- Why has Quant ESG Equity Fund outperformed?
- Which thematic fund should you invest in?
That and more on this edition of 'The Mutual Fund Show' with Alex Mathew. #NDTVProfitLive
- Which thematic fund should you invest in?
That and more on this edition of 'The Mutual Fund Show' with Alex Mathew. #NDTVProfitLive
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TVTranscript
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00:33 - Hi, thanks so much for joining in.
00:59 You're watching the Mutual Fund Show on NETV Profit,
01:02 and my name is Alex Mathew.
01:03 Now, this show aims to get you actionable insight
01:06 on everything related to mutual fund schemes,
01:09 whether it is on the fixed income side,
01:11 that is investing in everything from guilt funds
01:14 to liquid funds, to investing into equity funds.
01:18 And we discuss all the categories
01:20 within the equity category as well.
01:22 Today, we'd like to focus on thematic or sectoral funds.
01:26 And this is something that gets a lot of attention.
01:29 There is a significant amount of money
01:32 that the industry is handling within this category as well.
01:35 But there are several options within this.
01:37 And the question is, how do you allot money
01:41 or allocate money to one or multiple themes?
01:45 Now, we are going to be discussing one scheme
01:48 in particular at the start,
01:49 and that is in fact, the Quant ESG India
01:53 or the Quant ESG Equity Fund.
01:56 Because if you look at the last three years,
01:59 this is a fund that has outperformed by a very large margin.
02:04 I'm talking about CAGR gains here.
02:06 The question is, why has it outperformed?
02:09 And why have ESG funds by and large,
02:13 not really caught the attention of Indian investors?
02:16 And we'll also talk about thematic
02:17 and sectoral funds at large.
02:19 To talk about this, I've got Raghavendra Nath,
02:22 who's the MD of Ladder Up Wealth Management,
02:25 and also Vishal Dhawan, who's the founder
02:27 and chief executive officer of Plan Ahead Wealth Advisors.
02:30 Thank you so much to the both of you
02:32 for joining in and for speaking to us.
02:34 Let's start with a conversation, as I mentioned,
02:37 about the Quant ESG Equity Fund.
02:42 38 or 37 odd percent, if I'm not mistaken, of returns,
02:47 38.7% since inception,
02:50 over 32% over the last three years, CAGR.
02:54 Raghavendra, what explains this?
02:57 - So Alex, first of all, while the name suggests ESG,
03:04 it's a diversified fund, so it can invest into small cap,
03:08 mid caps, and large caps.
03:10 And when I was looking at the portfolio of Quant ESG,
03:14 I could see that almost 45% investments
03:18 have been in small cap and mid cap stocks,
03:21 and which has actually rallied quite a bit
03:24 in the last nine, 10 months or so.
03:27 And even if you look at individual stock exposures,
03:31 things like Reliance Industries,
03:33 which is the highest exposure in Quant ESG,
03:36 or stocks like Sun Pharma and Jindal Steel,
03:41 all these companies have benefited for a variety of reasons
03:44 over the last three years,
03:45 and that actually accounts for the performance.
03:49 So while ESG is the broader theme,
03:51 and I'm sure the fund will have around 50, 60% stocks,
03:55 which are focused on ESG,
03:57 but the larger reason for outperformance
03:59 has been the sectoral place,
04:01 as well as the stock level place in the fund.
04:04 - Okay, I also want your view on this, Vishal,
04:07 because Quant has a strategy
04:10 that I think a lot of people have spoken about.
04:12 It usually involves a significant amount of churn,
04:15 and that has helped them to beat the market,
04:18 beat the peers also in quite a few categories.
04:22 What is your reading of this particular scheme though?
04:25 - So I think there are a few things
04:27 that clearly have helped this.
04:29 One is, of course, the whole active stock selection
04:32 and sectoral selection that they have done.
04:35 So if you look at banking, pharma, commodities,
04:38 three of these sectors have been big beneficiaries.
04:42 But I also think there's a little bit of timing benefit
04:44 that they've got,
04:45 especially when you look at the since inception data,
04:48 because they started off in May, 2020.
