Privileged is to bring to you
Mr Ravi Gopalakrishnan, Head of Equity at Principal Mutual Fund
Ravi holds over 25 years of experience in the Indian financial markets – particularly in research and asset management.
He has to his credit an MBA and Masters in Finance (Investments) from USA.
At Principal Mutual Fund, Ravi currently manages: 1) the Principal Emerging Bluechip Fund; 2) Principal Midcap Fund; 3) Principal Small Cap Fund 4) Principal Focused Multi Cap Fund; 5) Principal Multi Cap Growth Fund; 6) Principal Dividend Yield Fund; 7) Principal Hybrid Equity Fund; and 8) Principal Balanced Advantage Fund. Cumulatively he manages assets over Rs 5,900 crore in these eight schemes.
In line with the investment philosophy at Principal Mutual Fund, Ravi follows a bottom-up approach and combines it with disciplined risk management – which has enabled certain schemes managed by him to display a good performance track record.
Before joining Principal Mutual Fund in July 2019 as the Head of Equity, Ravi has worked with Canara Robeco AMC, PGIM India Mutual Fund, UTI Mutual Fund, Hudson Fairfax Group, USA, and Sun F & C Asset Management Ltd.
He believes that the most important part for a fund manager is to follow a robust investment framework to take investment calls, and he has been doing that.
In this interview, Ravi shares his view on how he is navigating the waves of the COVID-19 pandemic and the approach investors should follow.
Navigating the waves of COVID-19
PersonalFN: When the novel Coronavirus or COVID-19 cases were reported in Wuhan, China towards the end of the calendar year 2019; did you envisage it spreading to the rest of the world – turning to be a pandemic – and causing havoc?
Ravi Gopalakrishnan: At the onset of COVID-19, we believe that no one in the world envisaged it to be a pandemic affecting the global economies to the extent it did during 2020 and 2021. The World Health Organization also declared it a global pandemic, only in March 2020. There were many unknown factors attached to the spread of COVID-19 and honestly, these unknowns were far from anybody’s guess at that juncture and we were no exception.
PersonalFN: The first case of COVID-19 in India was reported in Kerala on January 27, 2020, and in the financial capital, Mumbai on March 11, 2020. Two weeks later, Prime Minister, Narendra Modi announced a nationwide wide lockdown. The Indian equity market tumbled and hit a low of 25,981.24 points on the S&P BSE Sensex on March 23, 2020. How did this impact the equity-oriented mutual fund schemes of Principal Mutual Fund, particularly the ones you manage? And from a risk management point of view, what were the measures taken to reduce the negative impact?
Ravi Gopalakrishnan: All the mutual fund schemes across industry suffered on the back of the market correction as the nationwide lockdown was announced. Our funds were also impacted by the sharp correction in the markets. However, we were fairly confident that the period of unprecedented market volatility could also be used as an opportunity to connect with our distribution partners and investors to help calm their nerves and not get worried about short term market volatility. We have always believed in running a high-quality portfolio consisting of companies with robust business models, superior balance sheet and significant cost leadership. This enabled us to reduce volatility across portfolios. We continued to implement our investment process and adhered to the risk mitigation processes and keeping the portfolio diversified across companies and sectors.
PersonalFN: Principal Mutual Fund launched two new schemes – ‘Principal Small Cap Fund’ in May 2019, and ‘Principal Midcap Fund’ in December 2019 – just before the outbreak of the COVID-19 pandemic. How did this impact the performance of these schemes? Did you consciously take any cash calls?
Ravi Gopalakrishnan: We believe that the disciplined and robust investment approach and pure bottom-up stock selection has been the key driving factor for the scheme’s performance. Further, the 6 pillars of our investment process also helped the funds’ performance. As a philosophy, we do not believe in taking concentrated positions and generally our investment in each company under the mid and small market capitalization space does not exceed 3% to 3.5% of the portfolio. Diversification is also a key determinant in adequately spreading the underlying risk while generating returns. As a philosophy, we do not take any significant cash calls in our portfolios.
