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'We aim to organically grow our AUM base across T-15, B-15 locations in FY18'
The markets have been driven by strong fund flows both from the FII and domestic investors. Increase in domestic flows from retail investors is encouraging as it broadens market participation.
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Lalit Vij, Managing Director – Asset Management Company, Principal Pnb Asset Management Company speaks about his take on earnings, on whether he sees the industry’s rapid growth as a risk, and on his AMC’s competitive strategy for the current fiscal.
What are the key risks to the equity markets at this stage? Do you think the markets are over optimistically factoring in very high earnings growth?
The markets have been driven by strong fund flows both from the FII and domestic investors. Increase in domestic flows from retail investors investing directly or through MF route is encouraging as it broadens market participation that brings in a level of stability to the markets.
Equity markets are trading at expensive valuations compared to historical averages, though they are far from being in bubble territory. In terms of sources of uncertainty in the near term, there could be teething issues with the implementation of the GST as dealers destock ahead of GST roll out, which may impact revenue estimates.
Secondly, while the rains are forecast to be in line with long period averages, any variability could impact the economy, especially in parts of South India which have not had good rains in the past couple of years.
Thirdly, FII flows could be susceptible to global events in case the environment turns to a ‘risk off’ mode. With regard to earnings, volumes and price realizations most sectors have stabilized with most of the results that have been declared for the fourth quarter having either met expectations or marginally exceeded them. We are currently estimating earnings for FY 18 to grow at about 15% over FY 17.
The MF industry’s AUM grew 42% last year. If this pace continues unabated, do you foresee froth building up over the next few months? Is this a risk to the industry?
Yes, the MF industry has had a good run last 5 years and FY 16-17 has been particularly good for the industry. It is encouraging to see growth in retail AUM to 50% of the total industry AUM with a broad retail investor base of 55 Mn.
This high growth of retail participation in MF will continue for next 5 years, as retail investors gradually shift their savings and investments from low yielding Cash, Bank Fixed deposits to market linked financial assets as reward and return ratio between broad asset classes is changing.
With a favorable demographic, high household savings and increased financial literacy there is a huge headroom for growth of the industry panning the next decade.
Although, there is a bit of clustering that is happening on account of high inflows in relatively short period of time, experienced investment managers backed with disciplined research focused yet benchmark aware approach to investing are well positioned to continue generating alpha over benchmarks.
Please tell us something about some of the Investor Awareness initiatives undertaken by Principal last year.
In India the penetration of mutual funds is still very low and largely concentrated to a few cities only. We at Principal Mutual Fund believe that educating and creating awareness about Mutual Funds across age groups is necessary and thus have taken following two major initiatives last year:-
Youth Money Olympiad: In association with Money-Wizards, we carry out an exclusive program for students to create awareness on mutual funds. This is an ongoing event in which students are trained in a workshop, given study material and they participate in a quiz. Winners are chosen at college & national level and are felicitated. The program for 2016-17 concluded recently and we’ve managed to reach out to 15000 students over 200 colleges across India.
ELSS Campaign: Tax Savings is one of the major reason why people invest in Mutual Funds and thus we did a campaign to create awareness about Equity Linked Savings Scheme (ELSS) – A type of Mutual fund that qualifies for Tax deductions under Sec 80C of Income Tax. The campaign targeted at age groups between 27-45 years, was executed online & offline. For online we created a microsite www.savetaxwithpride.com which was promoted and for offline we partnered with crosswords wherein their walk-in customers were educated and informed. Through this campaign we managed to reach out to over 1 million audience with over 2.5 Lac visits to the microsite.
What’s your competitive strategy for the current fiscal? Do you plan to launch any NFO’s this year?
At Principal, we bring a disciplined research focused yet benchmark aware approach to equity investing that focuses mainly on sustainable alpha generation through bottom up stock selection over market cycles.
The India team follows the overall framework of “Growth at a Reasonable Price" by focusing on research led attractive bottom–up stock opportunities across a range of sectors and industries, focusing on companies with improving business fundamentals, low relative valuations and potential catalysts for re-ratings on the upside, with controlled reasonable portfolio turnover levels and high portfolio active share.
On fixed income side, the team again employs a disciplined research led approach which focuses on a study of macroeconomic parameters to identify where opportunities could lie across the yield curve and in which market segment. This is combined with a robust in house credit analysis process. The aim is to generate good total return across the rate and credit cycle, by tactically managing duration and credit exposure across key funds.
We aim to organically grow our AUM base across T-15 and B-15 locations through our distribution partners in FY 18. Our proposition is to offer a tight line-up of “true to label” select Equity, Hybrid and Debt funds for retail, mass affluent and HNI investors for various wealth creation and wealth preservation goals.
We will continue engaging with our distribution partners to evaluate need of additional products including global products to meet their client needs.