How fund managers strike a balance between returns and scheme objectives
As part of its special package on India's Best Mutual Funds, Money Today asked the top fund managers of 2012-13 how they balanced investors'
expectations with the schemes' objectives.
Fund managers often face the dual challenge of sticking to the objective of the scheme and living up to the aspirations of retail investors, who expect them to deliver top quartile performance year after year. A slight drop in performance and they come under the scanner of rating agencies, investment advisors and media.
Though they say that keeping out the wrong 'noises' and not giving too much weight to peer performance is the key to long-term success, it is a well-established fact that despite all the talk about focus on the long term, most see mutual funds as a two-three year investment tool. In such a situation, it's obvious for fund managers to get tempted to play to the gallery.
We asked the top fund managers of 2012-13 how they balanced investors' expectation of high short-term returns and the schemes' long-term objectives. Most were candid enough to share with us their experiences.
AXIS LONG TERM EQUITY
"The portfolio buys and holds strong companies with sound business models, pricing power and quality managements"
Jinesh Gopani
Fund Manager, Axis Long Term Equity
Fund objective: We seek longterm capital appreciation by investing in fast-growing companies that meet our criteria of growth, quality and valuation. The fund buys and holds strong businesses with sound business models, pricing power, quality managements and a history of creating wealth for shareholders.
Fund strategy: The fund has returned 13% between 30 March 2012 and 31 March 2013 and about 11% a year since inception in December 2009. "Smart stock-picking has been the key," says Gopani. The sectors that have helped the fund perform well are consumer staples, private banks and pharma.
The fund's top three sectors, banks (15%), finance (12%) and software (10%), account for 40% portfolio. The top picks are Kotak Mahindra Bank (5%), HDFC Bank (5%), HDFC (6%) and TCS (5%). The fund has remained underweight on oil & gas due to too much government control. Market capitalisation: The current mix is large-cap 68% and mid-cap 32%. The large-cap bias is due to the investment policy, which limits mid- & small-cap exposure to 50%.
BNP PARIBAS EQUITY
"Businesses with high entry barriers in terms of cost and pricing power give sustainable returns"
Shreyas Devalkar
Fund Manager, Equity, BNP Paribas Mutual Fund
Investment strategy: The focus is on companies with sustainable and superior earnings growth. Businesses with high entry barriers in terms of cost/pricing power give sustainable returns. They also have lower earnings volatility in uncertain times. We firmly believe that a quality portfolio will eventually deliver good results.
Rationale for high churn: Last year, we saw certain changes in trends in inflation, interest rates, consumption demand and decisive policy action in terms of increase in fuel prices, etc. In addition, the competitive dynamics in airline and telecom industries started improving. We churned our portfolio to gain from these changes.
Limitations of smaller AUM : The processes we follow, right from selection of the company to portfolio construction, are sound and work irrespective of the size of the fund. Both large and small funds have advantages based on size.
Sectors that clicked: In 2012-13, in particular, our overweight positions in health care, utilities and cement, plus underweight positions in auto, financials, metals and industrials, helped us.
BNP PARIBAS DIVIDEND YIELD
"We continue to expect outperformance from private sector financial, consumer, health care and telecom firms"
Investment strategy: In BNP Paribas Dividend Yield Fund, our focus is on growth at a reasonable value. Hence, stocks with decent dividend yield qualify. But we avoid high dividend yield companies without growth avenues.
Challenges: Since high-growth companies trade at high valuations, resulting in low dividend yields, the challenge is to find businesses/companies with good dividend yield and growth potential.
Cardinal sins of equity investing: Investing in businesses that one does not fully understand, ignoring corporate governance issues and excessive focus on valuations.
Investment gurus: I am influenced by Peter Lynch's investment philosophy of buying businesses that one fully understands for the long term, irrespective of market gyrations, and Warren Buffett's style of value investing. Both have given good long-term returns.
Sectors bullish/bearish on: We continue to expect outperformance from private sector financial, consumer, health care and telecom firms. Metals, capital goods and auto are expected to underperform.
