When it comes to stock selection, Vetri Subramaniam prefers large-cap stocks. While acknowledging that large caps are not "cheap," the chief investment officer at UTI Asset Management Co. pointed out that they have come down from their earlier valuation peaks, making them a more attractive option for managing risk in the current environment.
Large caps provide a higher level of valuation comfort and greater stability compared to mid and small caps, which are currently trading at significant premiums to their long-term trends, he said.
He sees a better risk-return profile in stocks, which offer low volatility in the current market environment, stating that low volatility combined with momentum or alpha is a better bet than standalone alpha or momentum.
Subramaniam noted that momentum strategies often struggle during market inflection points. These phases, where market trends shift direction, can pose challenges for strategies that rely on the continuation of trends. He also emphasised that this is a time for managing risk rather than chasing returns.
Investment Strategy: Systematic Transfer Plans
For investors looking to navigate the volatility of the current market, Subramaniam recommended considering a Systematic Transfer Plan over a 6-12 month period. With the market showing significant fluctuations, STPs provide a disciplined, phased approach to investing that can help mitigate the impact of market timing risks and offer a smoother ride through potential market turbulence, Subramaniam said.
Finally, he stressed on the importance of focusing on companies with strong cash flows and solid balance sheets.
Watch The Conversation Here
Here Are The Excerpts
On a day when the markets are on an upswing. I know you will not talk about the day-to-day movements, and we're not expecting you to do that. But do you think that this is going to be at the start of a positive rally that can sustain for some time, or an opportunity to take profits for those who've been waiting to do so?
Vetri Subramaniam: There will be some days where the markets will be up and some days where it will be down, and all of that is part and parcel for any investor who's planning to be invested in equities in order to achieve their financial goals over five years, 10 years and 15 years. So I don't want to sweat it too much about whether the market is up or is it down today. That is as I said part and parcel.
I also wish I had the foresight to be able to tell you on a given day when the market is up, whether it's the start of something larger, or whether it's actually a break in the trend. But I figured many years ago, that wasn't really my core competence, so I don't try to do that and you know, when we manage money for investors, which is hopefully, you know, being invested to achieve their financial goals over a long period of time. Then, you know, these daily things, or is it up and is that a trend or not really material. So I'll just, you know, pass on that.
The UTI Momentum Fund. It's done phenomenally well in a market that's supported it in so many ways. As we go into a period where maybe most would argue that we borrowed returns from the future. The journey is not going to be one sided or one way. How would you build a portfolio now? Would it be value, would it be growth, would it be market gap centric, would it be theme specific? What are the building blocks as we look at it into the next few years? Let's start with momentum. Are you still constructive on the momentum as a theme?
Vetri Subramaniam: No, I think let's first tackle that point. I think momentum has had a solid run over the last three-odd years and to be fair, if you look at the academic data over the long term, if you look at momentums performance in India, as well as a factor over five years and 10 years, it's actually been one of the factors which stands out in terms of the Alpha it's been able to create, compared to the benchmark.
Having said that, when we look at the history of momentum, there are also phases where it tends to sort of underperform, and those tend to be brief periods where the market is going through some sort of inflection. So, you know, our view has been that this is a better time to manage risk rather than return, and therefore, one would perhaps be better off combining momentum with low volatility.
Actually, you know, you ask this question as well. We currently have a factor-based strategy called the Alpha low volatility, which actually combines these two factors into a single fund, and it actually gives you a much superior risk-adjusted return over the medium to long term. So that's you know, what my thought process will be. Today's market, maybe your alpha low vol, or a combination of momentum plus low vol is better than pure momentum.
Vetri, just coming back to the kind of inflows coming in, and it's domestic investors holding up the market, even while foreign investors have been looking at the door. What is the kind of interest coming in from investors, especially on the Mutual fund side or if you look at the SIP data? Do you think that Thematic funds are losing their sheen, there's going to be more focus on large caps. What are you liking right now? What is the strategy you are looking at?
Vetri Subramaniam: Sure, let me start with what I like and then we can go on to the other question you asked. So we're a lot more comfortable with large caps in the current environment. That's been our point of view pretty much from the start of the year, or maybe even before that, and that's essentially from the fact that there's a lot more valuation comfort we have in the large caps as compared to mid and small. Not to say that large caps are cheap at the recent low point for large caps, maybe last week, they had just about come down from being expensive into kissing the fair value zone, and therefore much better than mid and small caps, which are trading at a massive premium to their long term trajectory and unusually in the case of small caps trading, at premium to the large caps as well. So a lot more comfort in the large caps and just a small point to make here.