04:51 This was just after the sharp COVID correction
04:54 that had happened.
04:55 And therefore, when you look at the data
04:58 from a since inception perspective,
04:59 part of it is coming from there.
05:02 And I would therefore say that,
05:05 we need to separate out the part of the gains
05:08 that have come from what has worked well for them,
05:11 which is the sectors that we spoke about.
05:14 And the part which comes from since inception,
05:16 just because they got their timing a little right
05:19 in terms of what was happening.
05:21 Otherwise in general, clearly, like you mentioned,
05:25 ESG investing has not really taken off in India.
05:28 And part of that has been because
05:29 there's been this whole global concern around greenwashing
05:34 and what it really means.
05:36 And how many of these funds are True Blue ESG funds
05:40 in the way that one would like to define them.
05:42 - Interesting.
05:43 Let's talk about that before we head into
05:45 a more detailed on sectoral and thematic.
05:47 Then Raghavendra, I want to come to you on this one.
05:50 Why has, so some part of it, of course,
05:52 Vishal has just spoken about,
05:54 but ESG has not taken off.
05:56 And particularly from the institutional perspective,
05:58 I think there's not much holding.
06:00 Is that the reason?
06:02 - Yeah, so globally, when you look at ESG as a team,
06:06 or majority institution investors have been the one
06:10 which have been investing in ESG primarily.
06:13 And retail generally, is more concerned with the outcome.
06:18 What kind of returns are they going to get?
06:20 They are just not too much bothered
06:22 about where the fund is going to invest.
06:25 Whereas institution investors are sensitive about,
06:28 global warming issues or polluting issues and all that.
06:32 And therefore many institutions in fact,
06:34 have a mandate not to go beyond companies
06:37 which are score high on ESG.
06:39 For instance, Norwegian fund
06:42 is one of the largest funds in the world.
06:45 And they invest only in ESG teams now.
06:48 So in India, because institutional participation
06:51 in the mutual fund industry is not very high.
06:53 Most of the money which their equity funds receive
06:56 are from retail investors, individual investors I mean.
06:59 ESG team has not been such a big focus.
07:03 - Okay, now I do want to talk about
07:06 just the last three years and what I kind of did
07:09 and the reason why I sent this topic to you
07:13 is because I was curious about the performers
07:15 over the last three years
07:17 and also over the last five years, right?
07:20 And some of these schemes of course,
07:21 are much older than that.
07:23 But the first filter that I put was a three year period.
07:26 And those funds that have at least a three year period,
07:30 I've looked at since inception.
07:32 And as Vishal pointed out,
07:35 the Quant ESG scheme is one that launched just after COVID.
07:39 And so the start point was quite beneficial.
07:41 The other schemes that have done well
07:43 are IPRU commodities, ABSL PSU equity, DSP healthcare.
07:48 And there is also an IPRU business cycle fund
07:52 that has done well.
07:53 I'm actually curious about why you think these schemes
07:57 have done well as well.
07:58 And I'm pretty sure it's difficult to look at each of these
08:01 and delve into portfolio strategies.
08:03 But by and large, do any stand out to you?
08:05 Vishal, I'll come to you first.
08:07 - So clearly I think one of the themes,
08:12 and I think while constructing mutual fund portfolios,
08:15 it's obviously very critical to think about sustainability
08:18 when you're doing thematic investing,
08:20 unless you're looking at it as a very sort of tactical play
08:25 and just deciding that I'm gonna move out
08:28 and come back in and do that again and again
08:30 across sectors and teams as time passes.
08:32 But assuming that you're a reasonably long-term investor,
08:35 I think sustainability of teams is something
08:37 that you need to think about very, very carefully.
08:40 And that's where I believe something like healthcare,
08:43 for example, is a theme that can be taken advantage of
08:48 over periods of time, even if it's had a great performance
08:53 in this narrower timeframe that we're looking at.
08:56 In contrast, something like commodities
08:59 or something like PSUs will tend to be much more cyclical
09:04 in terms of how they behave.
