The Mutual Fund Show: Is It Time For Investors To Consider Infrastructure?
Many see potential investment opportunities emerging from commitments by India and the U.S. to spend on infrastructure.
Since the Indian government has decided to pivot investments towards roads to ports and the quantum announced is large, infrastructure would be an interesting space to invest in, said Kalpen Parekh, managing director and chief executive officer at DSP Mutual Fund. But he does not expect gains similar to the 2003-2008 cycle.
The stocks in the space are already trading at 2-2.5 times the valuations in the previous cycle, he said on The Mutual Fund Show. If asset managers can incorporate components from the current infrastructure cycle in their schemes, there could be money to be made, he said.
Salonee Sanghvi, founder of My Wealth Guides, advised a cautious approach since cyclical stocks haven’t done much since the last corporate capex cycle fizzled out in 2010.
Yet, according to her, India is on the cusp of a capex cycle. And she doesn’t find a separate fund of cyclical stocks as necessary as flexicap and large-cap schemes have 15-25% exposure such cyclical stocks, excluding financials.
Such stocks suit aggressive investors who need to time investments cyclical funds well, she said. Sanghvi recommends Invesco India Infra Fund.
Sanghvi also suggested international funds for geographic and sectoral diversification. Her recommendations include the Motilal Oswal Nasdaq 100 Fund of Funds/ETF citing its track record and the visibility of investing in tech companies.
Watch the full show here:
Here are the edited excerpts from the interview:
Kalpen, I am wanting to understand from you, cyclical funds. A lot of people have now started talking about whether this could be similar to the great infrastructure cycle that we saw in the decade of 2000 to 2010, and whether it is prudent to take an exposure through infrastructure funds. What are your thoughts, why or why not?
KALPEN PAREKH: Our minds are wired to look for comparisons of the past because we are anchored and in fact, the 2003 to 2008 moments were probably once in a lifetime we hope we get that cycle again when earnings at large grew at 30% CAGR for five long years, and the Nifty itself went up seven times, the small-cap index went up 15 times. So, those type of comparisons are always good anchors to know about, but I don't think we can conclusively say that it is going to be a repeat of the same. It is easy to say that to attract money, but I think we still are far away because the global growth cycle—the India growth cycle—none of it is similar to what we had seen at that moment. Yet, what I want to say is that, two of the largest democracies on Earth, the U.S. and India, both have decided to pivot their investments aggressively on the infrastructure side. See every government has a five-year plan, in India we have a five-year expenditure plan and depending on the priorities and the cycle in which we are in, the government decides whether we want to invest in infrastructure aggressively or we want to invest with consumers directly, and that determines the spending pattern. As we have observed in the last six, eight months when the U.S., the new president came on board and likewise in India, both continue to say that for durability of our growth cycle, it is important that we invest capital prudently in the infrastructure space. Just to give you some data points, the U.S. on a $22-trillion size economy, has announced a $4-trillion investment plan between hard infrastructure and soft infrastructure. India on a $3-trillion size GDP has announced a $1.5-billion investment plan over the next five to six years. Now, of course, one can debate that—announcements are one part and the actual materialisation of that takes time, but these are very large numbers and this is giving a reasonable amount of confidence and hope that we will see more capital coming in this space and we will see more investments happening. If coupled with the right investment framework, this could be an interesting space to evaluate for the next five years but I would still not want to compare with the last cycle because those are very different days and that cycle started almost at 10 P/E multiple, we already today at 25-30 P/E multiple. So, both have a very different context.
Do you think there is reasonable comfort with the number that you're talking about and the focus towards job creation so on so forth, that there's a high probability that investing in this space could turn out to be beneficial? Similar to the last time or not, is different.
KALPEN PAREKH: I think it is a very valid point. I think we are optimistic, in fact, we have a fund called DSP Tiger which was very popular in those days and then it had a reasonably long patch of below average performance because the category itself struggled, but around 15 months back, we asked this question that irrespective of the category, what can we do to ensure that we have the best companies of that segment in the portfolio, and then contextualise it to the current cycle. So, in that cycle you had long gestation infrastructure projects which were getting most of the capital. Banks were expanding balance sheets, so banks were a large part of the portfolio, but we tweaked and we redesigned the fund completely and we repositioned and relaunched it in December last year, we will not make too much of noise around it because we want to ensure that performance stabilises and improves but we have redesigned the whole fund as a fund focused on engineering companies, on manufacturing companies, on industrials on companies which are automating oppressively on core sector. We've eliminated the lending part of the portfolio. In the old days the portfolio at 25% in corporate banks but we said that, let us keep this fund as a fund with low leverage. Basically most companies in the portfolio will have very low leverage and the moment you take away the leverage, the durability of the portfolio enhances. The risk of the portfolio comes down, it may compromise returns to some extent, but you don't have balance sheet risk, the moment leverage is killed. So, high ROE businesses, but mainly in these sectors, and there is a negative list of no IT stocks, no pharma stocks, no consumer stocks and no banking stocks. So, that's the way we've designed the fund and we'll be talking a lot more about it in times to come but that reflects our optimism, that this is a theme which merits meaningful focus. I’ll give just one more data point. In the last cycle the companies which are today in the portfolio from the segments or the sub-sectors, they contributed to around 65% of the index then. Today, the number has come down to 20. So, even the mainstream indices don't own these segments extensively. To give an example Tata Steel today—there is no steel stock in the Nifty index for example, whereas 50% of incremental revenue or profits in the next 12 months is coming from energy and metal stocks. So, I think things are changing. There is a debate whether this is going to last long or not but we are optimistic, and we are hopeful that there are opportunities in this space and we'll talk more about it.
