Mr. N. Sethuram Iyer took over as the Chief Investment Officer of SBI Funds Management Pvt. Ltd. on February 10, 2003. He started his career in State Bank of India 1976 and has over 26 years of banking experience in diverse fields like Credit, Forex and Investments. His last assignment was as Senior Vice President (Credit and Investments) at the Bank's Tokyo Branch

In an exclusive interview with Personalfn, Mr. Iyer revealed the ‘secret’ behind the amazing run of funds from SBI Mutual Fund.

Personalfn: What is your view on equity markets at present? How do you expect them to behave over the short-term (6 months) and long-term (3 years) horizons respectively?

Mr. Iyer: We are positive on the markets both over the medium as well as the long term. The reason being, that India has now reached the take-off stage. We are looking at GDP growth happening at around 6% plus on a continuous basis over the next few years. GDP growth is going to be contributed by manufacturing and services sector, which are the sectors primarily represented in the stock markets. I am looking at companies’ growth being in double digits over the next few years. With that and today’s forward P/E levels in the markets being at about 10-13 times or so, I feel these kind of valuations can be sustained going forward. Because of market momentum, we sometimes tend to get carried away. But I feel that at these levels, the markets are fairly valued.

Now, if the markets go beyond 7,000 levels, at today’s levels there would be a certain amount of heating in the market, so some correction can be expected. But each quarter results, which come in, (and they have been tremendous in the last several quarters), can add 100-150 points to the market. So we are positive on the market both over the medium as well as the long term. But if you ask me how the markets will behave in the next week, I really don’t know.

Personalfn: Do you expect the market to be volatile over the short term?

Mr. Iyer: Our markets by nature are volatile. I feel the ideal increase in our markets on a daily basis should be in the range of 30-50 points. So on any given day, if you have a 100-150 point increase in the market, you are bound to have a correction.

Personalfn: How do you expect the Indian economy to perform going forward? Any significant positives/negatives?

Mr. Iyer: In terms of positives, as already mentioned earlier, GDP is galloping and the ingredients for growth are already there. Also the focus areas have been defined by the government. For example, infrastructure is going to get a big thrust. The negative is the fiscal condition of the Central Government as well as the State Governments. The political setup (like the election results) is always a source of worry. The other negative, which I can think of, is that if over the next year should the interest rates climb up very dramatically, it could impact performances of companies

I am not even looking at monsoon as a big trigger. The impact of agriculture on GDP is becoming negligible now.

Personalfn: Schemes from SBI Mutual Fund have seen a significant turnaround over the last 12-18 months? Which factors have contributed to this success?

Mr. Iyer: One thing we did last year (in fact since 2003) was that we brought in a very clear focus for the funds. For example, for Magnum Equity Fund, we focused it as a bluechip fund; it was decided that the fund manager would not invest more than 10% in mid cap stocks. So it’s a 90% large cap portfolio. Likewise the Contra Fund had somewhere lost its contrarian nature. So we refocused the fund and added some value and growth stocks, which were contrarian in nature. At any point, we have had 2 or 3 scrips, which have been contrarian bets. Likewise for the Magnum Multiplier Fund, we put the investment ratio at 60:40 (large caps and mid caps respectively); this has a variation of 10%, so we can go upto 70:30.

The Magnum Global Fund had no characteristic in 2003. The fund manager was told to position this fund as a predominantly mid cap fund. Presently, the global fund has about 80% in mid cap stocks. As far as our sector funds are concerned, for example with the IT fund, we always maintained their character. There are several IT funds in the market today that have changed their character from IT funds to being diversified equity funds. Of course, the bias has always been towards mid caps, which have performed well.

The second reason for improvement in performance is internal monitoring; we started a very elaborate internal monitoring exercise. Every month, every scheme is analysed thoroughly in terms of sectoral allocation, individual company exposure etc. We look at about 4-5 measures, and provide him with feedback on the areas on which corrective measures are required.

Even since 2001 when we crashed in terms of performances, various internal control policies have been taken. These policy measures have aimed at reducing the risk due to concentration. Our performance fell in 2001 because many of our schemes had around a 40% plus exposure to IT.

Personalfn: How about a broader management or investment style? Which style would broadly encompass the fund house’s philosophy?

Mr. Iyer: Our basic philosophy is that we have a top-down approach as regards the sector and a bottom-up approach with regards to individual stocks. Having said that, the top-down approach is rather difficult to define. We generally have an idea about which are the sectors we are looking at, at a particular point of time. If it is comfortable to the investment team as a whole (these sectors are picked by the fund manager) then we go with that. Within those sectors, the fund manager picks the stocks.

Personalfn: Is a sectoral cap maintained for investments in various schemes?

Mr. Iyer: Yes, we do have a cap and it is linked to the weightages in the index. The benchmark index for most of our equity-oriented funds is BSE 100. So we maintain a cap at BSE 100 plus a maximum of a certain percentage. If this sectoral cap is violated the same is also reported to the Board of Directors, if they or we feel uncomfortable with the excess holdings, then the holdings are clamped down. The violations (if any) rarely exceed 2-3%.

Personalfn: Now that Societe Generale is partnering with SBI MF, will we be seeing any changes in SBI Mutual Fund’s management style?

Mr. Iyer: We have had discussions with Societe Generale over various issues and at various levels like investments, risks, compliance.

In the first phase, they are evaluating our processes and systems to determine whether we are at par with them. Their systems and processes are very sophisticated since they handle almost US$ 350 billion all over the world. They have an international system of risk management, fund management and compliance management. Most Indian mutual funds do not have the sophistication of an international fund house. So it is accepted that we would have to progress to reach their level. What we have found out is that the styles of investment are not too different from theirs. They are also basically comfortable with our systems.