09:06 And investors have to have the ability
09:08 to deal with large drawdowns,
09:11 because some of the thesis around why you're investing
09:15 and buying into these teams may not be sustainable
09:18 over longer periods.
09:19 I think PSUs are a great example of this,
09:21 where there's been a lot of excitement
09:23 in the more recent past about PSUs
09:27 and the performance obviously always leads
09:30 to some of this conversation.
09:32 But fundamentally, in a business,
09:36 you do want the majority shareholder
09:40 and the minority shareholders to be aligned
09:43 in terms of thought process.
09:45 And if your majority shareholder requires dividend
09:48 and capital most of the time,
09:52 while your minority shareholders are okay
09:54 with you reinvesting back into the business
09:56 if the opportunity provides,
09:59 we think there's a fundamental disconnect between the two.
10:01 And therefore, I think one needs to break up
10:03 the performance into sustainable
10:05 versus possibly just shorter term teams
10:08 which may not play out over longer periods of time.
10:10 - Absolutely.
10:11 And before we get into some more details,
10:14 and I would like to speak to you about infra as a theme,
10:17 about banking and finance as well.
10:18 But before we get into that,
10:20 I also want to talk about concentration,
10:22 because we were discussing the portfolio
10:24 of quant ESG equity,
10:28 and nearly 20% is in reliance industries
10:31 as well as geo financial services.
10:33 And I'm trying to understand also the selection,
10:37 of course, perhaps we can get the fund manager on
10:40 to try and understand how this fits into ESG.
10:43 But what do you think about concentration
10:45 when it comes to these sectoral and thematic players?
10:48 I'll come to you on this one, Raghavendra.
10:51 - So geo financial, which is,
10:54 a pure play financial services business can fall in ESG.
10:59 Most banking and financial services,
11:01 because they have nothing to do with environment
11:03 or social issues, generally should fall into ESG.
11:08 So geo will definitely be,
11:11 but reliance considering a large part of their revenues
11:15 still come from petrochemicals business,
11:18 which is one of the fossil fuels is,
11:22 most of the world wants to move away from fossil fuels
11:26 and move towards green energy.
11:28 Definitely that doesn't fall in the ESG team as such,
11:33 other than those two components,
11:35 which are the telecom and retail.
11:36 So probably fund manager is,
11:39 because they are those two other components,
11:41 which are also now significant part of reliance industries,
11:44 has taken, has chosen to invest in reliance
11:46 in the ESG fund.
11:49 But yes, concentration is always a risk in any mutual fund.
11:53 And we have seen in the past when things don't go well,
11:57 the drawdowns can actually kind of damage clients' returns.
12:02 But, that's obviously a fund manager's call
12:05 in terms of what is he thinking about next one or two years
12:08 or three years for these stocks.
12:11 Geo probably, still the reason for investing in geo
12:15 probably could be because it's,
12:18 in comparison to other NBFC plays that we have,
12:21 like Bajaj Finance,
12:23 geo is still a little undervalued.
12:25 And generally when you think about reliance as a group,
12:29 you think about disruption,
12:31 what they have done in retail or telecom.
12:34 And therefore people are expecting
12:35 that they may do some bit of disruption
12:37 in the financial sector as well.
12:39 Though the strategy is still not very clear to the market.
12:42 - Okay, a quick view on the scheme then.
12:45 And if you have people that are contemplating investing in it,
12:48 what should they bear in mind?
12:49 And then I'll come to Vishal in the same question.
12:52 - I think, rather than investing in teams like ESG
12:57 where there are not enough stocks
13:01 or enough kind of things available.
13:05 India, most of the companies in India
13:07 don't even basically secure ESG score for instance.
13:11 I think it's better to invest in two other things.
13:14 - Okay, Vishal, any thoughts here?
13:15 - So I echo Raghavendra's thoughts here.
13:20 I think, buying thematic funds on past performance,
13:25 I think it's a very risky strategy
13:27 because what you could be doing is entering a team
13:30 at exactly the wrong time
13:32 when you're making that decision.
13:34 Whereas, you should actually have entered that
13:36 maybe in the past,
13:38 which is what is reflecting that strong performance.