MIRAE ASSET INDIA OPPORTUNITIES
"In the present situation, one must stick with the asset-allocation plan and not try to time the market"
Gopal Agarwal
CIO, runs the fund with Neeleash Surana, Head of Equity, Mirae Assets Mutual Fund
Fund objective: To earn superior risk-adjusted returns consistently. It is a large-cap diversified fund and invests 80% money in companies whose market capitalisation is over Rs 11,000 crore. It does not take concentrated sector- or stockspecific bets and focuses on companies with competitive advantages and pricing power.
Top Sectors: The fund is skewed towards financials (26% weight). Besides, it is positive on energy (10%). It has invested 12% funds in the technology sector, where it likes TCS, as it generates good cash and is cheaper than peers. It invests in businesses that generate significant cash flow and high return on equity. The auto ancillary sector has also worked well for the fund. Sectors avoided: The fund is underweight on metals, construction and real estate.
Watch out for: Market movements are determined by earnings, liquidity and interest rates. In 2012-13, earnings growth was just 6% compared to 25% in 2004-2007. However, the economy seems to be entering a better phase with fall in global commodity prices. Over the next two-three years, 12% earnings growth is possible.
FRANKLIN BUILD INDIA
"We have clear focus on companies benefiting from investing in economic building blocks"
Roshi Jain
Vice-President and Portfolio Manager, Equity, Franklin Templeton Investments
Fund objective: Franklin Build India Fund is an equity fund with clear focus on companies benefiting from investing in economic building blocks-physical infrastructure, resources, financial services, social development and agriculture. The main focus is on structural and not cyclical themes.
Top Sectors: Pharma, as Indian companies have moved away from domestic focus and simple generics to new growth segments which offer companies good opportunities for expansion; financials, as the sector will be one of the key beneficiaries of rising incomes and growing demand for financial services/products; and energy as the country's energy demands are going to increase and pricing is expected to be freed further with falling fuel subsidies.
Sectors avoided: The fund is positive on housing and construction but continues to stay away from pure real estate plays. It instead plays through allied sectors such as paints and cement.
Investment strategy: A blend of growth and value style, the portfolio is managed through bottom-up stock-picking with a topdown overlay.
SBI EMERGING BUSINESSES
"We have been running the fund under a highconviction strategy focused on returns"
R Srinivasan
Head, Equity & Fund Manager, Equity, SBI Mutual Fund
Investment strategy: We have been running the fund under a high-conviction strategy focused on returns and agnostic to benchmark, peer set and market cap risks. At any point there are only a handful of stocks (25-30) that you have high conviction about.
Reasons for high churn: The churn is high due to two reasons. One, we restrict the number of stocks, which means the average holding per stock is high. Whenever we add new ideas, the existing ones have to go. Two, we maintain a large-cap filler of 20-30% to manage liquidity.
Calls that worked: The top attributors were SpiceJet, Muthoot Finance and United Spirits. I guess we got lucky on United Spirits; it's not an opportunity that comes by often, and even if it were to, I'd be apprehensive of the probability of us getting it right.
Calls that went wrong: We went wrong on Cox and Kings and exited mid-way. ICICI Bank and L&T attributed negatively because we didn't hold them.
Sectors bullish/bearish on: We are overweight on financials, health care and consumer discretionary and underweight on metals.
BIRLA SUN LIFE MIP II
"Duration calls are likely to give good returns as we expect a 100-125 bps rate cut in 2014-15"
Satyabrata Mohanty
Head, Mixed Assets, Birla Sun Life Mutual Fund
Fund objective: The primary aim of Birla Sunlife MIP II Savings 5 plan is providing regular income and growing money through fixedincome investments and limited exposure to equity. Both equity and fixed-income components are managed conservatively. While debt does not exceed three years, the focus of equity investments is high dividend yielding stocks.
Calls that worked: In 2012-13, the fund was active in taking duration calls. At the beginning of the year The fund was bullish on the longer segment of the yield curve and increased the portfolio duration from 2.5 years to 5.5 years with the view that the RBI will cut rates by 125 basis points. This paid off. The fund invested about 25% funds in G-Secs and the balance into corporate bonds and SDLs, which took advantage of spread contraction in the fixed income market.
Investment strategy: The debt component is actively managed and is used to invest only in liquid papers. Duration calls are temporary. The modified duration remains three years. The equity component is 10%. Here, it follows a buy and hold strategy with an investment horizon of three years.