PersonalFN: Since March 23 lows, the mid and small caps have zoomed much ahead of large caps – and beyond the fundamentals of certain smaller companies. Does this worry you; or you feel that despite the meteoric rise there is still a decent margin of safety available?
Ravi Gopalakrishnan: There are many midcap and small-cap companies that have improved their cost efficiencies, carry low leverage and have built a robust business model over time. The Make-in-India programme and Production Linked Incentive (PLI) scheme launched by the government, have the potential to create a lot of opportunities within the midcap and small-cap space. As the volumes start picking in the markets, these companies are potentially better positioned for margin expansion compared to the historical trends. Stock selection would be the key factor in picking up the right midcap stocks. We believe there are companies in these market capitalization space which are available at attractive valuations despite the market run-up of recent months.
PersonalFN: The second wave of COVID-19 has wreaked havoc. The numbers of daily new cases and the active cases have sort of slowed since the past weeks, but medical experts now point at a possible third wave around August-September this year. Do you see these waves of COVID-19 disrupting the wealth creation process through equities?
Ravi Gopalakrishnan: Despite the 2 waves of COVID-19, the Indian economy has shown resilience and is expected to recover in FY22 aided by the fiscal and monetary support, roll out of the vaccines and the return of economic activity to pre-pandemic levels barring a few sectors. From a near term perspective, valuations may seem somewhat stretched esp., during the ongoing 2nd wave of the pandemic and its potential economic impact in H1FY22. However, from the long term perspective, there are ample opportunities available for wealth creation. If you consider the expected improvement in economic growth along with margin expansion, the valuations do not appear to be very stretched.
PersonalFN: FIIs so far have been dumping equities. Do you see the old maxim, “Sell in May and go away” proving true this summer? Is the COVID-19 data, the way India has managed the inoculation drive so, our shortfalls in terms of implementing reforms, and macroeconomic undercurrents turning the focus of FIIs away from India …what are the reasons?
Ravi Gopalakrishnan: We believe that Indian equities are still attractive to FIIs and FPIs. While the net flow numbers* in Apr and May 2021 have been negative (INR -8,836 Crs & INR -1,958 Crs, respectively) these numbers are quite small when compared to the CYTD net inflow numbers of over INR 58,035 Crs. We are also experiencing healthy inflows from FPI in Jun 2021. We do not believe that foreign investment would remain away from Indian markets in the long haul, given the significant opportunities available in India, that are not available elsewhere.
*Source: www.fpi.nsdl.co.in ; Data as on 11th Jun 2021.
PersonalFN: Certain reports highlight that the impact of these waves of COVID-19 could be harsher on India’s GDP growth due to extended lockdowns and restrictions. What’s your take on this? Also, which sectors or themes in your view will lag and which ones will be the ultimate winners as we navigate the waves of COVID-19?
Ravi Gopalakrishnan: The 2nd wave of Covid 19 was largely concentrated, especially in the states that are economically important in India. The measures taken by state governments (like partial lockdown of businesses etc.) have impacted the economy of the state as well as the country. Further, rural India seems to have been impacted more during the 2nd wave compared to the 1st wave, The markets may be cautious about this in the near term, however, the Q4 results generally have been very strong and guidance from companies have also been particularly encouraging. Given the sharp run-up, we think the markets may be range-bound in the near term as the real impact of the 2nd wave will most likely impact growth in sales and profit of companies in Q1 FY22. Markets are likely to remain focused of the severity of the spread post the opening of the lockdown in addition to hardening of global yields and also global risk appetite.
PersonalFN: Take into account supply-chain disruption brought by the COVID-19 pandemic, the risk of imported inflation, cost-push effects, etc. there seems to be an upside risk to the inflation trajectory. The RBI, of course, wants to keep rates low to sustain growth on a durable basis amidst the pandemic. But do you see RBI’s current accommodative monetary policy stance turning counterproductive and at some point in time? Are we almost at the end of the current rate cut cycle? How are you approaching the rate-sensitive stocks and the consumption theme given this scenario?
