Sampath Reddy, chief investment officer (CIO), Bajaj Allianz Life Insurance Company, believes that the company’s investment philosophy has helped it in protecting downside risk, on a relative basis, and capture market upside reasonably well. Excerpts from an interview:
What is your outlook for markets in 2019?
Earnings growth has been recovering (albeit, slightly below expectations), but we expect it to accelerate from 2HFY19 onwards, and this should be the key driver for markets in 2019. Earnings growth over the past few years was primarily driven by domestic consumption sectors. But we expect that growth will be more broad-based in 2019, and also that the capex cycle (which has been a drag earlier) is now bottoming out, and will see a gradual recovery in FY20.
From a market cap perspective, we have been preferring the large-cap segment since the beginning of 2018, on a relative valuation basis. Although we still like the large-cap segment from a risk-reward perspective; with the correction in the small/mid-cap stocks there are some good selective bottom-up opportunities also emerging in the mid and small cap segment.
What are the sectors which, according to you, may do well this year?
We continue to like well-run private sector banks and NBFCs due to their good asset quality and healthy credit growth.
Pharma sector, which was struggling due to USFDA issues and weak pricing for generics, seems to have bottomed out. We are incrementally turning positive on capital goods, on expectations of a capex turnaround — as the industry capacity utilisation levels are inching towards optimal. We have also been liking IT services sector for its attractive valuation.
What should be the ideal portfolio contribution for investors in such a challenging scenario?
Other than age of the investor, two other important parameters for deciding asset allocation for an investor would be ‘investment horizon’ and ‘risk appetite.’ If the investor has a longer investment horizon and a reasonably good risk appetite, then they can consider a higher allocation to equities. Equities has been one of the top performing asset classes over the long term and helped in wealth creation for investors, even though they come with intermittent volatility.
We feel that that investor should follow a goal-based approach for asset allocation.
If the horizon for the investment goal is long, then they can start off with bulk or higher allocation to equities, and gradually tone down equity allocation as they approach the maturity period of achieving the goal. Also, as the investor approaches maturity of the goal or gets older, preservation of the wealth created becomes more important — so he/she should reduce allocation to equity and increase allocation to debt.
What will be the outlook for debt funds for 2019?
With a sharp fall in bond yields over the past few months, we feel that large part of the rally in debt markets is behind us now. We expect bond yields to be range-bound, and data-dependant, so investors in debt funds can expect steady returns in 2019. We are presently positive on short to medium term part of the yield curve.
Why should an investor look at long-term investment such as ULIPs for wealth creation?
Firstly, with the introduction of new-age ULIPs, they have become a very competitive savings/investment vehicle, with an added advantage of life cover. Second, ULIPs being a long-term investment product (along with life cover), enjoy various tax advantages. This further helps increase the net return in the hands of the investor — as compared to other savings and investment vehicles. Third, ULIP is a good avenue for wealth creation over the long term, being a long term investment product. Historical data shows that longer the investment period in equities, lower the volatility in returns and chances of any negative returns, and also--equity is among the top performing asset classes over the long term, managing to beating inflation.
As per a ratings agency, most of your funds have been rated as five star?
We focus on growth-at-a-reasonable-price investment philosophy. With ULIP being a long-term product, we also have a long-term orientation in our investment approach. We focus on investing in high quality companies with good growth potential over the long-term, and do not give much emphasis to short term volatility in share prices. We have invested in good research team and tools and follow a robust bottom-up research process for our investments. Typically, we look for companies with a strong competitive advantage in terms of brand, distribution reach, cost advantage and barriers to entry, along with good and competent management. Some of the key metrics that we use to identify businesses are higher ROE / ROCE, free cash flow, moderate leverage (debt), earnings growth visibility, and attractive valuation.