ICICI PRU EQ VOLATILITY ADVANTAGE
"We are underweight on FMCG. The best case return for the sector is 10%"
Manish Gunwani
Senior Fund Manager, ICICI Prudential Mutual Fund
Fund Objective: The fund goes for dynamic allocation based on a model that takes into account factors like price to earnings ratio and the price to book value, along with macro parameters such as interest rates and money supply. The net equity exposure ranges from 56% to 73%. Hence, the churn is high. It invests up to 35% in debt.
Calls that worked: The fund invested in good structural stories such as Amara Raja, Motherson Sumi and M&M Financial Services which returned 100%. It has invested 4% funds in the automobile sector, where Gunwani sees limited downside of 10-15 % but an upside of 30%. In large-caps, sticking to strong companies has helped the fund. It has been underweight on FMCG and pharma due to valuations. "The best case return for FMCG is 10%," says Gunwani.
Calls that went wrong: Its exposure to FMCG was only 2%, but the sector did well in 2012-13.
Practices: It prefers structural companies than cyclicals. If the market moves up, Gunwani will add mid-cap cement, where he sees strong upside for stocks like ACC and Ambuja Cement.
BIRLA SUN LIFE MEDIUM TERM
"We invest in the non-AAA space only after due diligence and identifying the risk-reward equation"
Manish Dangi
Co-chief Investment Officer, Birla Sun Life Mutual Fund
Fund Objective: The main aim of the fund is optimising returns by identifying mispriced credit opportunities in medium-term securities. "The fund seeks opportunities that offer high yields and where the investment is fairly priced for the risk taken," says Co-chief Investment Officer Maneesh Dangi.
Investment Strategy: The fund follows a bottom-up strategy and looks for investments that yield 3-4% above AAA papers and government bonds. "It invests in the non-AAA space only after due diligence pursuant to interacting with managements and identifying the riskreward equation," says Dangi.
Calls that worked: The fund has the option of lending to the government at 7.5%, investing in an AAA company like PFC at 8.5-9% or in a company like DLF at 14%. This is where it has remarkably earned its returns. Investments that have played out well are RHC Holding, which is secured by third-party pledge of equity shares of Religare Enterprises and Fortis Healthcare.
Duration Call: The medium-term fund is rate cycle-agnostic. It does not depend upon movement of interest rates and hence does not take duration calls.
SUNDARAM SELECT DEBT STAP
"There is possibility of long-duration funds remaining in favour for the next two quarters"
Dwijendra Srivastava
Head, Fixed Income, runs the fund with Sandeep Agarwal, Fund Manager, fixed Income
Investment strategy: Our fund management philosophy is grounded in the fact that it is retail money which we manage and that entails us to be aggressive only to the extent of the fund mandate. We think the philosophy of equity funds should not be any different
Scope for aggression: Fixed income investment is largely limited to liquidity, interest rate and credit spectrum. The fund manager is construed to be aggressive if he takes any of the above risks on the higher side of the fund mandate.
Calls that worked: Calls that benefitted were timely exposure to government securities and state development loans, getting into corporate bonds at the right spreads and timely exposure to the money market bucket at high spreads over the repo rate.
Calls that went wrong: The biggest mistake was holding an event view rather than a rate view.
Interest rate outlook: We believe the repo rate will bottom out around 6.75% as inflation may soften in the coming quarters and then rise as the low-base effect wears off and we see some green shoots in domestic and global economies.
PEERLESS LIQUID FUND
"I see key rates softening by another 50 basis points, but the fall in yields will not be one way"
Malay Shah
Fund Manager, Fixed Income, Peerless Mutual Fund
Investment strategy: The fund follows a mixture of top-down and bottom-up approach after taking into account the economy, interest rate and liquidity scenario. The endeavour is to outperform overnight benchmark rates.
Challenges: A liquid fund manager is primarily required to generate stable and non-volatile returns on a daily basis; in comparison, equity fund manager has a longer time horizon.
Calls that worked: Our calls on interest rates and credit spreads came off well in the shorter end of the curve.
Cardinal sin in debt investment: Not keeping track of the financial health of the company in which one has invested. Many times, lack of movement lulls the fund manager into inactivity, and these are times when real alpha can be added.
