The risk of investing using equity derivatives is not any different from investing though direct stock, says Vineet Bagri, CEO of Athena Investments — so long as there is no leverage.
While sharing his future outlook, Bagri also tells MintGenie about the huge potential of companies in consumer facing sectors. He also speaks more about the recently launched stock convertible scheme (SCS).
He says that he is cautious on Indian markets in the wake of downgrades of earnings estimates. Finally, he also tells us as to why Indian markets present a compelling investment opportunity.
Can you tell us about your stock convertible scheme (SCS) launched under the name of Athena investment? Given that the investment universe is 100 large-cap companies, how can one assume that the investment will be safe? Who all can invest in this scheme, and what is the minimum subscription amount?
The SCS is a Cat III AIF that is designed to generate absolute return from a basket of stocks using equity derivatives. As the name suggests, the product is designed to invest in fixed income, which will convert to equity in case there is a fall in markets. The product underlying is a diversified universe of 100 stocks, from which the fund manager will select a basket of 15-20 stocks every month.
The product carries equity risk, albeit the risk is lower than direct equity since the purchase prices are lower, and there is a portfolio hedge that is built into the product.
The scheme is open for investment to all investors, individuals, non-individuals (companies, partnerships, trusts), financial institutions and non-resident individuals. The minimum subscription amount is ₹one crore, as prescribed under the AIF CAT III regulations.
Since the investment in SCS will be made via derivatives, small investors may find it hard to trust the future viability of this scheme. What would you say to those investors for allaying their apprehensions?
The risk of investing using equity derivatives is no different from investing though direct stock, if no leverage is deployed. This scheme has no leverage, i.e., the equity portfolio on a fully converted basis will be only to the extent of the corpus of the scheme.
So, to that extent there is no real difference between a scheme that invests in direct equity or a scheme that uses equity derivatives to build a long position in equity.
Furthermore, since this is an absolute return scheme, there are portfolio hedges that are built into the product, which help avoid any episodic fall in markets. These measures make the scheme safe for all investors.
What are the sectors in the market that are likely to do well in the immediate and medium-term future? Is the IT (information technology) sector going to struggle for the foreseeable future?
At this point it is difficult to point out the areas of outperformance in the markets. Over the medium to long term, we believe businesses that face the consumer will continue to do well.
The IT sector has not done very well in the last few quarters. However, the large IT companies in India offer a unique opportunity since they have growth at scale and decent margins. We believe these companies should do well in the medium to long term.
As market indices have started scaling new historic highs amid not-so-great news from the mature markets such as the US and UK regarding inflation and unemployment data. Do you think the rise of Indian market indices is an aberration or is this a new normal?
In the short term, market movements are a function of flows. At the moment, flows in Indian markets from domestic and foreign investors are robust and are holding up the markets, despite what’s happening overseas. Some of the flows are structural, which could also provide a long-term cushion.
However, in the medium to long term, markets are driven by earnings. This quarter, earnings estimates were downgraded by 7-8 percent for next year. This makes us cautious on Indian markets. If earnings do pick up, then the outperformance could continue.
What is the advice you would like to give to investors about your future outlook of the market?
The Indian equity story is a long-term story. This is driven by world class companies and entrepreneurs who are running some truly great businesses. India also has a large consumption base across price points, which makes it a homogenous market which has something for everyone.
As formalisation of the economy takes root, more opportunities will be created. So, from a long-term point of view, we believe that Indian markets present a compelling investment opportunity.