13:40 - Good point.
13:41 I still do wanna talk about a couple of sectoral plays
13:45 after this next break that we have to take.
13:48 So do stay with me gentlemen and viewers.
13:50 We'll be back and we'll be talking about teams
13:52 like infra and power,
13:54 as well as the banking and IT sector funds.
13:58 So do stay tuned.
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14:17 So if you're new to the program,
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14:20 We're gonna be talking about a couple of things.
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17:09 Welcome back.
17:10 You're watching the Mutual Fund Show.
17:12 And we're having a conversation about
17:14 sectoral and thematic funds.
17:16 On this conversation, I've got Raghvendra Nath as well as
17:19 Vishal Dhawan.
17:20 Now, we have spoken about the Quant ESG Equity
17:22 Fund and a few other sector themes as well.
17:26 But I do want to talk, gentlemen,
17:28 about infra and power because for obvious reasons,
17:31 these schemes have outperformed over the last year
17:34 in particular.
17:35 And if I look at, therefore, the last five years,
17:39 then the first few schemes that have performed on a CAGR basis
17:44 over the last five years are Quant Infra Fund.
17:46 You have Bank of India Manufacturing and Infra Fund.
17:50 You have ICICI Approved Infra Fund.
17:52 You have Invesco India Infra Fund.
17:55 You have Nippon India Power and Infra Fund.
17:58 So the first five are from the infraspace.
18:01 The question is, does that carry forward as well?
18:06 And investors that are holding on to this,
18:09 how do they approach it?
18:10 Because usually, a sectoral bet is a tactical allocation.
18:15 Do you take money off the table as well?
18:17 Vishal, first you.
18:20 So I think the interesting part about infrastructure
18:22 is that a lot of investors have also had not so good experiences
18:27 in the past.
18:27 And you would recollect between 2006 and 2008,
18:32 there was a frenzy around infrastructure funds.
18:35 And a lot of them then never ended up making money
18:38 for many years after that.
18:40 So I think for investors who are experienced
18:42 in the financial markets in India,
18:45 this is at the back of their mind as well.
18:47 That in the past, it's been helpful for me
18:50 to take my money off the table if things
18:52 get too exciting or too hard.
18:56 Now in order to answer this question well,
18:58 it's important to look at the category of infrastructure
19:01 funds.
19:01 So there are basically two types.
19:03 One is what is diversified infrastructure funds, which
19:06 include the infrastructure sectors,
19:11 but also include financials of infrastructure.
19:16 And clearly, those which are the core infrastructure
19:22 industries-- industrials, materials, utilities,
19:24 et cetera-- those areas have been very, very benefited
19:28 in the last year or so.
19:30 While what has happened is over the last five years,
19:32 the performance has been fairly broad-based,
19:35 whether you bought a diversified infrastructure fund
19:37 or a core infrastructure fund.
19:40 So the way to think about it is, what
19:42 do I want to participate in?
19:43 If your intent is to participate in infrastructure
19:47 as you understand it, x the financials of that,
19:50 then you'd probably go to an infrastructure--
19:53 core infrastructure fund.
19:54 Now once you've made that decision,
19:57 the question is, how do I do this?
20:00 Because I've made so much money over the last five years.
20:02 There's obviously been a reason for it.
20:04 You had COVID.
20:07 The way spending needed to happen
20:08 is it needed to get spurred through the government.
20:11 It's private sector spending is only just starting to pick up.
20:15 So there is a lot of history to this, which one keeps in mind.
20:18 And therefore, I would tend to believe that going forward,
20:22 because valuations in this space are very expensive.
20:25 You would want to be careful about adding more money
20:28 to infrastructure funds just on the back of the last five years
20:31 performance.
20:32 If at all you want to do it, you'd
20:34 want to go to an SIP and really have a longer-term horizon.
20:37 Think that infrastructure will play out
20:39 over a period of time.
20:40 And I will participate in that story,
20:42 though there will be these downs that
20:44 will accompany that as well.
20:45 OK.