Interest rate outlook: Depending upon domestic economic variables, I see key rates softening by another 50 basis points. However, the fall in yields will not be one way. The risks are global shocks, rise in commodity prices and domestic political scenario, and hence there will be phases where markets will be volatile.
Though they say that keeping out the wrong 'noises' and not giving too much weight to peer performance is the key to long-term success, it is a well-established fact that despite all the talk about focus on the long term, most see mutual funds as a two-three year investment tool. In such a situation, it's obvious for fund managers to get tempted to play to the gallery.
We asked the top fund managers of 2012-13 how they balanced investors' expectation of high short-term returns and the schemes' long-term objectives. Most were candid enough to share with us their experiences.
AXIS LONG TERM EQUITY
"The portfolio buys and holds strong companies with sound business models, pricing power and quality managements"
Jinesh Gopani
Fund Manager, Axis Long Term Equity
Fund objective: We seek longterm capital appreciation by investing in fast-growing companies that meet our criteria of growth, quality and valuation. The fund buys and holds strong businesses with sound business models, pricing power, quality managements and a history of creating wealth for shareholders.
Fund strategy: The fund has returned 13% between 30 March 2012 and 31 March 2013 and about 11% a year since inception in December 2009. "Smart stock-picking has been the key," says Gopani. The sectors that have helped the fund perform well are consumer staples, private banks and pharma.
The fund's top three sectors, banks (15%), finance (12%) and software (10%), account for 40% portfolio. The top picks are Kotak Mahindra Bank (5%), HDFC Bank (5%), HDFC (6%) and TCS (5%). The fund has remained underweight on oil & gas due to too much government control. Market capitalisation: The current mix is large-cap 68% and mid-cap 32%. The large-cap bias is due to the investment policy, which limits mid- & small-cap exposure to 50%.
BNP PARIBAS EQUITY
"Businesses with high entry barriers in terms of cost and pricing power give sustainable returns"
Shreyas Devalkar
Fund Manager, Equity, BNP Paribas Mutual Fund
Investment strategy: The focus is on companies with sustainable and superior earnings growth. Businesses with high entry barriers in terms of cost/pricing power give sustainable returns. They also have lower earnings volatility in uncertain times. We firmly believe that a quality portfolio will eventually deliver good results.
Rationale for high churn: Last year, we saw certain changes in trends in inflation, interest rates, consumption demand and decisive policy action in terms of increase in fuel prices, etc. In addition, the competitive dynamics in airline and telecom industries started improving. We churned our portfolio to gain from these changes.
Limitations of smaller AUM : The processes we follow, right from selection of the company to portfolio construction, are sound and work irrespective of the size of the fund. Both large and small funds have advantages based on size.
Sectors that clicked: In 2012-13, in particular, our overweight positions in health care, utilities and cement, plus underweight positions in auto, financials, metals and industrials, helped us.
BNP PARIBAS DIVIDEND YIELD
"We continue to expect outperformance from private sector financial, consumer, health care and telecom firms"
Investment strategy: In BNP Paribas Dividend Yield Fund, our focus is on growth at a reasonable value. Hence, stocks with decent dividend yield qualify. But we avoid high dividend yield companies without growth avenues.
Challenges: Since high-growth companies trade at high valuations, resulting in low dividend yields, the challenge is to find businesses/companies with good dividend yield and growth potential.
Cardinal sins of equity investing: Investing in businesses that one does not fully understand, ignoring corporate governance issues and excessive focus on valuations.
Investment gurus: I am influenced by Peter Lynch's investment philosophy of buying businesses that one fully understands for the long term, irrespective of market gyrations, and Warren Buffett's style of value investing. Both have given good long-term returns.
Sectors bullish/bearish on: We continue to expect outperformance from private sector financial, consumer, health care and telecom firms. Metals, capital goods and auto are expected to underperform.
MIRAE ASSET INDIA OPPORTUNITIES
"In the present situation, one must stick with the asset-allocation plan and not try to time the market"
Gopal Agarwal
CIO, runs the fund with Neeleash Surana, Head of Equity, Mirae Assets Mutual Fund
Fund objective: To earn superior risk-adjusted returns consistently. It is a large-cap diversified fund and invests 80% money in companies whose market capitalisation is over Rs 11,000 crore. It does not take concentrated sector- or stockspecific bets and focuses on companies with competitive advantages and pricing power.
