Stock market prices are ahead of value, and that’s a risk: DSP MF CEO Someone who is only extrapolating the past 3-5 year returns will probably be disappointed, Kalpen Parekh of DSP Mutual Fund tells Sanket Dhanorkar
Investors who are only extrapolating the past 3-5 year returns will probably bedisappointed, Kalpen Parekh, MD and CEO, DSP Mutual Fund, tells Sanket Dhanorkar in an interview.
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DSP AMC has been consistently messaging about market excesses before the correction set in. What convinces you?
We are not saying that the market is peaking, because that means that we can predict the market, which we can’t. We have been saying that the price of the market is not in line with the value of the market. Our first signal was when revenue growth for the past 7-8 months started showing up in single digits, but profit growth rates were still 16-18% owing to margin expansion. Our thesis is that margin expansion is always mean-reverting. It cannot be secular. Eventually it should normalise. Hence, we have been saying markets are a bit expensive, given the growth rates. That reflects in the choice of our product launches or how we guide investors.
Are investors building in very high expectations for the future?
A lot of money has come in the last three-five years. The gratification has come immediately. So the expectation is that every year the market should continue to rise But the nature of the market is to fluctuate. Investors expect only the upside fluctuation and don’t acknowledge that the other side of the coin may prevail sometimes. The long term range of return for the market is generally closer to the return on equity or the profit growth rate of that market. Today we are running at twice that. At some point it will normalise. An investor who acknowledges that will not be disappointed. Someone who is only extrapolating the last three-five year returns will probably be disappointed.
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Markets are looking at US President Donald Trump with a sense of uncertainty. Do you also see him as a wild card who can upset the markets calculations?
All we know is that there will be a wide range of decisions he could take and the outcomes that can come out of it. That will keep the market on its toes. That uncertainty will remain and also reflects in various asset classes around the world. It is early to predict what will happen. Eventually, what will matter is profitability and what price you pay as an investor. There will be higher volatility because we are already sitting on higher valuations and then there is this uncertainty in terms of the world order, geopolitics, trade wars, etc. These can have certain outcomes which you have not seen in the last 10-20 years which can lead to higher volatility. We are cognizant of that but we will wait and watch.
How are you navigating this scenario?
We continue to run fully bottom-up, diversified portfolios relying on our quantitative filters. So that process does not change. In some funds, we do have slightly cautious positioning in terms of 3-4% extra cash levels. Normally, we keep around 4% cash. We have 8% cash positions in a few funds. In some funds where we have the mandate to hedge, our portfolios are fully hedged.
Is a multi-asset strategy the ideal approach in this environment?
Each individual will have a different time horizon of investing, and at different stage of their journey. My preferred recommendation generally is to harness automated asset allocation funds, whether it is multi-asset allocation or dynamic asset allocation or even a simple hybrid fund. If equities were below fair value, the recommendation would have been a bit more progressive. But because equities are above fair value, we are suggesting a cautious stance.
What will DSP Business Cycles Fund do differently than existing funds?
We have had a decent track record in the past 7-8 years of introducing funds at cyclical lows, especially thematic funds. Generally, our thematic funds are launched when the past one-year, three-year, five-year returns are poor. We avoid launching funds when it is easy to sell, but where future returns may not look that good. So our investors have had good experience whenever we’ve done thematic launches. But these are aggressive themes; they are not diversified. They need a reasonable amount of timing at both entry and exit. Not all investors may get this timing right. So, the idea is to weave all of these into a single strategy. The aim is to identify them early, take full advantage of the uptick and then move to another theme where we find value emerging. It is more nuanced than a traditional flexi-cap fund.
What role do you see factor funds playing going forward?
Factor funds are simply one lens of fundamental investing. At DSP Mutual Fund, most fund managers prefer high RoE businesses, reflecting quality as a factor. Most fund managers from the industry prefer companies growing at two times of GDP growth rate, highlighting growth as a factor. So, all our active funds are also essentially quality and growth factor funds. I feel all active investing also respects some or the other factor, albeit with a bit more flexibility. Pure factor investing is more well defined upfront with tight guardrails. A factor fund gives a slightly higher sense of empowerment to the investor to choose one style over the other. But there will be good times and bad times for each type of strategy. Often, the returns may have already played out. Even quality can go through five years of underperformance if the stocks have become very expensive. Generally, we launch strategies with poor recent returns so that the future experience for the investor is better.
The Author is Kalpen Parekh MD and CEO, DSP Mutual Fund
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This story originally appeared on: India Times - Author:Faqs of Insurances
