Mr. Ajay Tyagi
Executive Vice President & Fund Manager – Equity, UTI AMC Ltd
Ajay Tyagi is Executive Vice President & Fund Manager – Equity at UTI AMC Ltd. He is a CFA Charter holder from The CFA Institute, USA and also holds a Masters degree in Finance from Delhi University. Ajay joined UTI in the year 2000 and has been working in the equity research and fund management functions since then. He is presently managing few domestic mutual fund schemes He is also acting as an Investment Advisor to a few India dedicated offshore funds. Prior to being designated as a Fund Manager he has worked as an Assistant Fund Manager in the Offshore Funds division.
Q : The equity markets have rallied a lot in recent weeks. What are the factors driving this rally especially with high economic costs due to the present crisis?
Answer : The intrinsic value of a business in its most fundamental sense is nothing but the present value of all the cash flows that the business will generate through its life. While most investors cannot think beyond the next couple of years, but assuming that businesses are going concerns and well managed businesses are expected to be around for a very long time, the next couple of years or the next few quarters do not impact the intrinsic value of a business as much as we think. In fact, we did an exercise internally to find out how much would the impact of the ongoing pandemic be, to the value of a typical business and the results were in the range of 2% to 6.5%, although prices have fallen significantly more. Time and time again this is the common behavior displayed by investors during any economic downturn. While the reasons for the downturn are different each time but the common behavior of investors during the early phases of the downturn is to panic, sell their assets and realize cash from wherever they can, resulting in prices falling indiscriminately by about 30-50% during such phases. But, then prices start to rise again as some long-term investors who realize the above equation know that prices are significantly lower than the value. We believe, we are in a phase where sanity is coming back and investors are looking at businesses from a long-term perspective which is leading to retracement in prices rather than measuring them on the basis of the current poor economic data.
Q : The past month saw a lot of public opinion against China and there is some focus around "Atmanirbhar Bharat". How do you see this impacting domestic business given the strong integration with China?
Answer : We will have to break this up into the short-term impact and the long-term impact. In the short-term there could be some disruptions in the supply-chain and the industry will have to make alternate supply arrangements from within India or from countries like Vietnam, Taiwan, Indonesia etc. Thankfully because of the demand destruction globally there is enough spare capacity in the system across different countries so it is unlikely that these short term disruptions can get meaningful.
On the other hand, the medium to long-term impact of "Atmanirbhar Bharat” can be meaningful for certain industries like Pharmaceuticals, Chemicals including agrochemicals and specialty chemicals and auto ancillaries. Just for example, the government seems to be pushing the domestic players to come forward and set-up capacities for not only Active Pharmaceutical Ingredients (APIs) but all the way back to Key Starting Materials (KSMs) to fully backward integrate the pharmaceutical industry and reduce reliance on imports.
Q : There is growing interest around gold in recent times amongst investors. How do you see this asset class in today's scenario and should retail investors make it a part of its portfolio?
Answer : There is nothing new about the interest of investors in Gold; it has dominated the savings landscape in India for many years. There is a role for gold in investment portfolios as part of the asset allocation process as it acts as a hedge against inflation and can also be inversely correlated with risky assets during times of panic. But, it is not a yield bearing asset and nor is it a growth asset and in fact there are costs associated with ownership.
Chasing returns is not an appropriate strategy for any asset class, even more so in gold which should be viewed as hedge asset. Advisors should note that, investors may already be significantly exposed to gold, as many would not count it in their investment portfolio but it is part of the household wealth.
Q : How is the mutual fund industry coping up with the business duties amidst the Covid-19 crisis? Can you throw some light on how the operations are being handled?
Answer : It has always been “Customer First” for UTI. Right from the early days of the pandemic, we had started preparing for a scenario of near 100% distributed work model by employees accessing into our systems from remote locations. Even as we rapidly geared up, we provided a safe and sterile work environment for the employees in the interim. We quickly redesigned the architecture of applications, so that they are available for access through a distributed delivery model. We also deployed the operating model with all the market functionaries & intermediaries.
UTI’s investment in technology has enabled a smooth transition to virtual operations during this lockdown. The investment team is able to collaborate digitally using Microsoft Teams and all meeting schedules of the team are carried out as they were in the office. We had already increased our FM interaction with advisors and investor via live streaming events on our social media handles and that continues. We have increased fund manager connect by releasing monthly video updates on Funds. Further, during this period, we also concluded our technology upgradation; migrating our front-end Investment Management System to Bloomberg AIMS. This enables end-to-end electronic processing, encompassing analytics, trade execution and compliance.
Q : How should investors decide their asset allocation in such market volatility? What investment strategy should they follow?
Answer : Asset allocation for any client is not something that ought to be changing with the changing market moods. It has to be designed keeping in mind each of the client’s unique needs and requirements, expected inflow and outflow of cash and of course succession as well as tax planning. Only to the extent that the ongoing pandemic would have changed some of the above, there is need to revisit the asset allocation plan. The market volatility per se has no direct role to play in changing the asset allocation. In fact, the very reason for writing an asset allocation plan is to, not get influenced by market movements and just following the script in an emotionless manner.
We would strongly advise all investors to follow their asset allocation plans and continue with their SIP contributions. In addition to the SIPs, a lump-sum investment into equities would be warranted for many investors as their equity allocation would have gone down on account of marked to market movements.
Q : Many new investors are not happy with low equity fund returns, especially on their SIPs. In such a scenario what would be your message to these investors?
Answer : It is certainly not correct to look at the SIP returns after a deep correction in the market and pivot oneself to that. To visualize the complete picture, let’s look at the trend of 5-year SIP returns (CAGR) in UTI Equity Fund over the last 15 years. The returns are taken at the end of each month and there are a total of 180 data points. There are a few important observations that can be made by analyzing this data which reinforces our confidence that SIP is indeed the best way for investors to build their portfolio. Firstly, 5-year SIP returns over the last 15 years were in negative zone only on three occasions (Dec-08, Mar-09 & Mar-20) i.e. less than 2% of the times. Secondly, 5-year SIP returns over the same period were less than 5% only on 9 occasions i.e 5% of the times and were less than 10 % only on 21 occasions i.e. less than 12% of the times. Finally, the average 5-year SIP returns over the above period has been 17.04% which is indeed a good return.
Therefore, the message to investors is that although it can be painful to see the 5-year SIP returns get into the negative zone, but one has to withstand that pain and keep up the discipline. For instance, while in Dec-08 the 5-year SIP returns had turned negative but the courageous investor who had kept the faith was greeted by a very satisfying 20.80% return for his 6-year SIP by Dec-09.
Disclaimer : “Mutual Fund investments are subject to market risks, read all scheme related documents carefully.”