Sankaran Naren on the importance of volatility

By Morningstar Analysts |  04-04-17 | 

ICICI Prudential AMC won the ‘Best Fund House Equity’ and ‘Best Fund House Multi-Asset’ awards at the Morningstar Fund Awards 2017.   

In 2016, it won the ‘Best Fund House Equity’ award and in 2014, it won all three Best Fund House awards – Equity, Debt and Multi-Asset.

Sankaran Naren is the executive director and chief investment officer at ICICI Prudential Mutual Fund. Here he chats with Kaustubh Belapurkar, Morningstar India’s director of fund research.  

ICICI Prudential AMC has consistently been appearing amongst the top fund houses doing exceptionally well. What is being done that's really putting all the blocks into place?

You have to create a good research process and I think we've been working on improving our research process consistently. We have a fund management team which is basically homegrown and we run different types of strategies.

We've worked a lot to try to create different styles within the company. If you look at specific styles like value or quality, there are times when value does well, there are times when quality does well, and there are times when growth does well.

So, given that we are a mass asset company trying to service investors all over India in all types of categories, we have worked a lot in trying to create different styles of fund management. And given that markets don't behave in a similar way, I think I would say that that has helped us a lot.  We have seen periods where quality has just done exceptionally well. There have been periods where mid-caps have done extremely well.

On a continuing basis, one of the key things that we try to do is introspect into what we did right and what we did wrong and keep improving our processes so that we make newer types of mistakes and not old mistakes.

I must tell you 2012 to 2016 was a less volatile period for equities. If you see the last five years, there has not been a year where the market has gone down 10% also in the large-cap index. So, I think our processes are going to be tested when the market is much more volatile and how we handle the market when it goes up substantially and becomes overvalued like 2007. Those are all going to be very interesting periods for fund management, for me and my entire team.

ICICI Prudential AMC has also been doing fairly well on the allocation side where you've really grown balanced into a very meaningful category from an investor's perspective. How should investors be playing that? What is your take on the balanced category of funds?

In the last 20 years the two good things have happened.

First, people recommended systematic investment plans and they also became meaningful.

Second, we have also actively encouraged money coming into products like balanced and balanced advantage funds. Because my view is that over the 27 years that I've seen markets, it has delivered returns but the investor experience has not been in line with market returns. Having been a fund manager through 2007 to 2009 I have seen this acutely between 2007 and 2009. So, I think the entire trend towards balanced and balanced advantage fund, along with SIPs, is the best thing that has happened to the mutual fund industry.

The interesting thing is that nowadays market corrections don't worry us because we have always got opportunities to buy thanks to market corrections. And that is very, very healthy because if you look at it, if you're able to keep buying as the market falls, then the investor experience will be pretty good. I think this trend is the best thing that has happened to the mutual fund industry. And I hope investors will benefit out of it because even the global experience has always been that investor experience is worse than investor returns. The goal, I believe, for every mutual fund including ours will be to improve investor experience because investor returns will always come, but if you are managing to improve investor experience, you're going to have a very good situation for the industry.

Growth in the industry due to SIPs and products like balanced and balanced advantage, will sustain for a much longer period. The day it starts going back in a mega way into themes which are overvalued, then I would actually worry about the growth in the industry. But right now, it is just the opposite at this point of time.

Do you think we are in that space where we can cushion ourselves against foreign flows or outflows? We've seen early signs of that, but do you think that that's something which will continue going forward?

I would like to see some volatility. Luckily 2015 and 2016 showed periods of time when the market went down. I think certain amount of volatility ensures that people don't cross the level of risk. So, I would actually worry if there is no volatility. I would worry if there are no downs in the market. Because I think it was the downs in 2015 and 2016 which basically encouraged the balanced and balanced advantage fund category. And I believe that periodically you do need volatility for markets.

One of the biggest worries I've seen is that when you have 4 to 5 big up years, in every succeeding year people forget the word risk. And that I don't want that to happen.  Because when they forget risk our industry goes through volatile periods. Right now, the volatility in fixed income makes the product much more interesting to us as a fund manager.

If the market kept on going down as it was in the last two years, that would have been much more boring than the current situation where there is volatility, because then people are conscious of risk and then they take the right decisions. And I think we need volatility.

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