Sivasubramanian: Govt Must Incentivise Long-Term Savings in MFs

Franklin CIO KN Sivasubramanian on how mutual funds can grow in India and his view on the markets and the economy.
By Nazim Khan |  04-09-12 | 

Tucked away in Chennai, far from the busy confines of India's financial capital, sits KN Sivasubramanian, Chief Investment Officer, Franklin Equity - India, Franklin Templeton Investments.

Sivasubranian is one of India's most experienced and successful fund managers and under his leadership, several of Franklin's equity funds have achieved market-beating long-term performances.

In an interview, Sivasubramanian spoke to Morningstar about his investing philosophy, markets, economy and the mutual-fund industry.

The market has not gone anywhere in the past five years. What are the key things to keep in mind when it comes to bottom-up stock selection to get ahead in this Indian market?

Our belief is that irrespective of market conditions, there will always be stocks to invest, given our long term focus. Our emphasis is on companies that demonstrate the ability to deliver good results across business cycles, helped by sustainable competitive advantages, quality management teams and strong market positions.

In that sense, we ignore momentum stories that reflect short term market movements or fads and focus on building a portfolio of companies that are creating long-term value for their shareholders.

In both Franklin India Bluechip and Franklin India Prima Plus, you are overweight private banks, underweight consumer defensives, slightly overweight healthcare since some time now. Is that a sector-specific call or just a result of sector-agnostic individual stock picking where you are seeing value?

Our sectoral exposures are a derivative of the bottom-up stock selection process. At a broad level, we believe that consumption and investment will be the long term drivers underpinning India’s strong growth.

We are positive on the banking and financial services theme, due to low penetration of these services in India. Within this space, we prefer private sector banks to public sector ones, as the former seem better placed on the asset quality front. 

Perceived as defensives, consumer staples have recorded sharp gains over the last year or so and we think valuations are stretched. This has made us very selective in this space.

Talk to us about the Indian economy, which has been struggling with issues such as a stagflation-type situation and a sense of policy paralysis with governance. What to your mind are key reforms that can really turn things around and do you see them taking place in the foreseeable future?

Key policy changes that could revive investor and business confidence in India include:  credible progress on the fiscal front through expenditure and revenue reforms including implementation of GST and DTC; clear policies on natural resource utilization/allocation; taxation reforms--general anti-avoidance rules (GAAR) and the proposed retrospective tax-related policy changes need to be reviewed; and relaxation of FDI norms in sectors like retail, etc.

The government should also consider providing incentives for diverting long-term savings in gold and real estate into productive sectors of the economy. This will help provide much needed capital to the Indian economy while also creating a long-term savings pool for citizens.

The government appears keen to address policy perception; however given the nature of prevalent coalition politics, the timing/pace of change for large reforms remains uncertain. Nonetheless, regulatory risks should reduce over the medium to long term in India.

What about the global economy: the action of central banks in the West has largely tried to stimulate spending and risk appetite in economies that are, at some level, struggling with a fundamental problem of unsustainable debt levels and spending. Do you think this is the ideal way to approach the problem and is there anything that worries you about the global economy in a big way?

Given the scale of the 2008 crisis and the level of global imbalances, central banks and policymakers continue to face tough choices in terms of balancing growth focus with fiscal consolidation.

Compared to 2008, the range of monetary tools available with the ECB and the US Federal Reserve now is limited and they will need to resort to creative ways, going forward.

Overall, policymakers and the central banks have made it very clear that they are ready to intervene if growth falters any further.

We need to closely track commodity prices that have been largely firm due to speculation about event risks rather than demand-led pressures.

Within that, how do you see markets in the developed world over the longer term and whether we will see the term "decoupling"--which vanished from the investing lexicon after 2008--make a comeback with respect to emerging markets anytime soon or over the long haul? 

We always believed that the definition of decoupling was quite vague–-given the integrated nature of the global economy (in terms of trade and capital flows), there was never going to be a clear severing of dependencies. 

However, EM economies have fared quite well through the crisis and their share of global output has only increased and growth rates remain well ahead of developed counterparts. 

There is a growing divergence in the performance of various EMs, countries with weaker fundamentals and large financing needs such as those in Eastern Europe are vulnerable to external shocks. There is also a set of nations that depends largely on exports for growth and is exposed to global slowdown risks. 

However, the strong fundamentals may not necessarily translate into strong financial market returns, especially when examined for short timeframes, due to financial linkages and risk aversion that tends to impact all markets. 

Finally, give us a word on the mutual-fund industry in the country: you have had a ringside view of its growth through the past two decades but of late, we have seen hiccups. Will it overcome the current problems and continue to power ahead in the years to come and how? And what will it take to awaken the cult of equity: is it just a bull market that’s required--a la 2003-07--or something more? 

Growth in the Indian MF industry has slowed over the last couple of years owing to a combination of factors--namely market volatility and regulatory changes. 

With the right policy framework, the industry can grow at an accelerated pace over the long-term. Recent measures by SEBI seek to address some of these issues, and we are awaiting detailed guidelines for greater clarity. 

Globally, access to the long-term savings pool--especially mandatory retirement savings--has been a key driver for mutual funds. Given the long-term nature of these savings, they hold more relevance to equity funds.

We believe adequate tax incentives to encourage citizens to park their long-term savings in equity funds are an important step to boost flows and bring about stability. This will also help divert savings away from physical assets into productive sectors through capital markets.

I have had the privilege of managing equity funds that have close to 20 years of consistent track record across market cycles. Whilst there is a tendency to focus on short term performance, it is imperative that the mutual fund industry gets out the message of long-term wealth creation.

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