Salonee, have you looked at some of the cyclical funds which have this infrastructure focus and are you guys going out and advising your clients to buy into any of them, why or why not?
SALONEE SANGHVI: As Kalpen mentioned, we have definitely looked at cyclicals. They are very highly correlated to economic growth so they deliver extremely good returns if the economy does well and perform poorly if the economy doesn't do as well. We've actually not seen cyclicals do much in the last 10 years since the capex cycle peaked in 2011. Currently with low interest rates or sufficient capital in the system and deleveraged corporate balance sheets, I feel that we're on the cusp of a large capex cycle which right now is currently driven predominantly by the government spending on infrastructure and another tailwind would be once the private sector steps in and the capex picks up there. We've also seen a large increase in commodity prices globally. That being said, a lot of large-cap and flexi-cap funds already has 15-25% exposure to cyclicals excluding financials. So, a separate fund for cyclicals may not be necessary for most investors.
I would recommend it for very aggressive investors who are okay with the risk and the volatility and are able to time it because timing is very important especially for cyclical funds. So, it could form a part of the investors’ satellite portfolio.
And what funds, Salonee? Can you give us a couple of names and they may not be from the DSP stable but if can you tell us one or two funds which you believe are good for people to invest into?
SALONEE SANGHVI: Actually the DSP Tiger is one of the funds that we look at in this sector. I won't speak about that since Kalpen has already spoken about that extensively, another fund that I like in the sector is the Invesco India Infra Fund, which was launched in 2007, and is managed by Neelesh Dhamnaskar. This basically delivered a CAGR of around 15% versus 11.5% in the category over the last five years and has a substantial holding of industrials in the portfolio.
Kalpen, a word on floater funds? They seem to be attracting fair bit of attention, fair bit of money. So, what are these and what is your opinion there?
KALPEN PAREKH: There is a category called floater, among many categories in the fixed income space, but our observation is that most of these are of low duration, six-month, one-year assets which mature. So, automatically as they mature, they can be reinvested back at the prevailing interest rate six months or one year down the line. So, they are not floater in design, but they end up being floating rate because the maturities are very short. So we launched a floating rate fund in March called the DSP Floater and we have seen early interest in that because on one hand, interest rates have come down, we've seen a very big cycle where the 10-year government bond peaked at 9.5% in 2013-14 and today is at roughly 6%. On the other hand, overnight rates are at 3-3.4%, money market rates are at 3.5-4%. So, we've seen a huge rate cycle globally as well as in India. On the other hand, all governments globally again as well as in India want to spend a lot of money and deficits are likely to be much higher than what we have seen in the past. So, if you map these two things together, there is a probability that in the next year or two, interest rates are higher than where they are today. Number one.
