It’s not ULIPs v/s mutual funds, advisors can consider distributing both

  • 23rd Nov, 2018

You have managed mutual funds, insurance and hedge funds. Can you share the difference in fund management style amongst the three?

Basic investment management philosophy and processes are quite similar, irrespective of the investment product. In the insurance space, we have a longer-term orientation because of the nature of the product. Therefore, we do not get overtly influenced by short-term factors and noise even though we track and are cognizant of the same. Also, our flows are more stable. Moreover, we  are  not  affected  much  by  short  term  liquidity  and  flows,  compared  to  certain  other investment  products. This allows us a long-term orientation in our investment process (as mentioned earlier) and for the investment thesis to play out, thereby helping us to deliver superior risk-adjusted returns over the long term.

Can you share with us how you maximise fund performance?

We have a disciplined investment philosophy and focus on Growth at Reasonable Price (GARP) strategy.

We typically invest in a ‘business’ and not a ‘stock’ and try to identify ideas where the business opportunity size is large.

We follow a bottom-up research process, which helps us to identify the best ideas across sectors, and in superior stock selection which is the key contributor to alpha generation over the long term. We look for companies with strong competitive advantage in terms of brand, distribution reach, cost advantage and barriers to entry.  We  also  prefer  companies  with  good  corporate  governance  and  a  competent management team.

Some of the key metrics that we look at in identifying businesses are higher Return on Equity (ROE) or Return on Capital Employed (ROCE), healthy free cash flow, moderate leverage(debt), earnings growth visibility and attractive valuation.

The  last  few  months  have  seen  a  lot  of  volatility  in  both  equity  and  debt  markets.  Insurance companies give a lot of importance to capital preservation. So what has been your strategy to achieve maximum capital preservation in these markets?

We have been overweight on defensives like IT, pharma and consumer staples this year, which helped our portfolio  and  returns  amidst  the  market  correction  this  year,  as  these  sectors  have  managed  to outperform, and protect downside risk.

The recent credit event (IL&FS) has affected many insurance companies and mutual funds. What should investment managers do to avoid investing in such companies?

Considering that the paper was AAA rated and saw a quick and sharp downgrade to ‘default’ rating in a very short time frame, the event has taken investment managers and the markets by surprise. More so because the company and its subsidiaries are owned and had exposure across the investment and financial industry (insurance, mutual funds, pension funds, banks and NBFCs). We feel that this was a rare but still an important learning event for the markets and investment managers in general.

Why should financial advisors consider distributing ULIPs?

ULIPs typically have a longer-term orientation and help investors in achieving their medium to long term financial goals. New-age ULIPs have also become much more cost-effective compared to before, due to regulatory action and market dynamics.

The other competitive advantage for ULIPs is on the taxation front, due to its long-term nature and lock- in period. Also, in a new- age ULIP, the investor can switch between various funds option (equity, debt, liquid fund etc.)  without  any  capital  gains  tax  incidence,  and  can  switch  as  many  times–without  any additional charges or any exit load. This helps an investor to plan their asset allocation in a more efficient and tax-friendly manner, depending on market conditions and outlook.

After rationalization of commission and TER, mutual funds have become attractive for investors. Your comments.

Rationalization of expenses for mutual funds is a welcome move and beneficial for mutual fund investors.

In  the  life  insurance  industry  too,  we  have  seen  significant  rationalization  of expenses and presently some of the new-age ULIPs provide as competitive an investment proposition as other  investment  products  in  the  market.  Also, due to greater internet penetration, we are seeing development and traction of newer distribution channels like the online channel and this will help to drive costs lower for insurance.

We feel that insurance industry is also keeping pace with market trends and will continue to come out with competitive products to benefits investors.

Source : Cafemutual

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