ESG is the right way to invest during periods of volatility: S Naren

We think there is a requirement to be in equity, to follow asset allocations and have some position in gold, says the Executive Director & Chief Investment Officer, ICICI Prudential AMC.

What is your current market view?
It is not a very easy area from the point of view of the equity market because you are talking about roughly 45 days ahead of US elections. There has been a big melt up in US FAANG stocks and after that, FAANG stocks have seen a meaningful correction in the recent past. I would still say that even after the US FAANG correction, many of the US stocks are still meaningfully overvalued. So we are headed for a period of volatility globally.

In India, we have a two type market. There is one set of stocks which keep going up regularly. Another set of stocks keep going down regularly. So it is a very funny situation where you do not know what to say about the markets because on one hand, every day, the price to earnings, dividend yield, price to book, looks cheaper and cheaper by the day and another set of stocks where everything looks costlier by the day. And will that diverge, will that converge? Over the 30 years that I have been in the markets I have seen that one day they suddenly converge but there have been periods of like 1998-1999, 2006-2007 where these divergences have continued for some period of time only to finally converge. So that is a tough job.

The good thing is we have seen everyone make money, particularly retail investors, who entered the market in April. It seems everyone has made money in equity markets by and large, except for the people who follow valuation models like price to earnings, price to book, dividend yield. Anyone who does not follow any valuation model has genuinely made money. And in general, people have also made money because everyone buys a basket of things and in that basket of things something works. So I would say it is not very easy to say what is the market view.

How are you investing in this market? You have got a compulsion of risk management, you cannot buy more than 10% of a stock like Reliance. On the other hand, you have a benchmark to beat. How are you managing your portfolios?
Every global investment guru says that you have to take pain. We are currently in the process of taking pain because finally in the long run, the markets are rational and you cannot have a situation where only technology and pharma stocks keep going up and that also cannot happen at a time when deposit rates keep going down. Liquid and overnight funds give you just 3% return. Why should stocks which give you 7% and 8% dividend yield keep going down every day? I do not think that is also logical.

Eventually markets will be rational, that is what investment gurus like Benjamin Graham have to say. On the other hand, John Maynard Keynes said that markets can stay irrational and for long till you are insolvent and that is another thing. Chuck Prince has said you have to keep dancing while the markets are irrational. So you have a number of investment gurus making very good statements and that is a challenge that you have to stay rational because mutual funds are long-term investment vehicles.

For example, there were periods of irrationality in 2017-2018 when people said all that mattered was yield to maturity and risk did not matter. Suddenly in the 2018-2020 period, risk played out and stocks with higher the yield to maturity got into trouble. Today we have a situation that higher PE, higher price to book -- nothing seems to matter in many of the stocks. We will go through these phases.

If you look at something completely outside our domain, a stock like Apple corrected from $135 to $108 in no time. We have a job of looking after investors in the very long run. So if you look at investments on a point to point basis, there is a problem. If we have looked at investors in 2007 December, there were schemes of ICICI Prudential which were not doing well. It was those very schemes which when we had looked at in 2009 December, had started doing well. So if we had looked at it on 31st December 2007, you would have thought that they were very bad schemes and if you had looked at 31st December 2007 the schemes which were doing extremely well. Many of them did not do well on 31st December 2009.

Finally at the end of the day, I work for a mutual fund, I do not work for a hedge fund and my goal is to look after the investors of India in the long run and not look at it on a point to point basis. So I have to respect long-term investment techniques and short-term investment techniques. At the same time, I have to be aware that the world is changing. How do I look at investment in a world which is changing?

For example, in the last six months, we have been working out of home. We are so much more dependent on technology to get our work done. So there are a lot of other things which we have to keep thinking about because we are not in a continuous world where everything is the same. We are in a dynamic world and we have to keep thinking about that also at the same time. So while we have to think about investment techniques which have been there for a long period of time, we have to think about a changed world also.

When I see stocks like Snowflake and Lemonade and DocuSign and Nikola and Tesla, it is really interesting to watch what is happening in the world. At the same time, I have seen such periods of irrationality and may be what the world calls rationality in 2007 and 1999. So, there are times when a lot of things have changed dramatically only to converge. It is a very interesting period and of course it gives me sleepless nights. It gives me a lot of time to think and I have to keep thinking whether I am wrong, find where do I have to change and what do I have to do. I have to keep thinking about all these things.


