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Why Sunil Subramaniam is betting on largecaps now

We believe that the largecap space will continue to benefit from FII flows which will be sustained over the next three to five year period, says the MD & CEO, Sundaram Mutual Fund.

You have got your new fund offering opening tomorrow. Do you want to run us through that?
Yes, as you know Sundaram over its two decades existence has been known for the high risk, high reward spectrum of midcaps, small cap and sectoral funds. But over the last three to four years we have been also building capability in the multicap and large cap space. We launched a balanced advantage fund a few months ago, we launched a multicap equity fund one year ago. As part of this build up, we are now launching a diversified largecap fund. We already manage a concentrated largecap fund named Sundaram Select Focus which is a five star Value Research fund. We also have a large and midcap product which is a four star value fund and we have a balanced fund which is also four star.

Clearly, we have been successful in building a good performance track record in the multicap and in the largecap space. This fund named Blue Chip Fund essentially is going to be a diversified largecap fund as opposed to our Select Focus which is a concentrated largecap, 45-50 stocks and as the name implies it is going to use quality as a preference to pick stocks. We believe that in the long term, if you take the Nifty 100 as the benchmark, 46 stocks have remained in the benchmark in a period of 10 years. If you had invested in these 46 stocks in 2009, Rs 100 would have gone to Rs 289 versus the index going to Rs 240. Clearly there is good alpha available from good stock picking. Our approach is to use quality as a filter is and the fund manager for this is Rahul Baijal who also manages the other five star rated funds; Select Focus and the four star rated Equity Hybrid Product. He will bring his skills to the table in identifying winners in the large cap space.

We believe the economy is on the throes of a V-shaped recovery but that is still some months away. At the same time, FIIs have expressed strong interest in India as we can see we are the only emerging market to get calendar year to data and financial year to date, we have got about Rs 80,000 crore, the only emerging market to get positive flows. This is on the back of our long-term growth potential which long-term FIIs like pension funds are investing in.

We believe that the largecap space will continue to benefit from these FII flows sustained over the next three to five year period which should give largecaps not only a good stock price growth potential but also given stability that if there is a selling by domestic MFs as has been recently the case, the FIIs are there to buy. And also due to US elections or some other news, volatility comes in and FIIs sell out, we can see that domestic mutual funds have about 70% of their stock exposure only in the largecap space and so there is adequate liquidity support. Hence the corrections will not be as steep and deep as the broader market.

We believe that for the first time, for equity investors and people with a more moderate, conservative bent of mind, this product is ideal product for getting inflation beating returns. As you know the Nifty over 15-20 years has given 11% per annum compounded growth rates and if you take the advantage of taxation for equities, that 11% comes to 10% post tax which should easily be double of what the current bank deposits, for example at 6% post tax, will be between 4% and 5%. So the largecaps have the potential to deliver better than in terms of the other asset classes. At the same time, it gives stability to the portfolio. This is probably one of the final steps in Sundaram Mutual’s journey to have a more rounded investor experience through a range of risk reward products.

What is the concentration for this new fund offer? I understand the midcap contribution is likely to be at about 20%?What is going to be the sectoral thrust?
The midcap concentration was risen by the regulator. Once you classify as largecap, you are permitted to have only 20% outside of largecaps and to that extent that we will use it for buying emerging blue chips which can then grow into largecaps.

In terms of focus, this is going to be a blend of growth and value and so in terms of sectors also the growth sectors plus the value sectors will form a blend and our current view in terms of that is IT and telecom are the key growth sectors in the next phase. Banking is currently passing through a lull, but following a V-shaped recovery of the economy, it will develop into a very strong multiplier.

Financial services as a space — be it insurance or asset management — is a big play for us from the medium-term perspective. We will selectively add industrials and cyclicals as we see the V-shaped recovery. Today they are value picks and we will take on the good quality companies in moderation and then add to the portfolio as we see clarity in V-shaped economic recovery. Pharma in the current context is also a strong stable sector which will also form a part of our portfolio.

What is the sense that you are getting when it comes to the overall largecap focus? Largecaps have generated an 11% CAGR over the last 15 to 20 years.
We think that given the liquidity supply for FIIs and the safety oriented approach, people in a post pandemic world would give a higher value to safety. That is the reason why insurance will also get a higher demand if the largecap fund is ideally positioned to give investors a relatively less rocky experience. So within the equities category, largecaps are at the safer end of the risk reward spectrum and hence while on the one hand, the epidemic seems to be coming down in urban areas, we are also seeing it going up in rural areas. It will take some more time for a vaccine to be announced and it will take time for a V-shaped recovery of the economy. It could take a maximum of a year but in that period, largecaps have the capacity to deliver value because for the long term FIIs, India remains the best among the emerging markets because the low price of oil and our demographic dividend via cheap labour. China is aging and by 2024, India is expected to be the third largest country by GDP size in the world, which is a phenomenal rise because 16 years ago we were nowhere.

India will remain a very attractive market for foreign flows and which will be essentially 85-90% in the largecap space. Take the recent guidelines from Sebi for multicap funds. Sebi brought those guidelines because the multicaps where the fund managers have flexibility, were 70% in largecaps. Our new fund makes eminent sense for investors and we would say that even a first time investor in equities can look at this fund through the SIP route.

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