Good time to increase equity allocation; risk-reward is favourable: Vetri Subramaniam, MD & CEO, UTI AMC

How do you view the risk-reward scenario in the equity market? You think the correction is on its last legs?

Two years of equity markets going nowhere means that they have effectively de-rated over this time, as earnings have grown. Our internal asset allocation model is now suggesting that this is a good time to increase equity allocation. The risk-reward is compelling for investing in equity through lump sums and raising equity allocation. Historically, this is the region in which forward outcomes have been far more positive. This doesn’t mean the market will turn around tomorrow, but the risk-reward is favourable. Today, the market is attractive and very different from where it was in September 2024, or even in late 2021 and early 2022, when our model suggested reducing equity allocation.

What are the risks from rising US bond yields?

We are seeing a 20-odd-year high in US yields but it is not a 20-year high in Indian yields. From 2016 to today, even as the US 10-year bond yield is up by around 370 basis points, the Indian 10-year bond yield is up by only 40 basis points (100 basis points equal one percentage point). Borrowing rates and mort gage rates have also moved differently. So, yields are a problem for the US, but in India, the situation is different. We are not dealing with record-high bond yields. Certainly, the attractiveness of our bond markets comes down because of the narrow yield differen tial, but global investors are also aware that, over the last one, three and five years, they have been better off holding emerging market (EM) bonds than US bonds. This is for the simple reason that the US has been fiscally irresponsible, with no sign of bringing down the fiscal deficit even when the economy is doing well. India and most other EMs have done a far better job of managing their fiscal deficits. So, while this will certainly cause rate sensi tive capital to not necessarily favour India but many investors are aware of the structural problems in the US. They are aware that if the US continues to remain fiscally profligate, then yields can climb much higher whereas India and many EMs are doing a much better job. Another reason why the US yields are high is that in the last 18 to 24 months we have seen massive corporate demand for money because of the artificial intelligence (AI) build up. So there is a cyclical element related to that capex boom. Money is not flowing from global investors into the US sovereign bond market but into the US equity market at the expense of every other market, including from AI-linked markets like Taiwan and Korea. The US is just drawing disproportionate capital out of the rest of the world.

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Themes or sectors compelling right now?

This is a good time to invest in a well-diversi fied portfolio. Our preference is for a diversi fied portfolio with a large-cap bias, not a port folio which is only doing mid- or small-caps, for valuation reasons. On a sectoral level, our view has been that the biggest oppor tunity in India is in the banking, financial services and insurance (BFSI) space. Within that, the capital market may be slightly aggressively valued, but core banking and lending businesses are attractively valued in India. The potential for good absolute re turns in a challenging environment in BFSI is good. With credit growth running in the mid-to-high teens, it is a very supportive environment for the financial system.

UTI MF’s equity strategies have been struggling. What levers are you using to improve performance?

We have always relied on an investment process which supports a range of strate gies. We are quite happy with how our entire value-oriented set of funds have done. We do understand the challenges that our quality, growth-oriented strategies have experi enced. The market has not been favourable towards that component of the market.

But beyond what the markets are doing, we as a fund house have had issues in strategies we manage in a more blended fashion. I think our execution has been slightly poor in that area. We are trying to re-establish the guard rails so that we do not see a gap between what our process is telling us to do and the kind of execution that resulted in subpar returns. This comes down to portfolio positioning in terms of combining companies that are able to fit into that blended portfolio and, at the same time, do not move the portfolio too far away from a centrist position towards one of the extremes. We have got deep value on one side and aggressive quality growth on the other, but some of these funds just strayed from their middle positioning. What we are trying to do now is just make sure they remain in that mid dle positioning far more effectively.

Our preference for large caps (owing to valuation comfort) has also contributed to our underperformance in the last few years, as small- and mid-caps have blown out the lights. But this is a temporal thing that will correct itself. Further, we have also refreshed our tal ent and coverage. The markets widened dra matically in terms of the listed universe over the last few years.

UTI MF’s investing philosophy is perceived as conservative. Comments?