Number two, currently we are sitting on 11 lakh crore worth of daily liquidity in the banking system. Generally, if you take the last 15 years the first 10 or 12 years, India used to have neutral or negative liquidity in the banking system. The last two, three years because of demonetisation and then supporting growth during the Covid times, and to maintain adequate liquidity, we've had this surplus liquidity framework, but at some stage liquidity will start getting normalised. So, our expectation is that if you view the future one year down the line, not just today, there is a possibility that, not just liquidity will tighten but rates will start moving up, very low front-end part of the yield curve will start moving up, and even spreads will widen. You will be surprised to note that AAA bonds and the Government of India bond is more or less borrowing money at the same rates. Normally the spread is 75 basis point higher for corporate India because the credit spread will always be there but because of the surplus liquidity, the spreads have compressed. So, we thought of creating a contrarian product in a way where the portfolio buys a simple five-year Government of India bond for any state development bond, so it's a sovereign product, it has zero credit risk because we don't want to play the credit cycle right now. When spreads are virtually zero, there is no spread. So why take credit risk? It's a five-year government sovereign bond will automatically mature over the next five years and one year, two years down the line, it’s maturity would have come down further. On the other hand, we have designed an interest rate swap so we buy a two-year swap. It neutralises the duration so four year is the duration on the long side, and minus two from the soft side so the net duration is two years today. As we proceed into the next one year the net duration will come down to one year. So that's how we've designed this fund and there is a segment which says that we want to plan for the future cycle of interest rates likely to play out. We don't mind having a certain percentage of our portfolio in a product like this which is sovereign in nature where liquidity is not an issue. Remember, corporate bonds—the liquidity can dry out overnight when the cycle turns, when liquidity starts coming down, when the rate cycle turns. Even AAA bonds, sometimes have an impact cost. So, we've created a very conservative fund right now and the fund is around 2,000 crore in size. I wouldn't say that people are queuing up to invest in that but discerning investors are asking questions that if I want to hedge against the rising interest rate regime, one or two-three years down the line, if this rising inflation is permanent and if I want to hedge my fixed income portfolio then this can be a good product for that?
You are being conservative of course on that fund maybe compared to a few other houses, who might have their own version of a floater fund. So, the safety aspect is higher, the return aspect relatively might be lower but that's the game that you want to play?
KALPEN PAREKH: The whole idea is, in any product that we tend to launch, we always try to say that, let's not look at the scenario today let's try to see what could it be one year down the line, two-years down the line. So, when the risk manifests, this fund should give the right solution. It's like building an ark when it is sunny and not when it is raining.
Salonee, have you seen increased inquiries for floater funds at your end?
SALONEE SANGHVI: Actually, conceptually I really like floater funds because I think we're close to the bottom of the interest rate cycle and I see interest rate cycles also because of inflation pressure also going up, but I think a lot of times when there is a swap, the returns do not translate to the investor because when that is a swap, the increase in interest rate does not completely translate to the investor. So as of now we're not really looking at floater funds.
Kalpen you may have launched the Tiger Fund 15 months ago, it wasn't an old fund offer, now you have an old fund offer at hand as well. Tell us a bit about what came across this, both from a fund angle, and also from the branding angle because it was really interesting.
KALPEN PAREKH: To be honest, there was no thought of branding it differently or smart marketing intent. I'll tell you the genesis of this thought—we have this fund which was earlier called DSP Equity Fund and now the DSP Flexi-Cap Fund, it is a fund with a 24 years history, it is a point where I put my first investment in a DSP product, five years back. It is a very sensible fund which has generated 5-7% excess return over the benchmark over such a long-time horizon. Even in the last five years when there are debates of active passive, whether funds can generate alpha or not it has generated 200 to 300 basis point of Alpha over Nifty 500. It is diversified across sectors and market caps, it has a 12-page, transparent investment philosophy document which we have published and circulated. So, investors can ask or learn how do we think about portfolio construction and it has generated let’s say, 19% long-term CAGR. When I look at the number of investors who have stayed invested for 24 years, it is less than 19%. So, someone asked me this question that you speak so much about this fund but what have you done in terms of promoting in the existing old idea, if your focus is always going to be new ideas why will old ideas get justice? That was a very telling comment and that's where we as a team went back to say that this is a great fund. It has delivered on multiple aspects, why not just bring it back into focus internally as well as externally and then we were just debating how do we start talking about it and suddenly this word came out from nowhere that it is an old fund offer there is nothing new about it, there is no rocket science about it, it is a very simple idea, and we just want to do justice to it. That's how we started talking and communicating about it and with that, just a small tweak in focus, I'm happy to say that in the last 23 days since we launched the OFO, it’s not a NFO, it is an OFO. I'm not saying NFOs are bad because we will also be doing NFOs wherever we have product gaps so we will be coming up with many NFOs in times to come, but since we started talking about this product and its campaign, it is doing roughly four times more volumes than what it was doing otherwise. So, I think it's just a simple idea and I'm glad you asked this question and you gave me a compliment and it is an idea for a simple long-term, flexi-cap investing.
Kalpen ...right now the jury is split right down the middle when it comes to the performance relative return probabilities or possibilities of mid-caps and small-caps vis-à-vis large-caps. So, if flexi-caps and multi-caps were the answer, if when we were maybe a few 100 or a few 1,000 points lower, would it be a good idea spreading the bets wide or do you guys have the opinion that maybe there is safety in the larger numbers or the larger cap?
