Face to Face with Mr. R. Srinivasan   Sep 08, 2011

PersonalFN is privileged to bring to you Mr. R Srinivasan, Head - Equities at SBI Mutual Fund

In an interview with

Quantum Information Services Pvt Ltd (PersonalFN)

Srinivasan shares his views on the investment philosophy at SBI Mutual Fund, investment strategies in context to the present global and domestic economic scenario and how the Indian equity markets will pave their path.


PersonalFN: What is the investment philosophy which SBI Mutual Fund follows?

Mr. Srinivasan: We don’t have a common philosophy running across the fund house; it’s specific to a fund. We run various strategies across market caps, themes and sectors.

PersonalFN: But a core investment style which the fund house follows – a bottom-up approach, a top-down approach?

Mr. Srinivasan: Well, we have SBI Magnum Equity Fund, which is pure large cap and where we only invest in the top-100 companies (in terms of market cap rank). Here, we run a top-down approach, with active sector weight constraints, stock weight constraints and benchmark coverage because we think here’s a peer set where the benchmark will tend be in the middle most of the time. The target of this fund is to be somewhere between the 15th to the 40th percentile on a consistent basis. Then, we have Magnum EBF and Magnum Midcap which run a bottom-up approach, some others follow a combination and then there are the sector funds which only invest in that sector, and so on.

PersonalFN: So do you follow a growth style in that fund (i.e. SBI Magnum Equity Fund)?

Mr. Srinivasan: I think, in India, value needs to come with a growth flavour; it’s not ‘value’ in that typical global sense. But, specifically, in answer to your question, yes, inherently there is a growth bias – at least as far as I’m concerned. I like value only if it comes with some basic growth else you tend to get into a value trap.

PersonalFN: Since we talking about funds just coming to your front runner – which was SBI Magnum Contra Fund, it has underperformed in the last 1 – 1 ½ year, could you explain the reasons for the same.

Mr. Srinivasan: Well, there were a couple of reasons. If you divide the market into themes; for example, let’s say, there’s a momentum theme where you buy whatever is doing well or you have a quality theme or a contra, for that matter, or a deep value theme. Now, if you look at all these and break the market into what has worked, it’s been predominantly quality. Stocks which were already trading at a premium like an Asian Paints or an HDFC Bank or a Nestle have done extremely well and on the other hand, deep value has become deeper value! Contra, as a theme, has not played out at all while momentum may have played out in pockets. I think we probably did much more ‘contra’ than we should have. Secondly, and equally importantly, I think we could have done much better in terms of sector and stock selection.

PersonalFN: Interestingly we got a good bottom cycle in 2008 until March 9, 2009 – where you got good valuations to pick stocks, so don’t you think contra theme could have really worked? Was it that not enough stock picking was done or has sector selection gone wrong?

Mr. Srinivasan: What has worked from the bottom too is quality. Stocks which got beaten-down (during that time) have gone down even further. And stocks which didn’t fall so much, they’ve touched new highs. If you look at the market in the last two years or so, there’s a huge standard deviation in terms of performance. The consumer space never really fell much and it’s touching new highs while the infra space would be still negative. We define contra as a combination of several factors including consensus sell side recommendation, negative fundamental (Bharti Airtel around a year back) and technical momentum, ownership pattern (Reliance), deep value and event negatives (Mphasis after the fall).

We are now running the fund like a multi-cap strategy and have decided to own a contra stock only if we are willing to buy it in any other fund. In other words, it won’t be a portfolio that will necessarily look different because it’s contra. If we have a contra idea, yes, we’ll play it from a longer-term perspective but we won’t play contra for the sake of it.

PersonalFN: After the fall of 2008 – after the U.S. sub-prime mortgage crisis when the Indian equity markets rallied from March 9, 2009 onwards till date; the large caps have done better than the mid caps – especially those which were hammered down during 2008. So why has SBI Bluechip Fund’s (a large cap fund) performance hindered?

Mr. Srinivasan: Bluechip (SBI Bluechip Fund) has not done well and we got to accept that. We were probably much more into infrastructure and capital goods and those sector preferences haven’t played out. In the last two years, like I mentioned, there has been a huge deviation in terms of sector performance so if you were in the wrong sector(s) you would have underperformed substantially.

To be fair, we are doing well as a house. We have funds that are doing extremely well. In the mid & small cap category, this year, the top two funds are Magnum EBF (SBI Magnum Emerging Business Fund) and Magnum Global (SBI Magnum Global ’94 Fund). Equity (SBI Magnum Equity Fund) is doing well too and consistently – it’s a pure large cap fund and is in the top decile, ytd. The PSU fund which is just about a year old is out-performing the benchmark by nearly 9%, the Pharma sector fund is doing well and so is the FMCG fund. There are some that are not doing well but there is reason to believe they are and will improve from here.

