Investors who bought ULIPs three years ago haven't made great returns due to the large upfront charges. However, recent regulatory changes have made ULIPs attractive, says Mr Sampath Reddy, Chief Investment Officer – Equity, Bajaj Alliianz Life Insurance. Mr Reddy also explains how Bajaj Allianz equity funds have delivered good returns on the back of a conservative strategy.

Excerpts from the interview:

Are you seeing investors putting new money into unit linked insurance plans (ULIPs) now?

Inflows have unfortunately failed to pick up to expected levels. Though new IRDA regulations have made ULIP product much more attractive from an investor's perspective, I think it would take some time for the insurance companies to reach out to the customers on the benefits of revised regulations. Also the weakness in the equity market in the last few months has caused the new business of insurance industry tilt more towards fixed income products. Thus the inflows to equity funds have been muted.

Are you communicating with your investors and disclosing performance data?

Yes, we are trying to do that through newsletters and so on. But the fact of the matter is, despite good fund returns, investors who bought ULIPs three years ago haven't made a great return due to the large upfront charges. In the last one year, that has changed. If a fund delivers good returns, investors will be able to reap the benefits more quickly and directly.

Because ULIPs have a long lock-in period, do you have any advantages in fund management compared to mutual funds?

I would say that there is not much difference between mutual funds and insurance funds when it comes to fund management. We benchmark ourselves to mutual funds too, when we assess performance. The only difference I see it is that our inflows tend to be more predictable. Our investors usually have longer time horizon and this gives the fund manager a longer time frame and flexibility to perform. On the other hand, insurance companies are not allowed to take exposure to derivatives. Overall, I think the returns of ULIPs are quite comparable to that of mutual funds.

There is a belief that ULIP managers are passive investors who stick to index stocks. Is that correct? How big is your investment team?

There is that impression. Most of the investment management teams on the insurance sector were expanded in the last five years only. It is possible that some of the insurance companies may have had a cautious approach in managing funds initially, before they could scale up the investment research and team. However, we manage our portfolios actively based on the inputs from strong team of investment research professional. We have a 15- member investment team.

The three-year returns on your midcap ULIPs are 15-17 per cent which is a pretty good performance. What stock and sector choices helped that performance?

The midcap fund performance has been good due to a couple of factors. When we invested three years ago, we looked for high quality companies, companies that kept growing at 15 per cent a year and traded at a reasonable valuation.

We didn't go after sectors such as infrastructure, power and so on where there was a lot of action and momentum at that time and valuations demanded were very high.

We also focussed on companies with consistent free cash flows over the past four or five years.

Thus our investments in many mid-sized FMCG and pharmaceuticals, gas utility and companies linked to agriculture and pesticide have delivered excellent returns. We focused on investing these stocks at attractive valuations while investors were chasing infrastructure names.

With valuations of FMCG and pharma stocks shooting up have you rejigged your portfolios?

We haven't sold off any of our exposures in high quality companies. However, we used to have a fairly high level of cash in our equity portfolios. We have used that cash to buy into beaten down sectors. So the rejig is happening, but it is being done by deploying incremental money into beaten down capital goods and infrastructure names. My guess is that we had cash levels of 25-28 per cent in our portfolio in November 2010 and today in our midcap portfolios cash is down to 10 per cent. In the large cap funds, the cash level is down to 12 per cent.

Sticking to defensive sectors have helped you so far. But with valuations falling so much, what are the sectors in which you see potential now?

We have had large exposures in the FMCG and pharma space in the last three years. While are not selling out on FMCG or pharma. If if you look at our recent purchases, they have been completely outside of these sectors. Incremental money has been deployed in metals, mining, infrastructure and capital goods where we see good opportunities. Relatively valuations are much more attractive in these sectors than in FMCG or pharma. We do believe interest rates are very close to their peak. On banks and financials we see decent valuations especially in PSUs. However, we do see an NPA risk there. We would wait and watch on that sector.

Do you think investors should be fully invested at this level?

That's right. If you look at the earnings estimates for the market as a whole, it has been downgraded over the last three to four quarters. Estimates for the Sensex EPS have come down from over Rs. 1,300 to less than Rs 1,200 over this period.

However, we now believe that we have come to end of the downgrade cycle. Invest 10-15 per cent of any amount that you would like to allocate to equities on weekly basis from now till the next few weeks.

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