Top Sectors: The fund is skewed towards financials (26% weight). Besides, it is positive on energy (10%). It has invested 12% funds in the technology sector, where it likes TCS, as it generates good cash and is cheaper than peers. It invests in businesses that generate significant cash flow and high return on equity. The auto ancillary sector has also worked well for the fund. Sectors avoided: The fund is underweight on metals, construction and real estate.
Watch out for: Market movements are determined by earnings, liquidity and interest rates. In 2012-13, earnings growth was just 6% compared to 25% in 2004-2007. However, the economy seems to be entering a better phase with fall in global commodity prices. Over the next two-three years, 12% earnings growth is possible.
FRANKLIN BUILD INDIA
"We have clear focus on companies benefiting from investing in economic building blocks"
Roshi Jain
Vice-President and Portfolio Manager, Equity, Franklin Templeton Investments
Fund objective: Franklin Build India Fund is an equity fund with clear focus on companies benefiting from investing in economic building blocks-physical infrastructure, resources, financial services, social development and agriculture. The main focus is on structural and not cyclical themes.
Top Sectors: Pharma, as Indian companies have moved away from domestic focus and simple generics to new growth segments which offer companies good opportunities for expansion; financials, as the sector will be one of the key beneficiaries of rising incomes and growing demand for financial services/products; and energy as the country's energy demands are going to increase and pricing is expected to be freed further with falling fuel subsidies.
Sectors avoided: The fund is positive on housing and construction but continues to stay away from pure real estate plays. It instead plays through allied sectors such as paints and cement.
Investment strategy: A blend of growth and value style, the portfolio is managed through bottom-up stock-picking with a topdown overlay.
SBI EMERGING BUSINESSES
"We have been running the fund under a highconviction strategy focused on returns"
R Srinivasan
Head, Equity & Fund Manager, Equity, SBI Mutual Fund
Investment strategy: We have been running the fund under a high-conviction strategy focused on returns and agnostic to benchmark, peer set and market cap risks. At any point there are only a handful of stocks (25-30) that you have high conviction about.
Reasons for high churn: The churn is high due to two reasons. One, we restrict the number of stocks, which means the average holding per stock is high. Whenever we add new ideas, the existing ones have to go. Two, we maintain a large-cap filler of 20-30% to manage liquidity.
Calls that worked: The top attributors were SpiceJet, Muthoot Finance and United Spirits. I guess we got lucky on United Spirits; it's not an opportunity that comes by often, and even if it were to, I'd be apprehensive of the probability of us getting it right.
Calls that went wrong: We went wrong on Cox and Kings and exited mid-way. ICICI Bank and L&T attributed negatively because we didn't hold them.
Sectors bullish/bearish on: We are overweight on financials, health care and consumer discretionary and underweight on metals.
BIRLA SUN LIFE MIP II
"Duration calls are likely to give good returns as we expect a 100-125 bps rate cut in 2014-15"
Satyabrata Mohanty
Head, Mixed Assets, Birla Sun Life Mutual Fund
Fund objective: The primary aim of Birla Sunlife MIP II Savings 5 plan is providing regular income and growing money through fixedincome investments and limited exposure to equity. Both equity and fixed-income components are managed conservatively. While debt does not exceed three years, the focus of equity investments is high dividend yielding stocks.
Calls that worked: In 2012-13, the fund was active in taking duration calls. At the beginning of the year The fund was bullish on the longer segment of the yield curve and increased the portfolio duration from 2.5 years to 5.5 years with the view that the RBI will cut rates by 125 basis points. This paid off. The fund invested about 25% funds in G-Secs and the balance into corporate bonds and SDLs, which took advantage of spread contraction in the fixed income market.
Investment strategy: The debt component is actively managed and is used to invest only in liquid papers. Duration calls are temporary. The modified duration remains three years. The equity component is 10%. Here, it follows a buy and hold strategy with an investment horizon of three years.
