Cut Out Noise, Invest In Long-Term Prospect Of Economy: Market Expert A Bala Subramanian

The benchmark Indian index Sensex crossed the 75,000 mark in April, driven primarily by 30 index constituents cumulatively adding Rs 11,90,638 crore to their combined market capitalisation. In the same month, the other benchmark index Nifty 50 breached the 22,700 level mark. But the exuberance around large-cap stocks simultaneously came with mid-cap and small-cap stocks being pulled up by Indian regulators after they recorded bouts of volatility. 

When it comes to stock markets, people are mostly looking for answers on when it is a good time to invest, as there is always some apprehension around markets. For instance, India is going through a general election and results are expected soon. Concerns around instability have led to the markets giving up their gains. However, since markets are at an all-time high it’s also good news for investors. 

“Several people do not consider any investment, thinking that the market will come down further. Therefore, let me time my investment. And invariably all such people would have remained outside the market… You have to ignore those noise levels, be brave in that period, and put a leap of faith in the equity market for the long term,” A Bala Subramanian, the managing director and CEO of Birla Sun Life Mutual Fund, told The Core.

According to Subramanian, managing risks is possible only through asset allocation. Asset allocation is something I think within the equity space is a broad market itself. “Stock performance is linked to the index movements. As we go down the market cap, you start finding tomorrow's large-cap companies today, when they are small, which essentially means they generally tend to grow faster than big companies, and therefore unlocking a value generally is high,” Subramanian said. 

In The Core Report: Weekend Edition, financial journalist Govindraj Ethiraj speaks with Subramanian to understand the fundamentals of markets and investments.

Edited excerpts:

The markets recently hit peaks. We were at 75,000 on the Sensex. And of course, the markets have been steadily hitting a peak for more than a year now. The question that many people have is should I invest now? The second part is to look back at (your experience of the) 30 years before we came to the 75,000 mark. And as you look back, what are the key lessons? 

I think 30 years of experience has allowed me to look at various market fluctuations, various crises that come and hit the market, shook the confidence, and whether it is from interest rates, whether it is from the global market going for a toss, or an energy market crisis, or even global financial market crisis, scams, multiple scams. 

All those things have taught me one thing, being in the investment world, these issues will come and go. They are not permanent systems. What remains a permanent system is the hope and optimism that could drive economic growth next level. 

Second is how companies are being built to build the business for the future. They are building the business for the future, therefore how much they are committed to building the future. And then accordingly work backward to ensure you make the right investment and generate profits, increase your customers, and so on, and so forth. And if you look at in that context, every crisis, somebody has made an investment, they would have made actually more money than somebody would have just remained invested in the market. 

That's the way I think I see the experience of the 30 years coming in handy. 

Experience has also taught me, that general noise levels when the market turns negative are far higher than the noise levels when the bullish market remains. In the bullish market, not everybody will be sceptical, whereas, in the bearish market, there will be more people who become sceptical, saying it was known it was supposed to fall. Therefore they stay on the fence. 

Several people go to the fence, not considering any investment, thinking that the market will come down further. Therefore, let me time my investment. And invariably all such people would have remained outside the market by being worried and not looking at the big picture, which could drive the market to a higher level. That's something also I've learned that you have to ignore those noise levels, be brave in that period, and put a leap of faith in the equity market for the long term. Therefore optimism, a little bit of hope, a little bit of conviction, yes, our economy will do well, the market will do in the long run, and therefore you must invest. That has been my biggest experience. 

But during that period, managing volatility, managing vulnerability, managing uncertainty, they're all part and parcel of the game. So how do you do that? Only through asset allocation, nothing else. You can't be a perfect investor, except by managing your downside risk by focusing on asset allocation and so on, and so forth, or focusing on staying calm during the period of volatility, and then staying through the whole crisis, then you become a winner. That's the way I've seen my 30 years of experience.

Coming back, specific to the market. First of all, you asked a question about the market at an all-time high. In my 30-year cycle, I would have seen the market touching an all-time high multiple times. With every market has to touch a new high. When the index was 3,000, definitely 10,000 index was a new high, ten became 20 was a new high, 20 became 50 was a new high, 50 became 70 was a new high. Maybe all probability 75 also will go to one lakh in the next five, or six years. A new high is the question of how you see it. 