Ravi Gopalakrishnan: In recent months, the RBI has expressed some concern on input cost pressures which can feed into inflation particularly commodity prices and logistic risks. However, overall the RBI has indicated that there are both downward and upward pressures on inflation reflecting their stance that they likely do not see inflation as a major concern. In this backdrop, the continuation of the FIT (flexible Inflation targeting) regime for the next 5 yrs is also seen as a validation of its success since past five years and gives a good measure of policy continuity.
We continue to believe Consumption will be one of the significant drivers of growth and economic activity over the next decade given the expected rise in per capita income and broadening of economic activity RBI’s accommodative stance is expected to continue for the foreseeable future given its commitment to support growth in the economy.
PersonalFN: On the backdrop of the pandemic, market valuations, and given that interest rates may move up gradually; currently, how are you switching between equity and fixed income instruments dynamically in your Principal Balanced Advantage Fund? Tell us something about it…
Ravi Gopalakrishnan: The net equity exposure in the Principal Balanced Advantage Fund is at 30.13% (as on May 31, 20201). The allocation in the fund is the outcome of a market valuation driven asset allocation model. The exposures to fixed income instruments are capped at 35% for the fund.
PersonalFN: Despite all the jitter caused by the pandemic, the fact is Indian equity markets didn’t correct much. Robinhood investors or newbies are participating in equity as an asset class (mostly through direct stock investing) for quick wealth creation, as perhaps the returns offered on some of the traditional instruments look unappealing. The number of demat accounts hit a record of 14.2 million in FY21 amidst the COVID-19 pandemic. Are investors right in going gung-ho on equities? Did investors pull out money or redeem from your equity-oriented schemes to dabble directly in stocks – what was your experience?
Ravi Gopalakrishnan: Equity mutual funds saw outflows for in 2020 with investors most probably booking profits and/or reviewing their asset allocations. However, as you rightly pointed, out there has been a huge increase in the number of demat account holders during the same period indicating increased interest in direct equity investments from individual investors.
For long term investments, equity remains the most attractive asset class for all investors and investors should continue to invest a portion of the portfolio in equities based on their investment goals and risk appetite. We also believe that investors should continue with their asset allocation based on their goals while trying to cancel out the noise from short term market movements in any asset class. Disciplined systematic investments in equity funds have a high probability of helping investors achieve their long term investment goals.
PersonalFN: In general, what will be your advice to investors on asset allocation and otherwise; how can they be smart investors and make investing a habit, so that it serves to be in the interest of their long-term financial wellbeing?
Ravi Gopalakrishnan: Investors should follow the asset allocation based on their investment goals and risk appetite. It is prudent for them to consult their financial advisors to decide on the asset allocation of asset classes and funds. These should be reviewed at a mutually agreed frequency. We believe investing through systematic ways like SIP and STP helps in building a disciplined approach to wealth accumulation. These are conventional ways to create long term wealth and thus may eventually lead to financial wellbeing.
PersonalFN: Which are the three books or blogs on investing that you follow and would recommend to investors?
Ravi Gopalakrishnan: Common Stocks Uncommon Profits, Philip Fisher
Mastering the Market Cycle, Howard Marks
A Tiger in The Land of Bulls And Bears – Julian Robertson, Daniel Strachman
PersonalFN: Thank you, Ravi, for your valuable time and insights. I’m sure investors will immensely benefit from your views.
Disclaimers:
The views / opinions/ beliefs/ expectations contained herein are the independent views of the investment manager and are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto.
This material should not be relied upon by you in evaluating the merits of investing in any securities or products. Diversification does not guarantee investment returns and does not eliminate the risk of loss. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Past performance may or may not be sustained in future. The views and strategies described may not be suitable for all investors. Investors are advised to consult their Investment advisors for determining their risk appetite and Tax Advisor before taking any investment decision.
The investment strategy stated above may change from time to time without any notice and shall be in accordance with the strategy as mentioned in the Scheme Information Document of the scheme.
The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully
