“We are aiming for equity-like returns with low volatility”

Strong domestic inflows should hold, says Mr V. Srivatsa, Fund Manager, UTI Wealth Builder (earlier UTI Wealth Builder Series II). He also explained the new philosophy behind the refurbished UTI Wealth Builder fund, which aims at keeping volatility in check by changing equity allocations. Edited excerpts of an interview:

What is your take on the earnings results for the June quarter so far?
So far as the early indications are concerned, yes, we are seeing the bottoming of revenue growth as the impact of commodity deflations wears out. Earnings are also on recovery path in this quarter.

Do you see domestic institutional investments countering FII activity in our market to reduce the impact of FIIs?
We have seen strong mutual fund inflows, and this has largely been led by SIP flows. Since this is more permanent in nature, it should augur well for domestic flows.

How does UTI Wealth Builder differ from what it used to be earlier?
The earlier strategy was static. Equity was between 65-100% and gold was between 0-35%. We roughly maintained an allocation of 70:30 in favour of equities. In the current strategy, we have in place a dynamic equity allocation of 65-85%, either purely in equities or in including arbitrage, depending on our view of the markets. The balance 25% will be allocated to debt and about 5-10% to gold. The main feature of this fund now would be the dynamic allocation of equity where we may take the net long in equities from a range of 40-85%. What this does is to lower the volatility of the fund. With this fund, we are aiming to give equity-like returns with much lower volatility. This product would appeal to conservative investors.

But does gold’s inverse correlation with the domestic equity market still hold?
Gold works very well in an extreme scenario where equity gives negative returns. In such a situation, gold outperforms in a big manner. But because gold is also volatile, we’re limiting the exposure to it.

What are the indicators on which asset allocation is decided?
Asset allocation is decided on a multi-factor model that takes into account valuations, momentum, quality of companies, and earnings and sentiments. We believe that stocks and the index move up or down based on factors related to these main groups. We have developed a quantitative model that is able to predict the equity market direction based on the scores of the companies in the index based on the model.

Within equity, it would be a large-cap oriented strategy, with 75-80% allocation to large-caps. It will be based on a top-down approach where we try to identify the key sectors likely to do well and then picking up the best companies in the sector. Our midcap allocation would be limited to 20-25% and the focus would be on large mid-caps. On the debt side, the focus would be on short-term accrual papers.