Global asset management firm Invesco has recently acquired complete ownership of its India joint venture, with the Religare group selling its stake. Business Line spoke to Vetri Subramaniam, Chief Investment Officer of Invesco AMC, for his views on the transition and the outlook for the markets.
Earlier, as Religare Invesco Mutual Fund, your equity schemes have come to be strongly associated with a growth style of investing, where you strictly filter companies on return on equity, cash flows and similar parameters. Post the takeover by Invesco, will there be a change in this style or investment process?
No. Invesco owns a diverse set of asset management businesses across the world and believes in allowing Investment teams in different geographies the freedom to decide on their own investment process and style. There is no single investment process that Invesco follows across the world.
But what did change, three years ago, was that when Invesco came on board, our performance measurement and risk management systems moved to their global template. There is also knowledge-sharing, where all the global Invesco managers meet and interact frequently to discuss our ideas. So the thrust is more on global knowledge sharing than on adopting a single style or process.
Is there scope for bringing some of Invesco’s other global products to India? Invesco is a leader in index funds, for instance.
Yes, we are leveraging Invesco’s brand and capabilities to launch some new products. In the last two years we have launched a Pan European Fund, which is a feeder fund, and a Global Equity Income Fund. We are also engaging with them for passive products where they are global leaders. Globally ‘factor investing’ and ‘smart beta’ products are quite popular. These ETFs basically identify the factor that is responsible for an active manager’s outperformance, then try to mimic that through an index product. Powershares’ ETF products increasingly fall in the Smart Beta category. I think these kind of index products will certainly see more investor interest than simple index trackers. In India, active funds are still creating significant alpha. But that gap is coming down over the years. The NSE and IISL have already launched thematic indices. I think if you are able to create good smart-beta products, bring down costs for investors and also get wide distribution, index products can attract more investors. But this won’t be an either-or situation. I see both active and passive funds co-existing.
Do you see corporate earnings recovering to the double-digit growth that has been projected for so long?
The underlying momentum is still weak. We are yet to see volume growth returning across a range of businesses. Pricing power is absent in many. So the visibility of double-digit growth is still weak. But are there levers which could create double-digit growth? Yes, there are. Low capacity utilisation levels could improve. Leverage levels in corporate India are finally coming down. From tracking earnings for the last twenty years or so, I have found that analysts are not perpetually bullish. They are just anchored, usually to a 15-18 per cent kind of projection for the next year. When we are in a bad period like recently, the actual growth at 7-8 per cent has fallen well short of estimates at 15 per cent. But mind you, in the good years, the projections can still remain at 15-18 per cent, when growth is running much higher. The classic case is 2003, when by March everyone knew that it was a great year for profit growth. But still the estimates for 2004 were at 12 per cent. Yes, 15 per cent has been the actual long term trajectory for earnings in India. But if you count the number of years in which earnings actually delivered that number, it may be pretty small! The volatility of the number around the average is quite high.
Do you think it is a risk that mid-cap and small-cap firms are trading at a premium to large-caps?
With market cycles you live and learn. Each cycle may be different. But one learning is certainly that if your starting valuations are high, it will affect your overall returns. Even if earnings pick up from that level, the multiples can de-rate. We think mid-cap valuations are expensive and that there is relative value in large-caps. This is not to say that large-caps are cheap. They also trade at a premium to long-term averages. But mid-cap premiums are at unusual levels and entering at this level can compromise returns.