With all due respect to all global gurus, their own views are also changing. Buffett has done things which he has never advocated in the past which is buying technology companies, investing in IPOs. Howard Marks has changed in last six months in terms of his market view and assessment of the cycle.
The reality is that we are in a developed world central bank bull market. We are in a zero percent interest rate environment and in such an environment, a lot of things have become very interesting in the western world. If the Fed Chair comes and tells you for the next three years I am going to keep interest rates at zero, there are certain things which become very different from what it is before.

The world is also adjusting itself to a developed world central bank bull market and even in India we have seen one of the lowest interest rates on short term rates. We think there is a requirement to be in equity, to follow asset allocations and have some position in gold.

We believe there is a requirement to invest a certain amount of money in global markets and we believe that it is not wise to say today is the day to make your equity zero. These are the things that we learnt out of repeated discussions on what is the developed world central bank bull market means because while you may have a US presidential election, developed world central banks do not have to face elections, they do not have to go through a situation where if I underperform for a few months, my money will be taken off. So, these kinds of things do not happen and that is why we went through a lot of discussion to arrive at these views.

Global gurus are also learning that zero interest rate with very low credit spreads is something that they have also seen in such an extreme way for the first time so you have to also give it to them and you have to also remember that many of these investments like Warren Buffett in Apple were not made just now. Bulk of it was made much earlier and if you take an investment like Snowflake, I do not think Warren Buffett made it at $200. He made it at a different price point. So you have to also remember what is the price at which they were and what is the price at which the market is today pricing things.

One thing about investing is everyone makes mistakes and this is not arithmetic. I keep telling everyone that this is not arithmetic and this is a continuous learning business and we have to keep learning and we have to keep thinking and we have to keep aligning our learning. But at the same time, there are certain core investing techniques which we have to keep remembering and that involves a focus on cash flow and intrinsic value which has to be kept in mind at all points of time.

If you look at the credit fiasco which happened, it was based on the fact that some of the simple logics that had to be kept in mind got forgotten. When you forget core investing techniques, they will suddenly play out and they have played out in the past, they have played out in 2008, they have played out in 2000 and they can again play out now.

I believe the goal of the mutual fund fund manager or a CIO is to be disciplined because we are not looking at point to point, we are looking for the long run and we have large sums of money where we have to look after investor interest in the long run and that is why we wisely decided that we have to look after through an asset allocation framework rather than just a pure equity framework because pure equity goes through the problems of February-March where suddenly out of the blue, you lose 20% of customers returns and whereas in an asset allocation framework, the losses that investors suffer are much much lower and therefore we give a much better investor experience in an asset allocation framework. That is what we have tried to do to all our customers in our country through our products.

What are you anticipating given that the Nifty 100 ESG index has now completely recovered? Share with us a little bit more about the thought behind this?
ESG is a very powerful investing framework which got created over a period mostly by European investors and given the environment, social and governance factors play a big role. You have to remember that for equities as a class, we get the residual returns after what is due to employees, after what is due to the bond holders, after what is due to the government. It is the residual returns which go to the equity holders.

We think that the ESG framework is something which helps the equity holders. The Europeans have actually given a lot of thrust to this and they have realised that it actually gives a very good long term investment framework for long-term investors because at the end of the day, if you look after the environment, the social factors and governance factors, you are automatically going to take care of the residual onus of minority shareholders and therefore the minority shareholders are going to gain very significantly in the long run. That is how we have come up with this and this is a category which is going to gain traction over the next few decades.

It is something which we think provides a good opportunity to raise money and the timing of the launch was primarily because the markets have recovered. But we thought that given that in the month or so following the launch we would have huge volatility potential due to the US elections. The deployment period would be when you will have massive volatility. It is a very good long-term investing framework and people have to think long term in this category.

We have been asking a whole lot of our experts their mantras on getting rich . At a time like this, we have to keep in mind some solid investing strategies. What would be your advice to investors?
You have to remember that equity investors are residual risk beneficiaries. That is why we think ESG is the right way to go during periods of volatility. March was one of the best times to invest because there was so much volatility. We always believe volatility is one of the best times to invest and we spend a lot of time looking at governance factors, social and environmental factors and this is an area where we keep learning.

I believe the market itself is not in a very easy frame of investing at this point of time but at the same time, there are areas where a lot of long term investment opportunities are there at this point of time and there are areas which look fully valued now. We like the way both retail and institutional activities have been both involved unlike in the last 10 years when it was just institutions who were active and not retail. Thus is something which I like at this point of time.