In fact, if it were totally contrasting to their philosophy, probably they wouldn’t have tied up with us. The return expectations in India are much more as compared with Europe, where it would be a good performance if the index return were exceeded consistently.

The risk profile of Indian funds is also slightly higher with a predominance of midcap stocks. Today, if you see, all the launches which are coming are oriented towards mid caps with higher risk portfolios. So if this is what the markets want, then that is what we will give. What we would be achieving from our tie-up with SGAM is better monitoring of the risks and fine tuning our process so that we get the best performances.

Personalfn: According to you what should be the ideal investment horizon for an equity fund investor?

Mr. Iyer: Ideally, I suggest that people who want to look at equity investments should look at a period of 3 years. Investors should not look at equity as an investment avenue unless they have a horizon of at least one year. Day traders and short term players can lose money heavily when the market movements in certain periods are adverse.

Personalfn: How many stocks should a diversified equity fund ideally hold? Also how much should the top 10 stocks account for?

Mr. Iyer: It would largely depend on the fund manager’s approach and confidence. I would rate our Head of equity as the best fund manager in the business today; all his schemes are top performing. We have funds where the top 10 holdings are around 50-60%. Ideally I would also be happy where the top 10 holdings are around 50%. Also as a fund house, we try to keep a minimum of 20 stocks in each fund, except in a sectoral fund where we may not be able to do so.

Personalfn: What is your view on sector funds? Do you think the risk associated with them is adequately conveyed to investors?

Mr. Iyer: It is impossible for any AMC to individually educate every investor. Few investors have the time and patience to read an offer document fully. But when you are dealing with say a Magnum IT fund, the name conveys it all. In an IT fund, the fund house will invest in IT stocks.

What we expect the investor to do is that before investing, the investor can take a look at the latest portfolios, which are available at the AMC website or with any broker, agent or distributor. He can see what the portfolio is at that point of time. Yes, the risk he takes is that the portfolios can change dramatically at the end of the next month. In such a case, he has the option to exit. I don’t think we can go beyond that. But even then, in any investor education forum, we always say that in terms of the risk class, we always put sector funds as the riskiest.

Personalfn: Every time the markets experience a bull run; we witness a string of MF IPOs hitting the markets. Mid cap and Flexi cap funds are the season’s flavour at the moment. What is your view on the same?

Mr. Iyer: The competition in the mutual fund industry is very high. Mobilisations in a big way are happening only by way of IPOs. For example our Magnum Contra Fund has been our star performer in the last several years; in 2003, it was only a Rs 10 crore fund. Now, from a Rs 10 crore fund, it has moved up to being a Rs 200 crore fund. Now this is definitely a great growth, but what happens is today a new IPO can mop up Rs 500-1000 crores at the time of launch, so IPOs are now here to stay.

People are coming up with more and more and more IPOs every month and it has nothing to do with the markets. It has more to do with the competition in the industry. It is essential for funds to launch new schemes on a regular basis.

Personalfn: Don’t you think at times a lot of cannibalisation takes place within the AMC? For example we have a large cap fund, a mid cap fund; then the AMC launches a flexi cap fund. Now if fund houses believe that a flexi cap fund is the place to be (since it eliminates the deficiency of a large or mid cap fund), why would an investor like to invest in a regular large or mid cap fund?

Mr. Iyer: The flexi cap fund is good on paper. Today the mid caps are doing very well and we also know that at some point of time, the large caps will outperform. But as midcap stocks are not very liquid, shifting a midcap portfolio into a larger cap will take some time.

So if I am an investor, I need to be very clear on what I want. If I am confident on mid caps today, I will invest my money in mid caps. If I am not confident and not keen on taking risks and instead prepared for a sedate growth, then I would put my money in a bluechip fund.

The other point is that mid caps have performed in the last 2 years. From the market readings and from the current scenario, they could perform in the next few years also. At what point in time you will shift from mid caps is the question. Now a flexi cap, by definition, would involve periodically changing the portfolio, which may be difficult at times.

Personalfn: We have noticed that even tax-saving funds (ELSS) despite the 3-Yr lock-in period are managed rather aggressively. Isn’t this rather strange since the fund manger has sufficient time at his disposal to take long-term calls?

Mr. Iyer: If you see most of the top-performing ELSS schemes have very aggressive portfolios. This is partly because of the lock-in period where the moneys can be invested with a longer term view.

Personalfn: Your views on MAPIN, do you think it will deter investors from accessing markets/investing in mutual funds?

Mr. Iyer: I wouldn’t like to comment on that one. If the regulator feels MAPIN is good, we will go with the regulator.

Personalfn: What advice would you offer to a retail investor at this stage?

Mr. Iyer: Firstly I would advise the retail investor not to time the market. Secondly, don’t put all the money at one point of time. Thirdly, don’t get carried away by the markets, you don’t know if it has peaked. A whole lot of people said that the market has peaked at 6,500 points but I don’t think that we should look too much at them. Now after 6,500, it goes to 7,500 points the prediction would look very foolish. It is better for investors to spread out his investments over 6 months to 1 year. Take an SIP route and spread out your investments.

Personalfn: What kind of books do you like to read?

Mr. Iyer: I don’t get time to read at all; when I read, its generally fiction. I am not what you call an “investment professional”, I am basically a banker.

Personalfn: Which are the 3 individuals who have influenced you the most?

Mr. Iyer: Professionally, of course, there have been my colleagues and my bosses. One of my bosses Mr. S Govindrajan, who retired as an MD at State Bank of India is now the banking Ombudsman at Chandigarh. I would rate him as the finest human being I have worked with.

I have been very lucky that I have got very exciting assignments and I rate this current assignment as also very exciting and challenging. I would also rate my current boss as one of the finest people I have worked with.

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