PersonalFN: So right now is the fund house per se following more of a top-down approach – focusing more on themes/sectors?

Mr. Srinivasan: No, it’s all fund specific. EBF (SBI Magnum Emerging Business Fund) is purely bottom-up, Global (SBI Magnum Global’94 Fund) and Magnum Midcap too. A lot of the multi-cap funds follow a combination approach. In Magnum Multicap (SBI Magnum Multicap), for example we are now following a sector agnostic policy so you have a practically zero allocation effect and the excess return comes from pure stock selection. So every fund has a specific identity, and is run on that basis.

PersonalFN: Any set investment processes and systems which the fund house follows?

Mr. Srinivasan: Yes. For the top 100 stocks we compile and combine different inputs. We do a quantitative ranking based on a multifactor model which takes into account fundamental and technical momentum, relative valuations, RoI (Return on Investments) change, market expectations, the earnings cycle, etc. We have a huge smart sell side out there servicing us with whom we run an interface giving us their top conviction ideas. We also use external software based on cash flow return on investment. Most importantly, we have our in-house analysts who run their own models and target prices. We compile these inputs and come out with some kind of a ranking which is an advisory guidance on what you should actively weight - positively and negatively; that’s on the large cap side. On mid caps, obviously it is difficult to have a well defined process oriented structure but there is a fundamental philosophy that’s inherent.

PersonalFN: So fair enough emphasis on the quantitative parameters. What about the qualitative parameter which you look into while you invest into a company – which are they?

Mr. Srinivasan: Sorry if I gave you that impression. Qualitative clearly plays a much bigger role. We have a team of 9 analysts who handle their respective sectors along with the fund managers. We are not a quant shop, so the quantitative does not override the qualitative aspect. Quantitative is just one part of the process - it probably better captures the sharp movements in the market for a relative return strategy. The bigger input comes from the analyst and his fundamental thesis.

PersonalFN: But what are qualitative parameters while seeing the corporate governance of a company?

Mr. Srinivasan: We do prefer managements with better quality, but it would be wrong to say that we buy only great managements in which case we’ll be left with but a handful of stocks. But, we are strongly aware of this aspect. We look at the business model, assess the competitive edge in it (which you can define in terms of a market share or gross margins or some kind of moat the company has created), the long term track record and such. Someone, like a Redington, which has generated a 20% plus return on capital in a business that is extremely tough talks volumes about management quality.

PersonalFN: Moving away from the stocks let’s do the macro picture now…

For the first time the U.S. won the prime “AAA” rating in 1917, and now recently the S&P has downgraded the U.S. sovereign credit rating to “AA+” with a negative outlook, as they have once again resorted to increase the debt limit by U.S. $2.1 trillion (making it U.S $16.4 trillion). Also they have agreed to cut federal spending by U.S. $2.4 trillion dollars or more, but still their debt-to-GDP ratio is rather high (98%). Do you think this was a justified move for the U.S.?

Mr. Srinivasan: Whatever is happening in the US for the last many years, we all know. It’s the only country in the world that repays its creditors in its own currency. I would have thought people were aware of the numbers and in that context, am surprised with the knee-jerk reaction of the markets. It’s like the market has suddenly discovered something they didn’t know. However, if you read the note carefully you’ll realise the downgrade had more to do with ‘tea party’ politics than incremental economics. Is it justified? I’m sure it is but whether it should have happened in this sequence I don’t know.

PersonalFN: Recently the Fed has also said that they’ll continue to keep interest rates low until 2013; keeping interest rates near zero… does this seem to be a new version for the QE3 in a softer way?

Mr. Srinivasan: Maybe. I don’t know if they have another option.

PersonalFN: But don’t you think the long-term problem still remains, because the dominance of the U.S. economy due to dollar being the main currency right now would go…

Mr. Srinivasan: I’m not a macro expert. But that probably won’t because despite the dollar devaluing people have no option but to stay in the dollar (U.S. Dollar); gold is already going bonkers. Guess you just take consolation from the fact that it’s still AA+! But having said that, the U.S. is still probably the best economy to bet on – they are extremely flexible, the capitalism promotes a lot of entrepreneurship and they have a huge resilience in terms of their ability to come back. So writing-off the U.S. is like hugely underestimating their potential. But, like I said, I’m not the expert!

PersonalFN: The Euro zone is in a situation of debt overhang led by the PIIGS inability to put their public finances in place; do you see that as a dominant threat to the global economy?

Mr. Srinivasan: The Euro (euro zone) is worse than the U.S. So, yes, the Euro zone is a bigger threat to the global economy than the U.S., I think.

PersonalFN: And how do you see the Indian economy sailing across all these macro global economic factors?