ICICI PRU EQ VOLATILITY ADVANTAGE
"We are underweight on FMCG. The best case return for the sector is 10%"
Manish Gunwani
Senior Fund Manager, ICICI Prudential Mutual Fund
Fund Objective: The fund goes for dynamic allocation based on a model that takes into account factors like price to earnings ratio and the price to book value, along with macro parameters such as interest rates and money supply. The net equity exposure ranges from 56% to 73%. Hence, the churn is high. It invests up to 35% in debt.
Calls that worked: The fund invested in good structural stories such as Amara Raja, Motherson Sumi and M&M Financial Services which returned 100%. It has invested 4% funds in the automobile sector, where Gunwani sees limited downside of 10-15 % but an upside of 30%. In large-caps, sticking to strong companies has helped the fund. It has been underweight on FMCG and pharma due to valuations. "The best case return for FMCG is 10%," says Gunwani.
Calls that went wrong: Its exposure to FMCG was only 2%, but the sector did well in 2012-13.
Practices: It prefers structural companies than cyclicals. If the market moves up, Gunwani will add mid-cap cement, where he sees strong upside for stocks like ACC and Ambuja Cement.
BIRLA SUN LIFE MEDIUM TERM
"We invest in the non-AAA space only after due diligence and identifying the risk-reward equation"
Manish Dangi
Co-chief Investment Officer, Birla Sun Life Mutual Fund
Fund Objective: The main aim of the fund is optimising returns by identifying mispriced credit opportunities in medium-term securities. "The fund seeks opportunities that offer high yields and where the investment is fairly priced for the risk taken," says Co-chief Investment Officer Maneesh Dangi.
Investment Strategy: The fund follows a bottom-up strategy and looks for investments that yield 3-4% above AAA papers and government bonds. "It invests in the non-AAA space only after due diligence pursuant to interacting with managements and identifying the riskreward equation," says Dangi.
Calls that worked: The fund has the option of lending to the government at 7.5%, investing in an AAA company like PFC at 8.5-9% or in a company like DLF at 14%. This is where it has remarkably earned its returns. Investments that have played out well are RHC Holding, which is secured by third-party pledge of equity shares of Religare Enterprises and Fortis Healthcare.
Duration Call: The medium-term fund is rate cycle-agnostic. It does not depend upon movement of interest rates and hence does not take duration calls.
SUNDARAM SELECT DEBT STAP
"There is possibility of long-duration funds remaining in favour for the next two quarters"
Dwijendra Srivastava
Head, Fixed Income, runs the fund with Sandeep Agarwal, Fund Manager, fixed Income
Investment strategy: Our fund management philosophy is grounded in the fact that it is retail money which we manage and that entails us to be aggressive only to the extent of the fund mandate. We think the philosophy of equity funds should not be any different
Scope for aggression: Fixed income investment is largely limited to liquidity, interest rate and credit spectrum. The fund manager is construed to be aggressive if he takes any of the above risks on the higher side of the fund mandate.
Calls that worked: Calls that benefitted were timely exposure to government securities and state development loans, getting into corporate bonds at the right spreads and timely exposure to the money market bucket at high spreads over the repo rate.
Calls that went wrong: The biggest mistake was holding an event view rather than a rate view.
Interest rate outlook: We believe the repo rate will bottom out around 6.75% as inflation may soften in the coming quarters and then rise as the low-base effect wears off and we see some green shoots in domestic and global economies.
PEERLESS LIQUID FUND
"I see key rates softening by another 50 basis points, but the fall in yields will not be one way"
Malay Shah
Fund Manager, Fixed Income, Peerless Mutual Fund
Investment strategy: The fund follows a mixture of top-down and bottom-up approach after taking into account the economy, interest rate and liquidity scenario. The endeavour is to outperform overnight benchmark rates.
Challenges: A liquid fund manager is primarily required to generate stable and non-volatile returns on a daily basis; in comparison, equity fund manager has a longer time horizon.
Calls that worked: Our calls on interest rates and credit spreads came off well in the shorter end of the curve.
Cardinal sin in debt investment: Not keeping track of the financial health of the company in which one has invested. Many times, lack of movement lulls the fund manager into inactivity, and these are times when real alpha can be added.
Interest rate outlook: Depending upon domestic economic variables, I see key rates softening by another 50 basis points. However, the fall in yields will not be one way. The risks are global shocks, rise in commodity prices and domestic political scenario, and hence there will be phases where markets will be volatile.
