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1 year category returns: 1-2%. Here's why you should still recommend it.

Anup Maheshwari, Head - Equities & Corporate Strategy, DSP Blackrock

17th March 2016

In a nutshell

Rear view mirror investing is never a wise idea, and one product category that shows you why is the equity income / equity savings category. With a 1 year return in the range of 1-2%, the category has disappointed, but Anup believes the outlook is bright going forward, given his positive medium term view on equities and his expectation of a rate cut in the near future.

DSP Blackrock's new Equity Savings product will have an unhedged equity allocation between 20-40%, giving it a conservative positioning, while continuing to enjoy tax advantages thanks to its hedged exposures through arbitrage.

WF: A key concern for distributors relating to the equity savings funds category is the tepid performance over the last 1 year, which is in the 1% - 2% range. Why has the category done so poorly in the last 12 months and why should distributors be optimistic about better times ahead?

Anup: These funds have a long equity exposure of around 20% or more; this may have primarily acted as a drag to the performance in the last one year. One should note that S&P BSE Sensex is down over 12% over the last one year versus most of the funds in this category which are flat or marginally positive over the same horizon. Thus, the product is able to protect downside in falling markets and is able to provide modest capital appreciation in rising markets.

WF: Your unhedged equity exposure in the fund will vary between 20%-40%. Will the actual allocation be decided on the basis of an algorithm? What will be the likely equity exposure in the initial portfolio that you will cast?

Anup: The asset allocation shall depend on the fund manager's view of the market and available arbitrage opportunities.

WF: What is your equity outlook for the next 12-18 months and what do you see as the key drivers?

Anup: We expect corporate earnings to see a pick-up in the second half of CY2016, led by domestic cyclicals and interest rate sensitive sectors. This pick up in corporate earnings growth coupled with full transmission of lower interest rates and expanding return on equity (ROE) for corporate India makes us very optimistic about the outlook for Indian equities in the medium term. Medium term risks for markets include geopolitical tensions and possible increase in crude oil prices as a result and a global growth slowdown.

WF: What will be the equity strategy for the equity portion of the fund?

Anup: The equity portion shall be invested in a well-diversified mix of stocks that shall be actively managed. We do not expect to have any specific market cap bias or sector bias in the equity portion.

WF: What is your outlook on fixed income markets - in terms of interest rates as well as the strife we are seeing in corporate bonds with downgrades and liquidity drying up?

Anup: We expect the RBI to reduce the repo rate in the next credit policy due on April 5th, 2016. We also expect the RBI to maintain accommodative stance amid further softening of CPI and improvement in systemic liquidity conditions in new fiscal year. Based on that, we expect a gradual decline in yields over the medium term. Risk to our positive view could be in the form of inadequate monsoon and potential imbalance in demand-supply dynamic.

WF: What will be the strategy for the fixed income portion of the fund?

Anup: The fixed income portion of the fund shall also be actively managed through predominantly high quality fixed income assets. The weighted average maturity of the fixed income portion is likely to be in the range of 1-5 years, depending on the interest rate outlook. The allocation to government bonds, money market assets and corporate bonds will be based on the fund manager's views on relative value and optimal risk-adjusted returns in the medium-term.

WF: How would you suggest that distributors position this fund and who is it most suitable for?

Anup: This fund is most suitable for investors who are seeking a portfolio with a prudent mix of equity, arbitrage and fixed income with an aim to provide:

  1. Stable returns: Fixed income/ Arbitrage portion could provide returns with low downside risk

  2. Capital Appreciation: Equity exposure adds the potential for capital appreciation over medium term

  3. Favourable Taxation: Treated as an equity-oriented fund for purpose of taxation



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