20:46 And we'll talk about how much of your portfolio
20:48 should ideally go into these in just a bit.
20:51 Before we do, Raghavendra, I'm curious,
20:53 do you also agree with this?
20:55 Incremental money, be a little careful.
20:58 Some of these schemes are red hot,
20:59 or rather the underlying is red hot.
21:01 And an extension to that, one theme
21:04 that is relatively underperformed, or rather two,
21:08 is IT as well as banking in the recent past.
21:12 So if you are looking at a tactical bet,
21:15 then should you look at these options?
21:18 Yes, so I think I agree completely
21:21 with Vishal, and generally when you see returns which are,
21:26 let's say, three-year return and five-year returns,
21:28 when three-year returns are 30% CAGR,
21:31 and five-year returns are 20% CAGR,
21:32 that's, of course, not the normal.
21:35 And therefore, there has to be some adjustment which
21:38 has to be done by the market.
21:39 Because ultimately, in the longer term,
21:42 and that's what we have seen always,
21:43 whenever you look at a little longish period,
21:45 let's say 10 years or 15 years, the earnings growth
21:49 is going to get reflected in the share price.
21:52 And generally, for infrastructure companies
21:54 which are large, they have leveraged balance sheets,
21:58 they are a large dependence on government expenditure
22:01 for their growth.
22:04 And therefore, if the government slows down
22:06 the infrastructure spending, the companies also basically
22:09 will face the consequences.
22:11 When you're looking at infra as a theme,
22:13 you need to keep that in mind, that the last five years is not
22:17 the normal returns.
22:18 The normal returns could be more in line with maybe 12% to 14%,
22:23 15%, and not 20%, 30% that we have seen.
22:27 And therefore, it's good to be cautious right now,
22:31 because the markets have been in a kind of a frenzy.
22:34 As far as the other two sectors that you mentioned,
22:38 banking and IT, yes, of course, banking sector
22:42 during this last one, one and a half year
22:44 has not done as well as some of the other segments
22:50 of the markets.
22:51 And when we look at the valuations of the banking
22:54 sector in general, if you look at, let's say,
22:57 price to book, which is a common measure which is used
23:00 to basically evaluate banks, most of the banks other than ICICI
23:05 are quoting at under three times.
23:07 And therefore, there is a room for some amount
23:10 of enhancement in valuations.
23:13 Once the normalcy kind of returns.
23:17 So banking as a theme in any case
23:19 is a very long-term theme in India.
23:20 India is a developing economy.
23:23 We are expected to grow at 7% real rate of growth, 11%,
23:27 12% nominal rate of growth.
23:29 And banking generally will basically
23:31 be one of the drivers of that growth.
23:34 And as the retail consumption grows,
23:37 the credit space in any case on that side
23:39 will also kind of continue to do well.
23:41 So banking as a sector has a very, very long legs.
23:46 And therefore, if somebody wants to basically be exposed
23:50 to banking with a mindset of remaining
23:52 invested for 8 to 10 years, it's a good thing to do.
23:55 OK.
23:56 By the way, viewers, take a look at the bottom of your screen.
24:00 You will see that number.
24:01 If you've got a specific question on anything
24:04 that we're discussing right now or, in fact, anything related
24:08 to mutual funds, then don't hesitate to write to us
24:10 and we'll try and get your question answered.
24:13 Now, let's get into the nuts and bolts of it, right?
24:16 Because we've talked about multiple themes
24:19 and we've talked about how some of this portfolio construction
24:21 works.
24:22 But Vishal, the argument that is made in some situations,
24:27 we'll take that in a bit.
24:28 But I want to come to the nuts and bolts of the thematic fund
24:32 conversation, which is should you invest in it at all?
24:36 Because if you look at the Nifty 50,
24:37 38% odd allocation towards financial services.
24:41 There is a considerable allocation towards IT as well.
24:44 So if you are playing some of these themes,
24:46 they exist in both passive and active strategies
24:49 across the board.
24:50 Should you invest in thematic or sectoral funds, Vishal?
