Diversified stock portfolio can deliver 20% over 3-5 years

There is nothing like a ‘right time’ to invest in equities. What matters is the time horizon for which you want to stay invested, according to Sukumar Rajah, CIO - Equity, Franklin Templeton Investments India. In an interview with ET, he said, if one still wants to time the market, it makes sense to invest when there is gloom all around. 

What is the kind of returns that an investor should be expecting, if he is looking to stay invested for more than a year? And what are the kind of schemes he should be looking at? 

Investors with a longer investment horizon can look to invest in diversified equity funds with a track record across market cycles and those with a higher risk profile could consider funds targeting aggressive growth. We expect a diversified portfolio of stocks to deliver around 15-20% over 3-5 years, which is in line with our earnings growth expectations. 

Which are the sectors you are bullish on? 

We believe long-term investors are better off adopting a bottom-up approach and investing in companies with good fundamentals across market-cap ranges and sectors. 

Sectors that can piggyback on the domestic consumption theme such as retail banking, consumer goods and automobiles; trends in domestic infrastructure spending such as construction and capital goods, are good investment opportunities for long-term investors. 

How do you see interest rate sensitive sectors faring, given expectations that rates could harden further because of rising inflation? 

Interest rate sensitive stocks are likely to be under pressure until inflationary pressures ease out. Typically, our investments are with a medium to long-term horizon, but we reshuffle our portfolios on the back of relative valuations and opportunities emerging in various sectors. 

The recent market declines have resulted in attractive opportunities across the market-cap range and the sell-off has been indiscriminate in nature, with quality stocks also moving down sharply. We are using this opportunity to increase exposure to such companies across sectors/market capitalisation range. 

Do you agree with the general perception that the macro-economic situation is deteriorating? 

Domestic macro-economic trends have been largely positive — FY08 GDP numbers revised upwards, strong direct tax inflows in the current fiscal year and IMD indications of normal to excess rainfall trend in June. While rising borrowing costs and inflation are likely to impact GDP growth over the near term, longer-term economic drivers such as demographics, rising disposable incomes and investments in infrastructure remain in place. 

Oil remains a key factor given that imports account for over 75% of India’s crude oil requirements and its implications for domestic inflation/fiscal deficit. This means that continued rise in oil prices will impact India’s Balance of Payments (BoP) and put further pressure on the rupee. However, strong forex reserves and relatively low external debt to GDP ratio should help mitigate deficit impact to a certain extent. 

What do you think of gold as an alternative asset class? 

While it provides for additional portfolio diversification, gold cannot be the mainstay of a portfolio and investors can consider marginal exposure. They need to keep in mind that the performance of such a portfolio is likely to be cyclical and long-term returns have tended to be low. 

What is your investment philosophy strategy and what kind of cash levels are you sitting on? 

Franklin Templeton does not take cash calls on fund portfolios and we try to reduce risks through stock selection based on fundamental research focusing on the long term. 

We offer long-only products and there are different products like hedge funds, dynamic asset allocation funds (our FT Dynamic PE Ratio Fund of Funds) that are specifically designed to make tactical asset allocation changes based on market conditions. Our portfolios are typically fully invested (around 5% cash keeping in mind the liquidity requirements of an open-end fund). 

We will continue to invest in companies that are best positioned to take advantage of the Indian economic growth. As bottom-up investors, we seek to invest in companies whose current market price, in our opinion, does not reflect future growth prospects. 

We choose companies that have identifiable drivers of shareholder value creation and that present, in our opinion, the best trade-off between earnings growth potential, business and financial risk, and valuation.