During the course of this month, when the markets were lower,. in fact, our asset allocation models actually lifted the equity weightage by about five to seven points in the strategies where we dynamically manage equity allocation, like the Balance Advantage and the Multi Asset Allocation Fund in response to the valuation. So that's the big picture in terms of valuation and what we prefer. Very quickly. I know we spend a lot of time talking about SIP inflows, and I think it's very satisfying, not just for us, but for the industry as a whole to see the kind of money flows which is coming through on a consistent basis from retail into SIPs.
But let's not only look at demand. Let's also look at supply. If you actually look at the numbers, year to date, the total buying by domestics plus FPI is more than matched by the supply coming via IPOs, FPOs, QIPs, promoter sell downs, PVC sell downs. So we can't look at this purely on the basis of, oh, there's so much demand. Please also note, there is a significant amount of supply coming through primary and secondary sales.
So I get your bias. Large cap looks a lot more attractive, the risk reward favourable. Beta may not be the best theme to play. We might be going to slow grinding for a couple of months in the markets. If one needs to allocate incremental capital to equity markets, what is your model telling you, what should the ideal time horizon of STPs or SIPs be? Should it be three months, should it be six months and I ask you this to get an understanding from you on where you think valuations are?
Vetri Subramaniam: So honestly, if you're doing SIP, I would say the timeline for doing SIPs is almost perpetual through your lifetime, so that really doesn't matter. But just going back to the allocation point of view, we would actually say, and again, I'm basing this on our asset allocation model, which powers schemes which carry out asset allocation decisions.
If you think about the range in which they can invest in equity, which is somewhere between 40% and 80%, right now the equity allocation is just about 52%. So it's even below the halfway mark, which, let's say roughly, maybe at about 60%. So that tells you what we think about, in a sense, from a valuation point of view, what we think about the attractiveness of equity.
When it comes to large caps, what we have been telling people is to consider investing through STPs, maybe over a six to 12 month period, so that we are able to get any benefit of the volatility and hopefully some cheaper valuations, down the road.
Quick word on Debt. There's so much talk and anticipation of a rate cut, increase in government spending, inflation is a worry, GDP data is expected. What are your readings of the current macros? Will we get a rate cut in Feb. and as that is your backdrop, what are you doing in terms of your debt portfolio? Are you buying into corporate credit? Are you investing in duration? What would you recommend to the investors who are watching this interview to do at this stage, because there is that potential to maybe earn an early double digit if we do get the rate cut, as early as Feb.?
Vetri Subramaniam: That's a tough one. Our call was that there could be maybe two rate cuts at best. We didn't expect this to be a very deep rate cycle in terms of the downward move. But, you know, February now appears to be the earliest when you can hope for a rate cut given the background of the inflation number that we just saw. Mind you, the RBI already knew that this was going to happen. This was sort of in their projections as well. I do think there is a case for a Feb. rate cut and then maybe one somewhere down below three to four months after that.
Remember, very crucially, core inflation in India has been running below 4% for quite some time. Now clearly the central bank governor has spoken about the fact that their interest rate policies will be led by headline and not by core. But I do think that, you know, even the headline will give them some room to start cutting rates as you go into the 2025 Calendar. So there would be one to two rate cuts. We don't think there is too much scope at the complete long end of the curve.
But you know, let's say a 2.5 to 3-year duration portfolio level yields of about 7.5, seven seventy, there will be some scope for capital appreciation as you roll down the curve that could get you into slightly less than double digit returns potentially, if you think about the risk involved over there. So duration two and a half to three years is where we think is the sweet spot. Corporate spends are not very elevated, so you can look to stick with largely sovereign play.
So it's one very last quick question, one sector or stock, you won't tell me stock, but that you completely churned out of in the last month and a half of trouble times?
Vetri Subramaniam: So we don't tend to do that, because each of our strategies is managed with its own guardwinds and its own discipline. So there is no one size fits all philosophy which goes across strategies in terms of churning out sectors. Our portfolio allocations will be very different across sectors if you look around that, but you know, let me just put it as a message to my entire fund management team.
The one thing we've been telling people is this is a market in which you need to be more careful about stocks which are backed only by narrative, which are backed only by easy access to capital and secondly, cash flow and balance sheet in the current environment are more important than the narratives, because into a slowdown, if it persists for slightly longer than expected, those are the vulnerabilities where stock valuations will come under greater threat.
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