The market always discounts most of the stuff well in advance. As I mentioned hope and optimism are the ones that get discounted in the market. Because the market first moves and then the result should come. When the result doesn't come as per the expectation of the market, generally the market has got tendency to give up temporarily because it has not met the expectations of the street at large, and our money managers at large. 

Therefore the market has a tendency to give up. Sometimes you see the volatility in the market as more of giving up, of not meeting the expectations of the predictions. That's where the market is, otherwise, it doesn't change the fundamentals. Fundamentals remain constant. 

My own belief is that we are seeing after touching the 70,000 index, we are seeing some of the volatility. But you ought to remember volatility as a percentage if you see very small. In a market that has gone up by 70,000 indexes, suppose it falls by say 1,000 points. It's only a 1% or  1.2% fall. But the same thousand points fall as happens is 57,000 index is almost close to about 2% fall. My belief is as the market is becoming more and more mature, I think fall will be relatively less, bearable. It can be tolerated. At the same time, one need not necessarily get worried as if this fall or fluctuation is going to make me suffer big time. People want movement. It has to either go up or come down. If it remains flat in the range of say one and a half, 2% kind of range, the general frustration level also gets set in. 

And we have seen those periods many times.

We have seen those periods. In my 30-year period, I have seen all these. I have seen a period of consultation. I have seen a period as if the world is not going to survive tomorrow, especially the global financial market crisis. All of us felt being in the financial industry, is it the right industry to be in. And a lot of you are looking for a job outside. Something that happened in the internet bubble made a lot of people quit the IT industry to come to the financial market and other industries. Whereas those who are stuck in the same industry in technology would have made tonnes of money, both in terms of salaries as well as wealth creation. And the same thing applies to every industry, I would assume. 

Did you ever feel in 2008 that you wanted to leave the industry? 

In fact, in 2008, after the global market financial crisis, it did occur in our minds. Are you in the right industry? Is it something we should change our industry, go to the traditional manufacturing industries, or take up something more stable where we don't have the fear of job losses kind of things? 

Fortunately, the way regulators then came to address the issues and we're all involved. Even I, along with some other industry colleagues, was involved in finding a solution, working closely, shoulder to shoulder with regulators, and finding a solution.  

Tell us about asset allocation and has anything caused that to change in the way you allocate assets in the last, let's say, two or three decades? 

Asset allocation is something I think within the equity space is a broad market itself. And as the market becomes bigger and bigger, they generally tend to grow lower than the rest of the market. And therefore the stock performance is linked to the index movements. As we go down the market cap, I think as you start finding tomorrow's large-cap companies today, when they are small, which essentially means they generally tend to grow faster than big companies, and therefore unlocking a value generally is high. And eventually, if they can succeed, they generate multiple returns for the investors. That's something I've seen most of the time. 

There is a tendency for smaller mid-cap means to be risky. It is risky, no doubt because small-size companies generally are risky. But the same small size company has a vision and good management, they are in the good product, they are in the good business model. The general tendency to grow in scale and become larger ambition also helps in unlocking value. Therefore, within the equity allocations, one is part of Nifty related product, which is large-cap-oriented investment, mid-cap-oriented investment, and small-cap, that should come as part of the associations. 

The moment you have these other locations within the equity, anyway you have to take a risk. High risk, high return. And within that, you need to focus on asset locations, which is a good mix of large-cap, mid-cap, and small-cap and thematic. That's the way I think India has progressed. That is what I am referring to as asset allocations.

Second, if the allocation is about somebody who cannot take very high risks, he must have some fixed income-related portion of the portfolio in the fixed income component, because fixed income gives a higher accrual, gives stability. That's also building a part of the asset location. That's why I meant about the allocations towards the asset classes within the equity, the space is quite wider. You can't just stick to only one. 

Somewhere mid-cap and small-cap suddenly became bad words. I'm talking about the Indian markets now, compositionally, the way you're saying it, this was always there, we always had the larger caps. And if you were really betting on the future, you were to look at stocks which by definition were smaller caps. And then why did this distinction happen? And in a way that suddenly, obviously, I can see that values are shot up so much that everyone is now putting the microscope on it. And what is the learning from this?

The way I have seen in my career when the market goes through cycles, there are cycles, which are bull cycles. The general tendency for mid-sized, and small-size companies to do well and grab the attention of the industry is far higher. Therefore they tend to run faster, they tend to perform better. As the price movements become stronger, the tendency to participate in such investments by the larger investing audience is also high. That's why the euphoria comes. The moment euphoria comes, the valuations go outside the acceptable, the institution versus limit, or maybe regulatory limit. Therefore, some speed breaker has to come. 

