Great opportunity to build long-term equity portfolio

Life insurance companies have invested $9.4 billion in equity
markets in the first nine months of the financial year 2008-09 against FII outflow of $10.3 billion. Chief investment officer of Birla Sun Life Insurance, Vikram Kotak, in an interview says with the global deleveraging process nearing its end and FIIs putting a halt to their selling spree, investments by life insurance firms will surely be a big positive for the market. Excerpts from the interview:

What is your outlook on the equity markets in 2009?

Year 2008 has been a year of volatility. I believe we are nearing the end of global deleveraging process and will witness reducing risk aversion. This, coupled with improving liquidity and yields on developed countries’ treasuries at near zero levels, will result in flows returning to other asset classes, especially those that have borne the brunt of this deleveraging process.
Within emerging markets, we expect India to remain an attractive investment destination, given its relatively strong position and improving macro environment. Led by the comfort on the inflation front and moderating economic activities, we expect better liquidity, which will spur consumption and investment. Falling commodity prices will immensely benefit India. Also, the second stimulus package will be a sentiment booster. Further, Indian equities are available at attractive valuations. Sensex at 9,647 is trading at valuations of 10.5x FY09 and 9.3x FY10. Earning yield gap to 10-year government securities is more than 5.5 per cent, highest in the last 7-8 years.

Is it right to say that insurance companies have provided some cushion against FII outflows from equity markets? What kind of inflows can we expect from life insurance companies in equity markets this quarter?

Life insurance companies have invested $9.4 billion in equity markets in the nine months of FY09 against FII outflow of $10.3 billion and mutual fund inflows of $1.6 billion. It can be seen clearly that life insurance companies have provided a cushion to the market in the current meltdown. I expect further equity inflows of $4.25-4.5 billion from the life insurers in the coming three months . With expectation of the global deleveraging process nearing its end and FIIs putting a halt to their selling spree, such inflows from life insurers will surely be positive for Indian equities.

n Insurance firms are investing big money in debt market. Do you also see safe and steady returns from the debt market in 2009?

Different asset classes cater to requirements of policyholders with different risk profiles. We invest the premium received as per the mandate of the policyholders. With meltdown in equities and deteriorating economic outlook, we saw policyholders selecting debt funds along with equity funds. Debt is surely a safer asset class compared to equities and generates steady and stable returns.
Given the sharp rally in government securities in the last quarter (yields moving from highs of 9.47 per cent to 5.26 per cent) we expect yields to be range-bound between 5-5.5 per cent.

What are your plans for ‘09? Which are the new schemes in the pipeline?

We have a couple of funds in the pipeline for 2009, which would be launched at an apt time depending on market conditions and our assessment of policyholders' needs.

How have your funds performed in 2008?

In line with our investment objective of maximising long-term wealth for policyholders, Birla Sun Life Insurance funds have generated superior performance. To mention a few funds, our pure debt funds Individual Assure & Group Fixed Interest have generated 16.6 per cent and 19.7 per cent returns, Maximiser (80-100 per cent equity) has given –49 per cent returns (against -55.3 per cent returns of BSE 100) and balanced fund, Creator (30-50 per cent equity) has given -23.5 per cent returns.
Most of our funds have outperformed their respective defined benchmarks. Our newly-launched Income Advantage Fund (a medium-term debt fund) has delivered 15.7 per cent returns in four months till December.

Your advice to retail investors?

Over the long-term, equity has always been the best-performing asset class. What is important is that one should make equity investments with long-term perspective. Despite correcting by 52 per cent in 2008, the Sensex has delivered a CAGR of 19 per cent in the past six years. Due to the current meltdown, equity assets are available at very attractive levels, giving a multi-year opportunity to build long-term equity portfolio. However, an ideal portfolio should have a judicious mix of various asset classes and should be built in consonance with one's investment objective and risk appetite. zz