24:55 I think that's a very relevant point
24:57 that you make that portfolios, whether they
24:59 are diversified or passive or active or passive,
25:03 are going to have a large exposure to many
25:05 of these themes already.
25:07 And therefore, you need to be very convinced
25:10 that there is something which is happening
25:12 in that sector, which makes you want an even more concentrated
25:16 portfolio to that theme.
25:18 And therefore, I think one of the guidelines
25:20 that we would suggest to viewers is
25:22 that even if you want to make a thematic bet,
25:25 assume that you're very convinced about some story.
25:29 Do it to not more than 10% of your portfolio.
25:33 And ideally, try to allocate to two themes
25:36 rather than a single theme.
25:37 Because what we found is-- and banking is a great example.
25:40 If you go back to about a year and a half back,
25:42 the entire conversation was about how banking
25:44 is the most attractive thing.
25:47 And now with compression worries,
25:51 now with deposit growth worries, et cetera,
25:53 you're seeing the conversation change,
25:55 even though banks may be fundamentally very strong
25:58 because of their asset quality.
25:59 So I think there is a need to be very cautious about how
26:02 you want to build it if you have an existing portfolio already.
26:05 OK, fair point.
26:06 And I'm assuming, Raghavendra, you also have a view of 10%.
26:09 This is the stated case, I think,
26:11 for equity portfolios, right?
26:13 Yeah, generally.
26:14 Generally, I think the fund managers in any case,
26:18 basically--
26:20 one thing that we need to understand
26:21 is that in an NAV-based approach,
26:25 fund managers will always try to be in the sectors which
26:28 are in vogue.
26:29 They'll keep over-allocating to sectors
26:31 which are expected to do well.
26:33 So generally, when you find any fund,
26:35 you will find that the teams which are in vogue
26:39 will always find a little higher allocation
26:43 than the other teams.
26:44 So some bit of that sectoral play
26:46 is happening through the diversified funds in any case.
26:49 Fantastic.
26:49 Thank you so much, gentlemen, for joining us
26:51 on this conversation on sectoral and thematic funds.
26:53 Viewers, remember, if you've got questions on any of those
26:56 themes, then write to us on the number, or anything else
26:59 as well.
26:59 But that brings us to the end of this particular edition
27:01 of the Mutual Fund Show.
27:02 It's been a pleasure bringing it to you.
27:03 Do stay tuned.
27:04 This is NDTV Profit.
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33:03 In a remarkable shift, the Indian government's strategic transition from being a net importer to a net exporter has propelled the country's defense sector to new heights.
33:14 The Department of Defense marked a historic year in 2023, witnessing a surge in defense exports, reaching an unprecedented 16,000 crores in the financial year, almost 3,000 crores more than the preceding year.
33:26 And defense production also scaled to new heights.
33:30 All eyes will be on the budget to get some more dope on what the industry and the sector expects.
33:38 We have two very, very interesting and impressive individuals joining us on the show, Ashok Atluri, CMD of Zen Technologies, Arun Ramchandani, Executive VP and Head Defense, and Amit Mahajan, Director of Paris Defense.
33:51 Thank you, gentlemen. You're all three, in a way, are industry representatives and also represent defense and know the sector better than any of us do.
34:02 So, first question, Ashok, I'll start with you. With heightened tension in the Middle East and on the heels of the Russia-Ukraine war last year, will the current geopolitical setup have any weightage or impact on the nation's budget for defense as we head into budget 2024?
34:20 So, I think it's going to seriously impact. I mean to say that, you know, two things that came out very well out of this whole, you know, fiasco in Ukraine or in Middle East, the most impenetrable country where ragtag soldiers on hand gliders could take over the country for six hours.
34:41 One would be, you know, the lack of preparedness. And the first is that they were not prepared well, they did not work out all the scenarios and they almost, you know, Iron Dome, etc., went for a six hour.
34:52 So, the preparedness is one thing that will come out, combat readiness will come out very well as a high thing in this budget. And the second is a complete lack of defense against drones.
35:06 Another thing that will really come up in this budget. So, these two things are the, you know, are major factors that are going to determine the next course of action for many countries, combat readiness.