I think if you look at the market, there has to be always some speed breaker. I think when the market drives fast, I think it is not restricted only to the smaller mid-caps, it applies to even the large-caps. Speed breaker is applicable only the question is what kind of speed breaker you want to give, whether you want to have a frequency breaker or you want to have mild speed breakers, depending upon which segment you are in. The way regulatory intervention comes, the way we as a mutual fund also stop the flows in the smaller mid-cap, all these things, we should call them as a speed breaker. This speed breaker is always essential for the healthy market momentum for the future. 

I think if you leave it to the market, they'll always look at the sky's limit. But from a market stability point of view, a regulator’s point of view, mutual fund players like us, are here for the long term. We must ensure orderly movement of the market, which is more important for me than a substantial rise in the market. Therefore, we must put a speed breaker. Please go slow on your investments in this segment because it has hit the limit. Therefore more valuation gets moderated and so on, and so forth. 

And it will come back in any case. 

It will come back in any case. If you look at the market cycles, if you look at 2019 when the credit market crisis happened, the entire midcap space got hammered. A good period of 2016, 2017, 2018 beautiful returns. Smaller mid-cap as the only segment to invest. That was the theme that was coming in, whereas 2019-20 was bad. 

After Covid, that MSME guarantee was coming in from the government of for lending money. The whole mid and small-cap space picked up. And they are gave a return in the last two years, which they would not have given the last seven years. Market always has the tendency to give rather bump up the return on one or two years for which unless you stay invested, you will not get the bump up return. 

We are talking about valuations which are at a point where we are not able to make out, whether it's 1,000, 3,000, 10,000, 50,000 valuations constantly keep rising. And that's a fair argument because the economy is growing and earnings are growing, so everything is keeping pace. Why are we not applying the same argument when it comes to mid-cap and small-cap? Why did we panic there? 

No, panic is because of nothing. But I think it's panic because of ownership. I think if you take Rs 10,000 crores market cap company if the promoter owns about, say 60% or 70%, the free float is less. And when the free float is less, when more and more participation comes in, the demand is far higher than the supply that is in the market. Nobody wants to sell. But demand comes. Therefore there is a feeling that the price movement is not fully supported by liquidity in the market and they are illiquid. 

Therefore, the price discovery may not be necessarily driven only by earnings but is also driven by the demand-supply situation and is more in favour of supply. Therefore, in such a situation, you bring in the valuation. Then the valuation gives you a mirror. These are valuations. You understand the risk that is involved where to still invest. That's something money managers apply.That is why I think valuation we are bringing in the picture and this thing comes in. It is more of a supply-demand situation. 

The investing strategy question there is what should I therefore not be investing in or what should I be careful of when I invest? If I were to invest on my own or if I am watching my mutual funds investments, what are the red flags when it comes to the kinds of investments? 

Wherever the fundamentals are not supporting the price rise which is driven by earnings, cash flow, the company's dividend tracker record, and tax-paying track record. The business itself should be sound enough for you to also feel it. I think most of them, you can feel the business, whether it is a service or a product, you can feel it as, even as an investor. If you don't get that feeling, but you still feel happy about the price rise, then you must not get carried away by that. That's something one must avoid as a principle. 

From a mutual fund point of view, you don't find that risk to a large extent because we are diversified. Even if you make mistakes, the mistake is always a small component of the overall portfolio.

The only thing that you have to keep in mind about mutual funds is that the investment that you make purely based on the past return (assuming it) would (always) be very high therefore they'll be able to sustain the future, and if somebody has done very badly, therefore you'll not be able to sustain the future, both the assumptions are wrong because the market is a great leveler. A good performer gets neutralised in some years, a bad performer also gets neutralised in some years. Therefore the long run, more or less everybody generates similar returns. Chasing a return is one of the worst enemies that you will create.

One of the things that's clearly changed when it comes to mutual funds is the sheer supply of investments in mutual funds, particularly in the last two years. Now, a very broad question. How do you manage these flows? And I'm sure you feel good about it on some days, but I'm sure on some days it must be a concern as well.

See, it's a good problem to have in the sense that we always used to sit and pray that mutual funds should be the large player in India when FIIs (foreign institutional investors) took our market for a ride. Today it is the reverse when FIIs sell. Indian mutual funds have become large buyers of equity. They are a great stabiliser. Therefore, it is a good development and a good problem to have both from the government's point of view, regulation point of view, and as well as from the country's point of view. 

