ET OnlineMost aggressive hybrid schemes had a rough year in 2018. Most of them were in red, while just two schemes managed positive returns. Sundaram Equity Hybrid Fund was one of the schemes that managed to offer positive returns to investors in the tough year. etmutualfunds.com spoke to Rahul Baijal, Fund Manager-Equity, Sundaram Mutual, to find out how he managed this. Edited interview.
Aggressive Hybrid category has given an average -4.50 per cent returns in the last one year. Only two schemes managed to deliver positive returns. Sundaram Equity Hybrid Fund is one of them. The scheme has topped the category with around 2 per cent returns. Also, it is the only scheme which has outperformed CRISIL Hybrid 35+65- Aggressive Index in the same period. How did the scheme manage to generate positive returns while all other schemes suffered?
CY 18 has been quite a volatile year and it has been a tough market. However, there were three key calls which have worked well for the fund. Firstly, equity hybrids run a multi cap style and they can have both large caps and mid caps and how one manages allocation along the market cap curve is also important and makes a difference to the performance. One call I had taken was a greater allocation towards large caps early last year vs the peers. That has helped the relative performance.
Secondly, in the large caps, the stock picking was in line with the equity portfolio in Select Focus Fund, the large cap fund run by me. Broadly, the calls went there right and that was a top quartile performer last year and thus the large cap exposure did well in equity hybrid too.
And thirdly, even some of the mid cap stock picking which we did , did well vs the index performance.
Sector-wise, we were overweight in IT and private banks. The NBFC crisis did not hit us much because I had booked profits in most of the NBFC exposure pre-ILFS crisis, except for HDFC which remains a core holding. Also, I was in a risk-off mode for a better part of the year and thus stayed away from global cyclicals like Metals, too. Thus - these sector calls and stock picking in other sectors helped. The combination of all these things helped us to top the category in CY18.
Though Sundaram Equity Hybrid Fund has topped the chart in the last one year, investors are not happy with the returns. What has hit the scheme and/or the category as a whole?
Although it has given low positive returns but it is the top performing scheme in the category in CY18. The year has been a year of negative returns for most mid caps, small caps and many large caps as well. The Nifty has given around three per cent returns in a global backdrop of negative returns in many equity markets. Keeping that context in mind, the scheme’s returns are positive and close to 2-3 per cent and has protected capital in a bad year for equity returns in general. I think that in itself is a decent performance, keeping the overall context in perspective as well.
Did re-categorisation impact the performance in any way? Are there any changes in the way you manage the scheme after the re-categorisation? Currently, Sundaram Equity Hybrid Fund has 74 per cent of its assets in equities and rest in debt. Do you plan to keep similar portfolio mix in future as well?
In terms of re-categorisation, there were two key changes that happened in the category. One was that the equity hybrids can hold 65 to 80 per cent in equity allocation vs 65 to 75 per cent earlier. Secondly, the benchmark for equities is on the line of the 200 series of NSE or BSE instead of Nifty 50 series earlier.
I follow an equity exposure of around 70 to 75 per cent in the scheme within the overall band of 65-80 per cent. Also, on allocations, we have been clear in our positioning that we are a large cap-biased product. We will be staying around 45 to 60 per cent of the overall allocation in large caps and about 5 to 35 per cent range in the mid and small caps. That is what I have stuck to last year, this year and I plan to continue with this range going forward.
The portfolio mix will be in the overall range as mentioned.
The equity market has been volatile for a while now? What is your view of the market?
While its always difficult to take a call on the markets in the short term – my view is that it will remain a range-bound market because the upside is capped because we still have the uncertainty of the election outcome in April-May. At the same time, I do not see any material downside unless there is some other major risk-off in the global markets.
Post-elections, it is difficult to say as of now as lot of macro developments are expected to happen. Locally, we have an election uncertainty and globally, there are political events, US-China trade war on which some progress is expected in March-April and there is also the debate about the extent of the slowdown in the US, whether it is a soft landing or hard landing which will decide the pace of Fed rate hike. As we get more visibility of local and global issues, I can take a better top down call for rest of the year.
Even the money market is looking for firm cues, even though the 10-year G-Sec yield has eased from levels of over 8 per cent in around September last year to around 7.30 per cent. What is your strategy for the debt part of the portfolio?
The strategy is to invest mainly in AAA and AA rated corporate bonds. The objective is basically to provide an attractive yield with a high grade quality portfolio and typically the maturity of these bonds is between two to four years. We follow an accrual strategy for this scheme and the fixed income team decides which bonds to pick for this part of the portfolio.
Given the uncertainties in both equity and debt markets, what kind of returns can an investor expect from aggressive hybrid schemes in the current year?
Equity hybrid schemes have the flexibility to invest across equity and debt with 65 to 80 per cent in equity. It also has the flexibility to run in a multi cap style. Overall, long term, I would say, probably about 12-13 per cent compounding is possible to achieve. If a fund is managed well, one can achieve these returns with relatively lower volatility than many other equity schemes.
What are your expectations from the coming budget?
There will be some announcements to boost farm incomes in the short to medium term. On the fiscal front, I won’t be surprised if there is some slippage because the GST collections have been running a bit behind. These are the two areas where the market will focus on as well in my view.
What is your advice to investors in aggressive hybrid schemes?
It is a great product for entry level equity investors who want a transition from fixed income products. It gives 20 to 35 percent debt exposure. The large cap bias and its flexibility to manage it in a multi cap style and have mid caps as well tactically that can help in generating higher returns in the long term. It fairly balances the risk between debt and equity and within equity, between large and mid caps.