Mr. Srinivasan: I don’t buy the decoupling theory. I think if things go really bad we’ll also suffer. But in terms of the economic cycle, remember, India is going through a completely different phase. There (in the U.S.) they are printing money; here we are tightening because of inflation. Overall, from a global perspective, if U.S. and Europe do very badly then we have a problem. If they do very well also we have a problem, because money then would go there; the U.S. stocks at least on paper look pretty cheap. Like someone said, I think the best scenario for us, and which is probably most likely is that the U.S. remains sober – it doesn’t go down too much, it doesn’t rise too much. And, people will hopefully keep believing in the DM (Developed Markets) to EM (Emerging Markets) theory.

PersonalFN: So you think money will move from DMs to EMs?

Mr. Srinivasan: Yes, that’s already happening.

PersonalFN: So in this fall of the Indian equity market from their peak of November 5, 2010, any change in the investment strategies at SBI Mutual Fund? Are you still waiting for some level to take exposure again?

Mr. Srinivasan: We were carrying a negative bias in some of our funds since the start of the year and these portfolios have done well in the fall. We are still trying to figure if this is a good time to start shifting to beta names. Have been doing that at the margin.

PersonalFN: Are you sitting on cash at present in most funds?

Mr. Srinivasan: We limit our active cash calls and try to generate alpha though stock selection because that’s what we think our mandate is.

PersonalFN: So you think staying invested is a right thing?

Mr. Srinivasan: Not as a philosophy. If I were an absolute return fund, I would have gone net short. But in a mutual fund you don’t have that mandate because in an open-ended fund, the investor can always pull out money. So if he sits on cash and we also sit on cash, it doesn’t make sense. I think it’s good that he knows his product is fully invested; if he thinks the market is going to fall then he can pull out money and move to debt. We don’t want to take that decision for him. But, an important caveat here; globally if I say I don’t take cash calls I would be presumed to be running 0.5%, here when I say I don’t take cash calls, I mean it’s the 4% - 5% range due to various constraints.

PersonalFN: So any levels on the BSE Sensex, you have thought of…any earnings forecast?

Mr. Srinivasan: We had a lower estimate for the Sensex (BSE Sensex) at the start of the year -about 1230; which is being downgraded further. I think this year could see further disappointments.

PersonalFN: So for the year end for what’s your projection on the BSE Sensex?

Mr. Srinivasan: I wish I had an idea! We do have target prices and try to get a sense of the Nifty upside but the flaw there is all the prices don’t happen at the same time, if they do. Some prices fall, some prices remain and when these prices go up, the others fall. Simply speaking, stock wise targets don’t reach at the same time so it’s difficult to have index targets. We only take market calls to help us to position the portfolio in terms of beta. So if we are negative we are high on defensives and vice versa. That said, this is a time to buy, I would think, not sell.

PersonalFN: What are the risks for the Indian equity markets going forward for the fiscal year?

Mr. Srinivasan: Earnings downgrade is the biggest risk but I think a lot of it is getting factored. Interest rates, we are surely nearing the end of the tightening cycle. Global risks are aplenty.

PersonalFN: Do you think “global finance” as it is today, has been complicated by the Wall Streets of the world?

Mr. Srinivasan: For sure. For us, in India, ignorance has been bliss!

PersonalFN: So given risk and global economic headwinds, any change in investment strategies set in for your funds?

Mr. Srinivasan: We are overweight Healthcare, Telecom (primarily rather just Bharti) and Consumers. We are underweight on Metals, Infrastructure and Financials. We haven’t really changed our stance very aggressively but are definitely looking into go lighter on Consumers. While consumption remains a secular long term story we are worried about near term upside risks on alternate sectors. We are looking to buy quality names in the Industrials space.

PersonalFN: Given the global economic headwinds and risks which you just mentioned, what would be your advice to investors?...and do you think gold would be a safe haven for them?

Mr. Srinivasan: Look to gold as an insurance not as an investment. If things turn very nasty globally, and that’s a meaningful probability, gold should do well. The market is a funny animal and has its own way of factoring things in; given that, I wouldn’t try to time it too much at these levels. I know it sounds clichéd but stick to the desired asset allocation.

PersonalFN: Thank you so much Sir, for your precious time and insights.



Disclaimer: The views expressed in this interview are those of the interviewee only. PersonalFN and its subsidiaries / affiliates / sponsors / trustee or their officers, employees, personnel, directors will not be responsible for any direct/indirect loss or liability incurred by the user as a consequence of his or any other person on his behalf taking any investment decisions based on the contents of this interview. The user must make his own investment decisions based on his specific investment objective and financial position and using such independent advisors as he believes necessary. PersonalFN does not warrant completeness or accuracy of any information published in this interview. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the readers. Please read the detailed Terms of Use of the web site.

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Sep 28, 2011

Hey, that's peorwufl. Thanks for the news.
Sep 29, 2011

Times are changing for the bteter if I can get this online!

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