I prefer not to use the word conservative. I look at this as being process-driven. There is a mechanism through which any company can be brought into coverage, there are guardrails around the required level of cov erage, how large the position can be within the portfolio, and so on. For us the process is very important to make sure that over time we are consistent and prudent in the way we manage money. But I would not interpret that as being conservative or aggressive; we are disciplined. We are not going to throw that discipline to the winds just because some thing is in fashion. We are here to serve inves tor needs and it is important to follow the risk management process at all time.

UTI MF has so far stayed away from the specialised investment funds (SIF) space. How do you view this segment?

In the SIF space, the biggest proposition currently is the standard hybrid long-short strategy. In risk-reward positioning, it sits slightly above the traditional arbitrage fund. I think the long-term value in SIF lies in of fering a product which has a very different risk-reward and a different investor experi ence. There are challenges in terms of the talent which is available, which knows how to manage that long-short position in a format which creates value for the investor. So we have been a bit slow on this because there are talent issues and shorting is not something which comes naturally. Just because some body is a long-only fund manager does not mean everything they do not like becomes a short position. When we do it, we want to make sure that we have the product which can be different from what our current prod uct range is offering, and creates a new kind of product for the market rather than yet an other attempt to fill up one more white space. We will eventually go down that path when we have the talent and the process to manage it. We have not rolled out the SIF brand offi cially yet but that should happen soon.

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How do you view the shift to global markets after two years of flat returns?

Honestly, it just amounts to the same return chasing. I still can’t get over the fact that we saw record inflows into gold funds in December and January this year. That was nothing else but just chasing momentum. Unfortunately, some part of what we are see ing in this global investing boom is also just return chasing. Any global offering must exist for diversification and the reason you diversify is to improve risk reward, not to go and chase momentum in some other part of the world. That is the thought process with which we want to offer global products. It makes sense for you because it improves your risk-reward. If you were an investor in South Korea till 2024-end, or maybe even early 2025, you would have been crying that on a 5-10 year basis you have done miserably and then in the last two years everything changes. Now if you say you will invest in Korea on the merit of the last two years’ performance, you are chasing momentum. Any investment in that country held over many years would have created diversification, which would have improved risk-reward.

Your advice to younger investors?

I sense disappointment with a lot of investors who say they have not made any money for the last two years. Equity has never been a linear asset class. It is always non-linear; it’s idiosyncratic in terms of how the returns im prove. Eventually, the important thing in the compounding journey is the ‘n’ (number of years of holding investment). You need to stay invested for some period of time and eventu ally the benefit of that ‘n’ kicks in and the ‘r’ (rate of return) also improves. Trying to make money by just focusing on that ‘r’ on an an nual basis is self-defeating and you will only be chasing momentum. Also, when I meet a lot of younger investors, I see too much focus on making money quickly. My response is that the biggest value you will create at your stage of life is to focus on compounding your ca reer’s earnings. That will be of far more value to you in the next 20 or 30 years rather than trying to compound your capital on a small amount of money. This is not to say you don’t start investing early, but your focus cannot be on managing your portfolio to create returns. Focus on career compounding before you worry about compounding your wealth.

RAPID FIRE

Q.An investing theory you believe more now than previously?

That investment success is less about making big decisions and more about having an investment process.

Q.From fund manager and head of equities to CIO and now CEO, how do you see your evolution?

My focus has shifted from numbers and markets to people, culture, values and governance. Earlier, I analysed companies outside-in, now it’s my responsibility to drive change inside-out.

Q.If markets could talk, what would they say to investors today?

Bear markets are fertile grounds for investing.

Q.If your portfolio were a Bollywood movie or song, what would it be titled?

Ruk jaana nahin tu kahin haar ke. Kaanton pe chalke milenge saaye bahaar ke.

Q.A trend or theme you think investors are underestimating?

Banking and lending businesses are being underestimated

Q.From fund manager and head of equities to CIO and now CEO, how do you see your evolution?

My focus has shifted from numbers and markets to people, culture, values and governance. Earlier, I analysed companies outside-in, now it’s my responsibility to drive change inside-out.

Q.Any recent market narrative that makes you cringe?

That concentrated portfolios are better than diversified portfolios.

Vetri Subramaniam

MD & CEO, UTI AMC