The advice is to stay invested for long term compounding returns with low volatility. Look at it as a product that can give you probably about three-four per cent better returns than bank FDs.
Aggressive Hybrid category has given an average -4.50 per cent returns in the last one year. Only two schemes managed to deliver positive returns. Sundaram Equity Hybrid Fund is one of them. The scheme has topped the category with around 2 per cent returns. Also, it is the only scheme which has outperformed CRISIL Hybrid 35+65- Aggressive Index in the same period. How did the scheme manage to generate positive returns while all other schemes suffered?
CY 18 has been quite a volatile year and it has been a tough market. However, there were three key calls which have worked well for the fund. Firstly, equity hybrids run a multi cap style and they can have both large caps and mid caps and how one manages allocation along the market cap curve is also important and makes a difference to the performance. One call I had taken was a greater allocation towards large caps early last year vs the peers. That has helped the relative performance.
Secondly, in the large caps, the stock picking was in line with the equity portfolio in Select Focus Fund, the large cap fund run by me. Broadly, the calls went there right and that was a top quartile performer last year and thus the large cap exposure did well in equity hybrid too.
And thirdly, even some of the mid cap stock picking which we did , did well vs the index performance.
Sector-wise, we were overweight in IT and private banks. The NBFC crisis did not hit us much because I had booked profits in most of the NBFC exposure pre-ILFS crisis, except for HDFC which remains a core holding. Also, I was in a risk-off mode for a better part of the year and thus stayed away from global cyclicals like Metals, too. Thus - these sector calls and stock picking in other sectors helped. The combination of all these things helped us to top the category in CY18.
Though Sundaram Equity Hybrid Fund has topped the chart in the last one year, investors are not happy with the returns. What has hit the scheme and/or the category as a whole?
Although it has given low positive returns but it is the top performing scheme in the category in CY18. The year has been a year of negative returns for most mid caps, small caps and many large caps as well. The Nifty has given around three per cent returns in a global backdrop of negative returns in many equity markets. Keeping that context in mind, the scheme’s returns are positive and close to 2-3 per cent and has protected capital in a bad year for equity returns in general. I think that in itself is a decent performance, keeping the overall context in perspective as well.
Did re-categorisation impact the performance in any way? Are there any changes in the way you manage the scheme after the re-categorisation? Currently, Sundaram Equity Hybrid Fund has 74 per cent of its assets in equities and rest in debt. Do you plan to keep similar portfolio mix in future as well?
In terms of re-categorisation, there were two key changes that happened in the category. One was that the equity hybrids can hold 65 to 80 per cent in equity allocation vs 65 to 75 per cent earlier. Secondly, the benchmark for equities is on the line of the 200 series of NSE or BSE instead of Nifty 50 series earlier.
I follow an equity exposure of around 70 to 75 per cent in the scheme within the overall band of 65-80 per cent. Also, on allocations, we have been clear in our positioning that we are a large cap-biased product. We will be staying around 45 to 60 per cent of the overall allocation in large caps and about 5 to 35 per cent range in the mid and small caps. That is what I have stuck to last year, this year and I plan to continue with this range going forward.
The portfolio mix will be in the overall range as mentioned.
The equity market has been volatile for a while now? What is your view of the market?
While its always difficult to take a call on the markets in the short term – my view is that it will remain a range-bound market because the upside is capped because we still have the uncertainty of the election outcome in April-May. At the same time, I do not see any material downside unless there is some other major risk-off in the global markets.
Post-elections, it is difficult to say as of now as lot of macro developments are expected to happen. Locally, we have an election uncertainty and globally, there are political events, US-China trade war on which some progress is expected in March-April and there is also the debate about the extent of the slowdown in the US, whether it is a soft landing or hard landing which will decide the pace of Fed rate hike. As we get more visibility of local and global issues, I can take a better top down call for rest of the year.
Even the money market is looking for firm cues, even though the 10-year G-Sec yield has eased from levels of over 8 per cent in around September last year to around 7.30 per cent. What is your strategy for the debt part of the portfolio?
The strategy is to invest mainly in AAA and AA rated corporate bonds. The objective is basically to provide an attractive yield with a high grade quality portfolio and typically the maturity of these bonds is between two to four years. We follow an accrual strategy for this scheme and the fixed income team decides which bonds to pick for this part of the portfolio.
Given the uncertainties in both equity and debt markets, what kind of returns can an investor expect from aggressive hybrid schemes in the current year?
Equity hybrid schemes have the flexibility to invest across equity and debt with 65 to 80 per cent in equity. It also has the flexibility to run in a multi cap style. Overall, long term, I would say, probably about 12-13 per cent compounding is possible to achieve. If a fund is managed well, one can achieve these returns with relatively lower volatility than many other equity schemes.
What are your expectations from the coming budget?
There will be some announcements to boost farm incomes in the short to medium term. On the fiscal front, I won’t be surprised if there is some slippage because the GST collections have been running a bit behind. These are the two areas where the market will focus on as well in my view.
What is your advice to investors in aggressive hybrid schemes?
It is a great product for entry level equity investors who want a transition from fixed income products. It gives 20 to 35 percent debt exposure. The large cap bias and its flexibility to manage it in a multi cap style and have mid caps as well tactically that can help in generating higher returns in the long term. It fairly balances the risk between debt and equity and within equity, between large and mid caps.
The advice is to stay invested for long term compounding returns with low volatility. Look at it as a product that can give you probably about three-four per cent better returns than bank FDs.
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