Interview with Yogesh Patil, CIO (Equity), LIC Mutual Fund Asset Management Limited

Against the backdrop of the equity market witnessing a splurge and thereby attracting a larger number of investors, Yogesh Patil, CIO (Equity), LIC Mutual Fund Asset Management Limited, takes stock of the present scenario, shares tips about the path that investors should tread on, and casts a perspective on what the future beholds

With the recent market surge, how is your investment strategy adapting to this optimism? Can you share some specific examples of how you have adjusted the portfolio composition in response to this rise?
De-globalisation, reduction in fiscal deficit, Indian demography, digitalisation, defence and manufacturing are the five themes that make for the India growth story. There is also a need to create capacities to cater to the rising demand. The demand for better infrastructure for the movement of goods and incremental power to run the plants can also create more investment opportunities. In the last one year, our focus has been to identify companies that may benefit from these themes.

Taking into account the investment mandates of the schemes, fund managers have realigned the portfolios. We have increased our allocation to stocks in sectors such as defence, power and logistics. Since the identified themes offer a diverse universe of stocks, our investment strategy may help us generate healthy risk-adjusted returns on our equity portfolios over the medium term. Our schemes’ portfolios have allocations to stocks of companies that are expected to benefit from such themes. These businesses may show sustainable growth in the medium term.

What are the core investment principles that guide your decision-making process? How do you identify and evaluate undervalued opportunities in the current market landscape?We look for companies with a proven promoter track record of efficient allocation of capital, along with a favourable business cycle, growth rate compared to peers, and a strong balance sheet. Within these, we pick stocks of companies that are scalable businesses and have a relatively high return on capital, which indicates a competitive edge. The scalability of a business is an important factor, and we ascribe valuation to a business accordingly. A long pathway of compounding profits by the underlying business is necessary for long-term wealth creation. At the portfolio level, we focus on striking a balance between expected growth and the price we pay for it. Portfolios of multi-cap, Small-Cap and Mid-Cap funds are designed keeping in mind the PEG (price-to-earnings growth) threshold.

The Indian equity market is witnessing some interesting trends like the rise of new industries and increasing retail participation. How are these factors influencing your long-term investment outlook for the market?
New listings from emerging industries are interesting phenomena. On the one hand, it gives diverse alternatives to choose from and on the other hand, the investor has to be careful while picking one given the limited history to fall back on. Some of these businesses have a very long growth path, but they still need money from investors to run their operations. We like some businesses in the new industries but we need to keep a tab on these companies, understand their business in greater depth, and figure out the right price to pay for them.

These businesses can certainly add value over the medium to long term. Along with digitalisation, relatively better returns from equities and the desire to invest in some familiar brands from emerging sectors will bring many retail investors to the stock markets. Retail investors have emerged a strong force in the domestic markets and have reduced volatility. As more investors invest in equities directly and through mutual funds, it may add depth to our market.

LIC Mutual Fund manages a significant amount of assets. How do you ensure efficient allocation and diversification of this capital across different sectors and market capitalisations? What are the unique challenges and opportunities associated with managing large equity portfolios?
Diversification is a must in each equity portfolio to manage promoter-specific risk, sector-specific risk and business risk. Managing liquidity at the portfolio level is another serious challenge, especially when we manage small-cap and mid-cap portfolios. Though we identify stocks with high growth potential and significant upside, we do not blindly load up on those if they do not fit into our risk framework or the asset allocation stipulated for the scheme. We stick to the investment mandates of the schemes and adhere to asset allocation.

For example, we have minuscule or negligible allocations to small-cap stocks in our Large-Cap schemes and that too is based on a large margin of safety, long-term structural growth potential and reasonable valuations. An investor in a small-cap scheme is prepared to take the risk associated with small-cap stocks, but an investor in large-cap schemes does not want it. Sticking to the investment mandate and offering ‘true to label’ portfolios is the best way to strike a balance between challenges and opportunities while managing large equity portfolios.

Certain sectors like infrastructure and technology are gaining traction. How are you approaching these sectors from an investment perspective?
Infrastructure is a broad-based theme with seven large sectors ranging from telecom to metal. We are positive on infrastructure. Information technology (IT) companies are in a sweet spot as digitalisation catches speed and we embrace technology in all walks of life. These are irreversible changes and the demand for technology is going to increase. In some equity schemes, we have enhanced our exposure to these sectors. We are selective while investing and avoid overpaying for the stocks we like.

With the US Federal Reserve set to ease the interest rates, what impact will it have on the Indian equity market and mutual funds?
Interest is a cost. One can call it a type of tax the borrower pays. Reduced interest rates boost consumption as well as capital expenditure. It will benefit equities and especially the Indian equity markets. It may also enhance investors’ participation in Indian stock markets. Mutual funds as a vehicle to invest in stocks should see more takers.

The Indian economy is undergoing a structural shift towards consumption-driven growth. How is your portfolio positioned to benefit from this trend?
Consumption and investment are the two drivers of the India growth story. Their contribution keeps changing depending on the government policy and investor appetite. Sometimes consumption takes centre stage and sometimes investment takes the lead. At a time when infrastructure spending and the capital expenditure cycle play up, we see investments doing well. This leads to job creation and has a multiplier effect on consumption over some time. Both rarely move together. Today, we are in an investment-led growth phase and our portfolios are positioned accordingly. Consumption will come back strongly after some time.

What would be your advice for an investor who wants to park Rs 1 lakh in equity mutual funds? Can you highlight any specific themes that you believe will be the key drivers of this growth?
Investors with a 3–5 years timeframe should look at investing in multi-cap portfolios since they allocate money to large-cap, mid-cap and small-cap stocks. Do not chase stocks looking at past returns. Instead, take a systematic investment plan route to invest your money. If you have a lump sum, then use a systematic transfer plan to invest in a multi-cap fund.

Looking ahead, what are your key priorities for LIC Mutual Fund’s equity portfolio in the next 3–5 years? What are the exciting opportunities you see on the horizon?
We intend to build diversified portfolios of stocks of companies that are very efficient allocators of capital and can offer good earnings growth, without taking undue risks. We are also exploring new product launches in the near future that will enhance our offering to investors.