Indian MFs play on tales, have zero respect for valuations, says business chief

NEW DELHI: Even though every fund manager out there swears by value investing, an industry veteran claims there is zero respect for stock valuations in the fund industry, which is busy mainly focusing on stories.

Kalpen Parekh, President of DSP Mutual Fund, said fund managers are never questioned for their choices, which is what allows them to do what they wish.

“No one questions us if the market is at 27-28 times PE, what does historical evidence say? Historically, 99 per cent of the time, when the market trades at such high valuations, returns over the next 3-5 years are less than bank savings accounts,” he said.

PE multiple refers to the amount an investor is willing to pay for a security against every rupee of earnings.

In mid-February, Nifty traded at around 28-times earnings and Sensex at 26 times. However, thanks to a massive selloff in following months, the valuation multiple has since come down to 21 and 20.

As of May 5, two-fifths of BSE500 stocks traded at over 20-times their earnings, data from Accord Fintech showed. They included popular names like Bombay Burmah, Shoppers Stop, GSK Pharma, Adani Green Energy, Equitas Holdings and Bajaj Finserv, for which investors were ready to pay 200-750 times their earnings!

Parekh also questioned people who justify high valuations with arguments that India can afford very high PEs because interest rates are low in the country.

“That is a very good narrative to justify valuations. But the question I would ask is: fine, interest rates have come down, but how often have interest rates remained at 6 per cent and below in India? And if they go up in near future, will the valuations correct?” he asked.

Parekh was speaking at a virtual conference on ‘Human Behaviour & Investing Lesson during Crisis’ organised by his fund house.

He highlighted the tendency of market exports to make bullish, forward-looking statements and warned investors to not fall into that trap and try to separate the chaff from wheat. “How can you do that?”

He suggested investors to take such comments by eliminating the adjectives and confronting them with facts.

“Train your mind to look for adjectives in a story, or an interview, and try to eliminate them. What is the data telling you? Is that supporting those adjectives or is it just a simple narrative and a look back at history? Don’t get trapped in an authority bias, where you believe in him just because the person is an authority, has more experience or educational degrees,” Parekh said.

He said the logic that just because India is a growth story, the market should give high returns is inherently not true. “China, which had the highest growth rate in the world during the last decade, gave negative returns in that period,” he said.

The Shanghai Composite index was at 2,870 on April 30, 2010, and traded at 2,858 on April 30, 2020, as flat as it can get. The gross domestic product of the country more than doubled during this period.

Parekh, who has previously had stints with ICICI Prudential AMC, Birla Sun Life AMC and IDFC AMC, said a time horizon of 3-5 years is not right for equities. “In last five years, the 30-share Sensex pack has appreciated just 16 per cent, largely thanks to the April rally,” he said.

“We, as fund managers, usually say right returns are coming in next 3-5 years. Now look back at evidence. If your time horizon was 3-5 years in equity as an asset class, what was the worst case return? Have you seen negative returns? Many times. Hence, this can never be the right time horizon,” he said.

Parekh, however, said one does not need to be discontent with so much negativity, as markets usually have large cycles. “One needs to be objective and practical in her assessment of facts,” he said.

“When things look very good, the future is going to be bleak, and vice versa. Because these are cycles and they keep on playing out. So when times are bad, most of the narratives that you will hear are bad. That is when you should try to look for one of the positive narratives that are backed with evidence,” said the industry veteran with over two decades of experience.

Parekh said one cannot avoid biases completely, but can be aware of them and minimise them using two tools: evidence and cynicism.

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