KALPEN PAREKH: I would just say that, and this would be my answer permanently that a flexi-cap fund, always, not because we are doing this OFO campaign right now, permanent a flexi-cap fund makes sense because it will always have a very disciplined ratio of 75 in large caps, 15 to 20 in mid caps and 5 to 10 in small caps. And more than the market cap, the design is about buying good companies. So, a good small-cap company is safer than a bad large-cap company is the belief that we've always had. Just to tell with more evidence of what I'm saying recently when I purchased the house I wanted to reduce my equity exposure. I have moved out of either a thematic fund or a market cap focused fund but not touched my flexi-cap exposure because this is something forever, because the fund manager will keep on navigating. For example in the last month we have reduced some exposure to small and mid cap where they've run up a lot in the flexi-cap portfolio but the rest of the portfolio, we still like these companies. These companies are still growing at 15-25% profit growth rate, their margins are expanding. So, there is no reason to get out of them, they may have some bit of volatility intermittently, but I think they're very comfortable with the category in itself.
Salonee, just a quick word on flexi-cap funds. Typically people say that if there is an existing proven investment fund around, don't go for newer names, any thoughts around this OFO?
SALONEE SANGHVI: I think I agree with Kalpen, I personally also prefer flexi-cap funds, or especially for conservative and balanced clients because they get the exposure of small and mid-cap without it being too large in exposure as the fund manager has the flexibility of moving into segments and sectors based on their thought process.
So, I think rather than selecting just a large cap, mid cap, small cap, we prefer flexi-cap funds for our clients. Only for aggressive clients would we look for individual small-caps to give them the added exposure.
I think it's a great idea that they've come out with an OFO for an existing fund because you also have a proven track record so you can see how the fund actually performs over various market cycles.
Have you tried to analyse that one in any fashion whatsoever or do you believe there are other flexi-cap fund which you like more?
SALONEE SANGHVI: I haven't analysed the DSP flexi-cap fund in a lot of detail. We've looked at some other flexi-caps in the sector.
Have you been able to look at the NFO from the SBI stable?
SALONEE SANGHVI: We have looked at the SPI Balanced Advantage Fund. It's basically a dynamic asset allocation fund that decides the allocation of debt and equity versus market conditions. My belief is that I would consider an NFO only if it adds a new category or a sector to the portfolio. So, I feel if one wants to invest in a balanced advantage fund, there are multiple options which have a track record across market cycles and in a balanced advantage fund, especially a dynamic asset allocation fund it's important to see how it is done across various market cycles. So, I would ideally look at investing in the existing options which have been around for a long time.
Are you at liberty to be able to tell us a couple of names of balanced advantage funds that you really like?
SALONEE SANGHVI: One of the balanced advantage funds that I like is the Edelweiss Balanced Advantage Fund, which is essentially a trend following fund, so it looks at moving averages and the trends to determine equity allocation. So, if the market is rallying if the market is going up, they'll actually add to the equity exposure, and if the market starts falling, they'll actually reduce exposure. What I like is that they actually rebalance it daily, so in case if they feel like say for example, March 2020 when the markets crashed the fund fell 16% because they took action very quickly. So, I feel in the balanced advantage category, this is one of the funds that I like.
A bunch of people want to make a beeline for international funds, and maybe diversification is a great idea and hence I request you to tell us a couple options on the international fund side, and what kind of investors can go for those funds?
SALONEE SANGHVI: I think international funds as you said useful for diversification, but from two perspectives. One is of course the geographic diversification and second is also the sector diversification. We have a lot of unicorns in India but there are a lot of sectors, which cannot participate in India via the public markets, like social media, technology or electric vehicles, e-commerce, healthcare etc. I think from that perspective that is a gap in most portfolios so I think it is good to invest internationally to fill that gap. If one is looking for one fund, I'd recommend the Motilal Oswal Nasdaq 100 Fund of Funds, which essentially mimics the Nasdaq 100 which basically includes the top 100 largest non-financial companies. Many of them household names like Amazon, Apple, Microsoft, Alphabet, Facebook Tesla etc. In fact, even if you look at from a diversification perspective, this has actually delivered a CAGR of 28% with a five-year period versus 15% for the BSP 500.
I think ETFs and fund of funds are great options as you begin to invest in international funds. We're also seeing launch of a lot of new funds on various geographies — China, Europe etc. — but I'd like to wait and watch on that before investing in them.
The fact that this Motilal Oswal Nasdaq has had a really good performance over the last 10 years since its launched, the erstwhile CEO who now currently is the CEO of Infosys was telling me about the kind of performance over 10 years for that. Is it past its prime or there is no way to say that?
SALONEE SANGHVI: I don't think it's past its prime, if you're looking from a longer-term perspective, if you're talking from maybe a one-year perspective, then yes definitely there could be some scope of correction, but if you're looking at a 5-10 plus year horizon, then, as I mentioned, there are a lot of sectors and companies, which we don't have access to and I think those are sectors of the future. So, that is something that you definitely would want to get exposure to.