Second, the mutual fund coming in with more and more companies that are now tapping the equity market more than the debt market. See, if you take the '90s and 2000 period, the number of companies who used to fund the business through debt was far higher than the number of companies to fund debt growth through equity. Today, every company after the financial market crisis, and credit crisis in 2019-20, most of the companies have realised the best way to build their business through the rising equity and have less dependence on debt. 

Moderation of course happens. Moderation happened through the intervention by all of us as money managers. We stop flows in some schemes, and we reduce the flows only through SIPs so that we come for the long term and also tell people, I think valuation is too costly, therefore you must come in the large-cap fund rather than going into the mid-cap fund. When the market crashes, everything will come down. 

The overall financialisation of the markets is something you've talked about in your investors' letter as well this year. Now, that's something that's going to keep driving funds, let's say, from savings into equities or mutual funds, basically non-savings opportunities. How do you see that going ahead? 

I think it will only increase. The reason I see the financialisation that we have seen in India in terms of savings patterns moving towards various other products and before that the payment banking revolution that has happened in the country through mobile banking and then the smaller banks reaching out to the nook and corner of the country, the way NPCI has actually made payment very easy from mobile to mobile and so on, so forth. Access to information, on various platforms, has gone up. Awareness about investing in financial market instruments has gone up quite significantly thanks to of course mutual funds i.e. initiatives that they have taken in the last few years of financial literacy. RBI is doing their bit, insurance doing their bit. I think their whole awareness about investing has gone up quite substantially. So therefore my own belief is gradually I think as you move forward the traditional investment versus new investment, I think there will be a shift of traditional investment towards capital market assets including mutual fund equity schemes and equity and fixed income mutual fund schemes. They would start forming the larger component of the savings because people understand it. Therefore more money will come into the capital market assets as you move forward. 

How do you as a fund manager stay ahead of the game? And how do you also convey to your investors or other investors that you are ahead of the game?

Looking beyond say 2024. I think you look at the future. I think a money manager's job is tough. All the time, you have to look through the future, whether it is economic growth, whether it is holding high optimism on the economic growth itself, leadership, earnings of the companies, and then sectoral rotation that could happen on the basis of the valuations and what is happening in the sectors. This is something, that is the regular exercise that we do. 

We do an annual survey within our team on which are the sectors that could outperform next year compared to last year. And then we do communicate that. Not necessarily all such predictions that we make always come true. As long as your hit rates are about 60%-70%, we should be happy. This is one way we do it. 

We also do an annual survey about the external world to gauge the pulse of consumer behaviour or the reflection of our distribution community in terms of what they feel, in terms of economic growth, market momentum, and so on, so forth. And that also gives us some sense in terms of where the street is thinking and what is our thinking. And then see how to map these two things and see to it we derive some conclusion out of it. 

Second, of course, the way we do is we do an investment voyage event every year, religiously, for the last twelve years. We are doing it because external experts come from various parts of the country and speak on sectors and the economy, including international development. That gives a sense in terms of where each of the moving parts of the economy will further move ahead. And basically, you have to form your thesis. 

If today you are trying to attract capital, though I know it's coming without you asking for it, what would be let's say the distinguishing aspect of a Birla Sun Life mutual fund versus someone else? Or if I were to look at about five mutual funds, how do I choose? And what is it that you feel I should use to choose either you or someone else? 

Right now as I speak, this is the 30th year of its existence. Somebody who has been a part of the industry for 30 years, being one of the old players, having seen cycles and become a large player in the mutual fund industry without having a bank as a promoter, except the promoter of course, Aditya Birla has now become the large player. That shows the commitment that the business brings to the table for the investor. That's one. 

And having seen cycles it helps in having proper risk management. As I speak today I was just chatting with somebody, some of the boutique managers. I'm told they are not getting the mandate from overseas investors as they used to get in the past, not because they are poor managers. I think beyond the point it's not managing money alone that is important, generating returns alone is not important. Managing the risk along the side is also equally important. Today managing risk is also becoming one of the major components and people like Aditya Birla Group, and Aditya Birla Sun Mutual Fund have invested heavily in people and processes, on risk management tools and software that you need to build automation and enable the right set of people to perform better in all market cycles. 

For a few cycles, we go through ups and downs but as long as you have the wherewithal to come back, this is something we have as a fund house.