gold. Also the power of compounding is high for them.
  • Thus lazy investing such as investing in liquid fund also gives you better returns and security. The only risk you are running between investing in gold and liquid funds is that you are able to capture the dollar value in gold.

• Mr. Parimal Ade:
  • With this kind of Money Printing we are seeing, the Quantitative Easing provided by Governments & Central Banks. Will this Quantitative Easing (QE) have positive impact on Gold Prices all over the world?
• Mr. A. Balasubramaniam:
  • With this question I would again like to come back to the topic of real rate of interest. The real rate is rate of interest minus inflation. So, currently, your inflation is low and interest rate is also low.
  • Your interest rate is 5% and you inflation is 3%, thus you real rate of interest is 2%. By Quantitative Easing (pushing down interest rate and improving dollar value), gold is now becoming an alternate to investing in a bond.
  • Ultimately it is the real rate of interest one should get from any asset class. Since gold is able to justify its real rate of interest higher than bond, money is coming into this asset class.

• Mr. Parimal Ade:
  • Currently, Nifty is at around 10,300 level. The journey from 7,500 to 10,300 was quite sharp (V-shaped recovery at least in the stock market). So, are we seeing some kind of Euphoria right now in the markets because of the liquidity infused by Central Banks & Government?
• Mr. A. Balasubramaniam:
  • I wouldn’t say euphoria. If it was euphoria, markets would have gone up substantially. There is a bit of confidence coming back that the way the liquidity has been pumped in.
  • Investors who are low on equity allocation and also due to the fear of missing out on the recovery, investors have suddenly started to see value in the market which is bringing the markets up. Price to book, PE and Earnings are lowest currently.
  • Although market should remain low due to low earning, the other 2 – PB and PE are pulling the markets. But with time after June quarter results, market will take a different shape and consolidate.

• Mr. Parimal Ade:
  • Right, even I thought that the markets should consolidate but the kind of reaction which we have seen and also since the FII numbers are quite positive, FII Inflows are at around $3-4 Billion in last 1-1.5 months. So, is it the long-term FII inflows or short-term opportunistic investors are coming & investing in the markets?
• Mr. A. Balasubramaniam:
  • It is difficult to say, but in my view the money should be long term for one simple factor that these investors withdraw money only when an opportunity comes which is far superior to the current one.
  • Till they see Interest rates going up in US, they will remain in the Indian market. And secondly, from my observation whatever money that comes in India, which I call the Abhimanyu Chakra, it stays within the country for significant length of time. More or less 70% of the money will remain in India for long term.

• Mr. Parimal Ade:
  • Finally, as an Investor, what is the Asset Allocation in your own portfolio?
• Mr. A. Balasubramaniam:
  • I have been bullish on equity; hence, I have not made big money both through SIPs and lump sum investments. But I have gained huge money on my investments which I made 4-5 years back, so I cannot ignore equity because of the current scenario.
  • I am also equally weighted on real estate, since being a south Indian I have the tendency to invest in land, though it does not make much sense as compounding in equity will be much higher. Also, I have exposure to fixed income schemes as well, being a working employee.
  • I have also increased allocations in PPF which gives me retirement money, equity gives me wealth creation and fixed income gives me stability and money for emergency purpose and real estate is for children.

• Mr. Parimal Ade:
  • What about Gold?
• Mr. A. Balasubramaniam:
  • I do not fancy gold as an asset class because of the simple factor of the storage value.
• Mr. Parimal Ade:
  • Not even Gold bonds and ETFs?
• Mr. A. Balasubramaniam:
  • Coming back to my earlier point, compounding provided by fixed income schemes is about 7-8% without much risk.
  • I would therefore encourage even conservative investors to invest in fixed income schemes as creating income is very important.

Mr. Balasubramaniam – MD & CEO Aditya Birla Sun Life Mutual Fund in an Interview with Mr. Parimal Ade, Co-Founder, Yadnya