Q&A: Nitin Rakesh, CMD, Motilal Oswal AMC

'Look for leaders in sector'

A few industries have not been very promising. Nitin Rakesh, CEO & managing director, Motilal Oswal Asset Management Company, tells Neha Pandey & Masoom Gupte, that investors should follow a stock-specific strategy. Excerpts:

What should be a retail investor’s strategy in the current market?

I don’t think it’s a runaway market, but a stock-specific one. Investors should buy on dips. Some industries have not been promising, and hence, the market is subdued.

For instance, the rise in the input cost for automobiles was unexpected, and so, the companies have reported less-than-expected profits due to dropping margins. On the other hand, banks have done extremely well. Despite the rise in interest rates, their net interest margins have gone up.

Going by the first quarter results, which sectors (besides banking) look promising?

The telecom sector has been in-line so far. This sector can be a value player, if you invest in the right company. The global commodity cycle have hit metal companies and pulled down their earnings. In the fast moving consumer goods (FMCG) space, we were looking at an aggregate growth of slightly lower than 20 per cent.

Should an investor take cues from quarterly results?

You have to primarily watch out for what is the trigger for a company or a sector. For example, the drop in car sales for automobiles is more of a concern than rising input cost. In the cement space, the issue is over capacity. But it is a region-wise change.

Look for companies that have bigger market share in a sector. Among two-wheelers, you either look at Hero Honda or Bajaj. In commercial vehicle segment, it is either Mahindra & Mahindra or Tata Motors.

What is your take on public sector divestment? Is it a good way to enter the market?

It all depends on the pricing. So far, the initial public offerings and the follow-on public offers have not been priced attractively. During the British privatisation in late 1980s, the government gave 25-30 per cent discount. Also, the number of shares per application should be limited.

What are your targets in short-term, medium-term and long-term?

I won’t be surprised if the market is at the current level by this year-end. In the past nine months, the market has been in the same range, but earnings have been rising. This is called time correction. Although it has been dull and range-bound, a lot is changing. So, where the markets saw 20+ price-to-earnings multiple earlier, it is now between 16 and 17+. If it stays at the same level by December, markets will be at 13 to 14+ multiple.

Where do you see the markets next year, same time?

The earnings are going to grow at 15 to 20 per cent annually, so the markets should also be 15 per cent higher a year later.

What are the top three sectoral bets right now, and which ones to avoid?

Banking, especially infrastructure, capital goods, capital equipment and select auto, essentially consumer auto. Avoid some of the large-cap FMCG companies as they are expensive. Also, avoid some of the large-cap oil and gas and metals, especially the globally linked ones.

For someone looking at investment, would you recommend lump sum or via systematic investment plan (SIP), especially for a first-time investor?

In any market, SIP is the best way to invest and this holds true for all types of investors.

Source: http://www.business-standard.com/india/news/qa-nitin-rakesh-cmd-motilal-oswal-amc/403569/

New valuation norms to raise Liquid Plus schemes’ volatility

The new valuation norms, which mandate fund houses to mark-to-market securities with a maturity of over 91 days in the Liquid Plus category of mutual funds, may increase volatility in these schemes.

Asset management companies (AMCs) are now gearing up to revamp their investment strategies to ensure that volatility is curtailed without compromising on the tax arbitrage enjoyed by the Liquid Plus category of funds.

While there has not been any immediate adverse impact of the new ruling on the assets managed by fund houses under Liquid and Liquid Plus categories, there may be concerns in the future, if there is high volatility in the money market. It is, thus, important for fund managers to insulate these products so as to retain their large-ticket institutional investors.

“One likely change in the investment strategy can be to incorporate a higher percentage of securities with less than a 91-day maturity in Liquid Plus schemes,” says Mahendra Jajoo, ED & CIO (fixed income), Pramerica Asset Management. “This would reduce the volatility of the portfolio which will otherwise be marked-to-market for securities with maturities higher than 91 days,” he adds.

This new strategy, which fund managers may now look forward to, will, in fact, act as a double-edged sword. On one hand, Liquid Plus schemes will run like any other liquid scheme, on the other hand, investors will continue to enjoy the tax arbitrage applicable to Liquid Plus schemes.

Liquid Plus schemes currently attract a dividend distribution tax (DDT) of nearly 22.7% against 28.3% DDT applicable to the Liquid category of funds. It’s for this reason that many institutional investors prefer Liquid Plus to Liquid schemes. Moreover, as the Liquid Plus category invests in papers with a maturity higher than 91 days, their returns are relatively superior to Liquid schemes which invest in papers with less than a 91-day maturity.

Over the past one year, Liquid schemes have generated an average of around 4% returns while Liquid Plus schemes have generated about 6% returns during the same period. For large institutional investors, with investments running in crores of rupees in these schemes, this differential of 200 basis points is quite significant.

The popularity enjoyed by Liquid Plus schemes is also evident from the assets managed by these schemes vis-à-vis Liquid schemes. By the end of June ’10, Liquid Plus schemes managed assets worth around `1.9-lakh crore against `66,000 crore by Liquid schemes.

Thus, with new valuation guidelines directing the securities in Liquid Plus schemes to be marked-to-market have raised more concerns among investors of these schemes.

The new investment strategy, to run Liquid Plus schemes like any other Liquid scheme, will reduce the volatility of the portfolio, but will also mean that investors may have to compromise on returns that accrue to securities with higher maturities. However, this may not be an immediate concern since currently the yield curve being flat — both short and long duration securities are earning relatively similar yields.

“Going forward, however, the industry may see the category of Liquid Plus schemes being sub-categorised as those with maturity of less than 91 days, carrying a lower risk and volatility and those with securities more than 91 days and up to one year, which will be marked-to-market, will be construed to be more volatile,” says a fund manager from the industry who did not wish to be named.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/New-valuation-norms-to-raise-Liquid-Plus-schemes-volatility/articleshow/6258917.cms