A graduate in electrical engineering from the VJTI and an MMS from NMIMS, Shyam Bhat began his career as an equity analyst with the Tatas. Thereafter he was sent to London for training at Kleinwort Benson HQ.

He was promoted as a fund manager in March 1996. Initially, he restructured Tata Young Citizens Fund and then he was given charge of the Tata Pure Equity Fund and Tata Balanced Fund.

In his second interview to personalfn.com.com Shyam Bhatt, Fund Manager, Tata Mutual Fund, spoke at length about the markets and his favourite sectors and stocks.

PFN: What is your view on the markets currently? Where do you see it heading?

Mr Bhat : The markets are very lacklustre at the moment and I expect this to continue for another month at least. We are currently witnessing a trading market and the markets will continue to oscillate in the 4,200-4,700 points range. We have yet to witness signs of a one-way bull market that we saw last year.

As far as volatility is concerned, it certainly offers more opportunities to make higher returns than otherwise. There can be no two opinions that mutual funds are long-term players. However I believe the opportunities that a trading market also should not be ignored. A buy/hold strategy works fine in a bull market, but it won’t work in a sideways market for a major portion of the portfolio. This will help us improve returns to our investors even if the market remains sideways for a long period of time.

PFN: The month of August has seen very limited activity by MFs, while FIIs have bought/sold reasonable quantities. Why have MFs been so low-key?

Mr Bhat : I think one reason MFs could have been so guarded is because of the new SEBI guidelines regarding investments. I think some MFs are probably uncertain about the recording and reporting of reasons for investments to SEBI whether each and every trade during the day should have reasons ascribed to it. This could have curtailed investment activity. I am not saying this is the reason, but it could be one of the reasons. Moreover, the MF industry really hasn’t seen the kind of inflows that it witnessed last year. This year only the income funds seem to be attracting most of the inflows.

PFN: Which sectors seem attractive to you right now?

Mr Bhat : I continue to remain bullish about the IT sector. The results of 1QFY2001 have shown that software companies are able to maintain their growth rates. And we expect these companies to be able to maintain these rates over the next couple of years. The PEG (price earnings to growth) has come down dramatically for these companies. Moreover, the rupee depreciation will benefit software exporters.

Of course, fund managers have learnt a bitter lesson from last year. I think software allocations will come down from 70-75% to about 50%, which I believe is fair. But demand for new economy stocks will definitely be there. We’ve just witnessed a rate hike and there is a diesel hike in the offing. Moreover, industrial figures indicate that there has been a slip up in industrial production. So old economy stocks are going to see a selective rally, whenever it happens. Of course money will go into stocks like Dr. Reddys, Nestle, Glaxo, etc. which are not strictly old economy, but fall under non-tech.

PFN: There seems to be so much value in some stocks like Tata Engineering? What is your view?

Mr Bhat : There is value in several old economy stocks but from a very long-term perspective such stocks are unlikely to give good returns over the next one year. Currently our NAVs are being regularly monitored by investors, research agencies, the media and against this backdrop I am not sure how much we can allocate to such underperforming stocks.

PFN: Apart from IT, which sectors look good to you right now?

Mr Bhat : Telecom looks good and so does banking. In telecom, we don’t really like VSNL and MTNL . VSNL, mainly because its monopoly could end very soon and MTNL because of increasing competition from Hughes and uncertainty on taxation issues. We like Sterlite as we believe fiber-optic cables have a great future in the country.

We have a reasonably large allocation to banking compared to other funds. The banking sector (especially the new private sector banks) have really harnessed technology towards their growth.

PFN: What has been your investment strategy as far as equities are concerned?

Mr Bhat : Apart from fundamental reasons like business model, quality of management, PEG, etc. I have followed one more rule very diligently, i.e. of investing mainly in liquid stocks. In the bull market last year, all good stocks (including the illiquid ones) participated in the rally. The prices of some of these illiquid stocks really appreciated a fair bit. But I think with every succeeding rally, there will be fewer stocks participating, so holding on to some of these illiquid stocks may not be the smartest thing to do. These illiquid stocks may be very good with a high pedigree but they could still underperform. The reason I believe this, is because right now every other fund manager is tied down with 4-5 good illiquid stocks. But an exit could be tough for them. And no fund manager is going to add on an illiquid stock afresh because in doing so, he may be inadvertently providing an exit to some other fund. So it’s a vicious circle we have here.

PFN: A prominent fund house has not paid dividend under its monthly income plan for the month of July. Another one has warned investors that it may not be able to do so in future. What is your view on this?

Mr Bhat : I do not manage our income funds and am therefore not the right person to really comment on this development. But what could probably have triggered this is the double whammy income funds have got over the past few weeks. The debt portfolio (of around 85% of net assets) has depreciated after the interest rate hike (in July). To aggravate the situation, equities, which are often used effectively by income fund managers to enhance returns, also plummeted. This twin-blow weighed heavily on monthly income funds and probably didn’t leave them with enough for a dividend payout.

PFN: How is Tata MF positioned in terms of net assets?

Mr Bhat : Right now we manage assets worth Rs. 8,000 million. The ratio of debt-equity is roughly 2:1, with the income fund being the largest.

PFN: How have inflows been over the few months?

Mr Bhat : We are witnessing in the income inflows in all our funds, Tata Young Citizen’s Fund is seeing good inflows, because it is the best fund in its category and possibly because of institutions going in for early redemption of Deep Discount Bonds. The Tata Pure Equity Fund is also doing extremely well. Among Tata Funds, Tata Pure Equity Fund has given the highest annualized returns (compounded annualized returns of approximately 55% as of July 31st 2000) and highest dividends (136%) till date. It has been recently ranked No.1 among all diversified equity funds for the last 3 moths (by Value Research and Micropal) and No.2 for the last 1 year ending July 31st 2000). Tata Balanced Fund too has been ranked No.2 in a recent study by ET Crisil.

PFN: Who are the personalities you admire the most?

Mr Bhat : There have been several and I can’t put my finger on any one in particular. I like to inculcate different positive aspects from different personalities. My “idol” per se is Lord Ganesha. I draw my inspiration from HIM.

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