Rajat Jain (BE - Mech., PGDM - IIM Lucknow) was the Chief Investment Officer (CIO) at SBI Mutual Fund before shifting to Principal Mutual Fund in 2000. Widely experienced, he has handled several functions ranging from fund management to research to dealing in equities.

In his second interview with Personalfn, he expressed his views on the Indian economy, the equity markets, Principal’s investment strategy and its fund performance.

Pfn:  What is your view on the economy?

Mr. Jain:  I think the industrial growth is very encouraging. We are seeing excess capacities that have been built up since the 90s being utilised. The body language of the industry is very different. We meet a lot of industrialists and the tone is like we can compete and foreigners better watch out. So I think the industry is broadly on track.

Services is a little difficult to measure in the economy. But its adding significantly to the GDP and balance of payments. I would leave it that. But the evidence is all there – home loans, etc. you know the works.

Agriculture post-monsoon looks positive, production will improve. The focus that industry got in the past from the government and banks, we are seeing the same focus being extended to the rural areas. India has the largest arable (fit for irrigation) area in the world. But productivity has been a problem. To improve productivity we are seeing water linkages and other measures, which is a good thing.

We get numbers from various organisations. I don’t have them now, but the trend is right.

Pfn:  How do you see this growth percolating to the markets?

Mr. Jain:  I must say at the outset, that I have never been a great timer of the markets. We are seeing P/E multiples improving. We are seeing companies do all the right things – belt tightening, cost reduction, focussing on core competence, capacities being used up, greater pricing power. The Indian market looks cheap, not very cheap, but generally cheap. We are seeing the market cap to GDP ratio in the region of 38-39%. Then there are strides in power and transportation that has not reflected in the index as yet. As these companies get privatised, this will get reflected in the market cap. I think going forward we will see more allocations being made in terms of the market cap. In the long term, I mean at least 2 years, it looks good.

Pfn:  What is your investment strategy? What are your key parameters for stock selection?

Mr. Jain:  We generally choose companies that have a competitive advantage. We don’t choose the ‘me-too’ kind of companies. There is money to be made in the ‘me-too’ companies as well but for that you have to time the markets well and we don’t want to do that. We look at good management. We have seen too many companies with cheap P/Es of 4 that have fallen to 2 because of lousy management. Of course, the valuation is important and has to be attractive. To make money in any business, the price you pay for the asset is the deciding factor. So if you look at my portfolio, you will find a standout feature in each stock in terms of the criteria I have outlined.

Pfn:  Over the past year and a half, we have seen this mid-cap frenzy in the markets. Have you been a participant in it?

Mr. Jain:  Our stock selection is bottom-up, so we don’t look at any sector or segment. I am never in line with the index in terms of sectoral allocations, either overweight or underweight. Of course, we had companies that were in the mid-cap segment. We have had Concor, Blue Dart. We have had mid-caps that we felt weren’t sufficiently rewarded by the markets. But we haven’t looked at mid-caps from the ‘hot trend’ perspective. We don’t look at stocks from that perspective, that for instance, pharma is ‘hot’ today and some other segment could be ‘hot’ tomorrow. To that extent we weren’t participants in the mid-cap rally.

Pfn:  Principal Index Fund is one the oldest and largest index funds in the country. Do you believe there is a rationale for investing in an index fund given that the index has been flat over a 3-year period? Moreover, most active funds have outperformed index funds, so investors are still better off investing in the former.

Mr. Jain:  I think that’s for the investor to decide. It’s a product that I am offering him and he needs to take a call on whether he wants an exposure to the index. If there is appreciation in the index and he wants to capture the growth, then being in the index can help. Of course, the active fund manager will also clock growth at the same time, which is why we don’t say that it’s a question of either/or, it can be both. The investor must not only be in the index, he must also be in the index, maybe upto the extent of 20% and the balance he can allocate in active funds.

Pfn:  In the US, index funds play a very important role. Do you think such a trend happening in India?

Mr. Jain:  In the US, index funds do play a very important role and they have outperformed active funds regularly. In India, if you look at some of the broader indices like the S&P CNX 500, you will find that active funds haven’t outperformed them as easily as the narrower indices (Sensex, Nifty). However, in India, active funds definitely have a more important role to play, they are here to stay.

Pfn:  Your MIP has been a consistent performer without taking undue risk on the equity side. How do you manage that?

Mr. Jain:  We have maintained our stand that we made to the investor at the time of launching the MIP in April 2000. We promised him steady growth without taking on excessive equity risk and we have adhered to that. We have a 15% cap on equity, but have not exceeded even 8%.

Pfn:  How do you manage your income funds?

Mr. Jain:  We manage our duration bets actively. I think in India duration management is largely the way income funds are managed. It’s the same with us. The liquidity of the portfolio is also important to us. We consider the credit profile of the portfolio. In fact we were among the first ones to have an in-house credit analyst. This is a practice with Principal globally. That gives us strengths on credit management. Incidentally, Principal is very strong on the income side globally and we have credit checks in place.

Our income fund has been ranked high consistently. We try to cut down on volatility without compromising on returns. I think that’s what investors want – lower volatility with consistency in returns. That’s our strategy across all our funds on the income and equity side, to give a higher return at lower risk.

Pfn:  Do you think something like the Alliance Capital issue will have a negative impact on the industry and will disturb investors?

Mr. Jain:  Having spoken to investors and distributors, I don’t think the impact will be that significant. The domestic industry is well regulated and something like this is unlikely to have a significant impact on investor perception in the long run. The value proposition that the mutual fund industry brings in terms of transparency, higher returns, liquidity is far superior and something like this will not really change this.

Pfn:  What is your advice to the retail investor?

Mr. Jain:  Look at fixed deposits – it’s a very large base at Rs 13 lakh crores, that’s where most of the money is. Compare that to mutual funds, it’s a little over Rs 1 lakh crores. I think FD investors can invest some money in income funds because they are more tax-efficient, offer better returns and are low cost. They can put some money in cash/liquid funds for liquidity. Maybe some money in MIPs and about 15-20% in equities.

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