Business Cycle NFO is a kind of all-weather fund: Mahesh Patil, CIO of ABSLMF

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In a detailed conversation with Vivek Law, consulting editor, Money9, Mahesh Patil, CIO of Aditya Birla Sun Life Mutual Fund, shares his insights into the current market situation, while throwing light on Business Cycle NFO that the fund house has launched today. 

Edited excerpts:

The big question now in everybody’s mind is that whether we have still some legroom left in this rally as we are crossing the levels of 60-62000 or we are tiring out at these levels, given the current cues that the market is picking up?

Yes. There’s no doubt that the markets have done exceptionally well in the last one and a half years after it bottomed out during the pandemic. And the recovery has been very sharp and quick. As a result of that, the market is probably slightly ahead of fundamentals and that sometimes makes us worried — whether one should really be exiting from the market or the market has topped out.

We will see fairly strong economic growth for the next few years and that is what makes us positive at these levels. There could be some correction, though.

But for long-term investors, even from here as the economy recovers and corporate earnings growth improves, you should see the markets getting higher. So, the overall effects of the profit, corporate profit-to-GDP numbers are nowhere near the peak levels.

There is still enough room for corporate profits to improve. This year, we will have earnings growth of around 35% for Nifty companies and if that plays out, then the market can still move higher.

I would say we are still no kind of a bull market we are somewhere in the middle of this market. There is still some distance to be crossed over before long-term investors start worrying about.

What happens if this liquidity tap is closed? A large part of this rally has been owing to the liquidity that is coming in that tap. What could go wrong if that tap closed? We are already hearing talks coming in from the US.

So, it is natural that a lot of money that has moved into a risk asset class or equity gets pulled off. But the central banks and the governments are going to let you do that in a gradual manner and they’ll do that only when they see growth coming back.

So, as growth comes back, you will see liquidity getting tightened a bit. The interest rates will go up. Yes, there is a kneejerk reaction in the market because there is an adjustment that will happen in the market.

After that initial correction, it probably is driven by the outlook on economic growth and corporate earnings.

What do you attribute to the huge record flows that we are seeing into SIPs? We’ve crossed 10,000 crores monthly SIP. Where is this money coming from? What is your assessment?

I think there are multiple factors that have led to this sharp increase in money coming into equities, not only into direct equity but also on the mutual fund side.

Probably, there is also a reason for that. A lot of people working at home, or there’s enough time for people to dabble into the markets. There have also been some of the savings which getting channelled into equity markets.

At a time when interest rates are low, you are looking for higher returns. And the kind of fantastic run that the equity market has had!

So, if a person wants to invest at this point in time, what would you tell her to do? Would you tell her to pause for a bit? Or would you say just start your SIP? What would your advice be?

Obviously, you start with your right asset allocation, depending on your risk profile. Once you decide on the asset allocation, then I would say that the best way to do is through a SIP. Markets, no doubt, are elevated levels and this can be very expensive. But you never know, right?

Let’s talk a little about the new fund offer that you’re coming out with. It’s a business cycle NFO. We keep hearing about the launch of new index funds, balanced advantage funds, etc. In fact, we’ve seen several NFOs actually in the last 12 months. What is this Business Cycle NFO all about?

We continue to look at various themes or products, which we feel make sense for investors to look at a point in time. We have launched in the past other thematic funds or sector funds at a time when we thought they were right for the market. And they have done well. For this particular fund, which is the Business Cycle Fund, I think any market timing is good. It is a kind of an all-weather fund unlike some of the sectoral funds or thematic funds.

There is no market cap and sectoral restrictions, the only thing is that it is more top-down. Top-down means when you are constructing a portfolio, there are two parts, right one is your top-down and the other is a bottom-up approach.  This fund will predominantly be driven by a macro top-down approach, and which is determined by the cycle in which the economy is in.

So, we have seen that various sectors can do well in different phases of the economy. For example, the economy is in an expansionary phase, then we see that the cyclical sectors do much better than the defensives.

Whereas when the economy is kind of decelerating or slowing down, the defensive sectors can do well that’s a broad general mistake, it’s not necessarily that way.

The objective here is to really try to understand what phase or what cycle we are in the economic cycle. And then with businesses. Based on that, take large allocations in those sectors or businesses, and construct a portfolio and then look at the underlying stocks within those sectors to build a portfolio.

So, in a way, one is trying to really optimize the portfolio based on the outlook on the various sectors. I think this kind of a fund is good at any point in time cycle because the fund would, to some extent, adjust for the cycle where we are in.

If you are in a kind of population market, then the fund will probably slowly start to adjust towards more defensives and create the right balance in that portfolio. We have other diversified funds, other flexi cap funds, where also we have some kind of a top-down approach, but here that’s the predominant factor that will give the allocation.

How many sectors would you look at any given point in time? As you rightly said, you would have other diversified funds and there also you and your fund managers would be trying to catch a particular business cycle by default. So, how would that differentiate this fund from your earlier ones?

There is no real gap in the number of sectors that will be there. Having said that, I think it’s well understood that this fund will be slightly more concentrated in terms of its sector allocation. For example, during an expansionary phase in the economy, you will see a larger concentration for non-cyclical sectors. It could be the commodity sector, it could be the capital goods sector, it could be the banking and financial services sector.

So, here the sectoral concentration, in a particular sector where we are more bullish, obviously, next one year, your perspective will be much stronger than what you would see in a normal diversified equity fund.

What kind of investors would this fund be suitable to? Would you put this in a more higher-risk kind of fund on the risk meter?

So, I would ideally like to see that this fund is akin to multi-cap fund or Flexi-cap fund and to some extent also diversified. There is a concentration in a particular sector at a particular point in time, but across the market cycle, this fund will move across sectors. You’re not fixing on a particular sector.

I think it is suited to most investors, I would say, those who are seeking a more diversified portfolio. Considering the fact that it has a slightly higher sector concentration at certain points in time, the risk will be slightly higher than a normal diversified Flexi cap fund.

It is investors who are looking at a more diversified broad-based portfolio, but with the added punch of a larger sector concentration, added with a slightly higher risk and also with slightly better returns. If you are making those top-down calls and those calls are right, then you should expect slightly better returns. Yes, slightly higher risk profile than a normal diversified Flexi cap fund.

Disclaimer: (This article is created on behalf of Aditya Birla Sun Life Mutual Fund by Studio9 team)

Aditya Birla Sun Life Business Cycle Fund

(An open ended equity scheme following business cycles based investing theme)

NFO Opens: November 15, 2021 NFO Closes: November 29, 2021

1.Name of scheme

Aditya Birla Sun Life Business Cycle Fund (An open ended equity scheme following business cycles based investing theme)

2. This product is suitable for investors who are seeking*:

i) Long term capital appreciation.

ii) An equity scheme investing in Indian equity & equity related securities with focus on riding business cycles through dynamic allocation between various sectors and stocks at different stages of business cycles in the economy.

3. Riskometer

*Investors should consult their financial advisers if in doubt whether the product is suitable for them

The product labelling assigned during the NFO is based on internal assessment of the Scheme characteristics or model portfolio and the same may vary post NFO when the actual investments are made.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Sector disclaimer- The sector(s) mentioned herein do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s).