Mr. I. V. Subramaniam is the Senior Fund Manager and Head – Research at Quantum Asset Management Company Pvt. Ltd. He is a commerce graduate and a LLB. Mr. Subramaniam is also a Company Secretary and holds a Diploma in Business Finance. He has 15 years of experience in the Indian capital markets and 4 years in global equity research He has been associated with Quantum Advisors Pvt. Ltd. since 1996 with responsibilities ranging from equity research to portfolio management.
In an exclusive interview with Personalfn, he expresses his views on a number of topics ranging from the Indian economy, stock markets, and interest rates to the fund house’s investment philosophy.
Pfn: What is your view on the markets, from a short-term (1 year) and long-term perspective (5 years)?
Mr. Subramaniam: It would not be fair to judge market levels on a 1-Yr perspective. However from a 5-Yr perspective, 10 to 12% returns seem possible. But if the market corrects, then a 15-16% compounded annual return over a 5-Yr period appears possible. From 1980 to May 2006, the Sensex average return was roughly around 18%.
Pfn: How do you see the Indian economy unfolding? Any significant positives or negatives?
Mr. Subramaniam: On a 5-Yr basis, definitely the economy will continue to do well. But in the intermediate period, cyclical downturns may happen just like we have been on a cyclical upturn for last three years now. Corporates are now spending on capacity expansion. While this might impact profitability growth, volume growth may continue to be good. This of course assumes that there are no external shocks such as droughts, flooding, war etc.
Our internal view is that, given the current spending on infrastructure, GDP growth should be around 6% on an average although near term growth could be higher. We think 6% growth is very good but if the government spends more on infrastructure then we can actually see a growth of 8-9%.
The negative is clearly the low spending on infrastructure. For e.g. the current economic growth may lead to serious power shortage. Our conclusion is based on a bottom up analysis which lead us to believe that apart from consumption by the industrial sector, power consumption is set to significantly increase as the new malls and offices (read BPO, IT) that are being set up across the country consume power for running the computers and the air conditioners. We also took into account the fact that mobile charging could increase power consumption significantly given the current mobile population of 100 m units.
Additionally, barring the national highway we don’t find any significant road construction happening in the cities given the inflow of vehicles. Now if we take the case of Mumbai, with the amount of cars being added, the roads are definitely not enough for all people to travel comfortably. These are fairly serious issues, which could derail the grand plans that we have for the Indian economy.
Some states are developing very fast and aggressively, so the inflow of people from one state to another can be a serious issue going forward, if not corrected.
And lastly the amount of investments being made in education (schools and colleges) is not enough, if as a country we aspire to grow by 8% to 10%.
Pfn: What is your view on interest rates?
Mr. Subramaniam: For the next 1-Yr, we think that interest rates will appreciate by around 100 basis points (i.e. 1%). The 10-Yr bond may go up to 9% from the current levels of 8.2%.
Pfn: Could you please explain/describe the investment philosophy and style that is followed at Quantum Mutual Fund?
Mr. Subramaniam: Our investment philosophy is value. The stocks that go into the portfolio should have significant volumes. Our universe that meets these trading criteria is around 200 stocks. Even if there is value in a stock, we might not buy it, if it does not meet our liquidity parameters. So there must be value combined with adequate liquidity.
Pfn: In your view how much of a diversified equity fund’s portfolio should be invested in the top 10 stocks?
Mr. Subramaniam: In a diversified equity fund, the top 10 stocks should probably be 50-60% (of net assets). Presently, around 40-45% of our portfolio is in the top 10 stocks.
Pfn: In a diversified equity fund, how concentrated/diversified should the sectoral allocation appear?
Mr. Subramaniam: With us, it’s more of a bottom up investment approach. For example, if the automobile analyst comes up with more ideas and there is more value in this sector, then we will have more automobile stocks. But we ensure that the portfolio doesn’t get skewed towards a single sector. We have “guardrails†to ensure that sectoral diversification is maintained.
Pfn: In an economy like India, which is in a growth phase, do you think value funds can outperform growth funds over the long term?
Mr. Subramaniam: Being in a growth phase, does not mean that there are no value stocks. The US has been in a growth phase, but you had value stocks and value investors. If you are looking at the P/E ratio (i.e., price/earning ratio) then a growth-oriented investor will focus on ‘E’ i.e., how much ‘E’ is growing and accordingly decide, but the value oriented investor will focus on ‘P’ to decide. In a country like India, which is growing and also faces bottlenecks, you will periodically find attractively priced companies that meet the definition of value. Eventually these value stocks may become growth stocks. At that point, growth-oriented manager will buy the stock and value manager may exit. So there is no strict definition by which you can differentiate. Even in developed markets we cannot find clear demarcation between value and growth. But we will definitely find periods when either the value or the growth theme will be dominating. For example if we go back to 1998/1999, almost all technology stocks were growth stocks, but by the end of 2000 some stocks became value stock.
Pfn: On the expenses front, over the long term (3-5 years) what kind of expenses are you looking at so as to give investors a significant advantage over more expensive peers?
Mr. Subramaniam: Though most equity funds have expense ratio of around 2.5%, it does not include distribution commission. It will be our endeavor to keep these expense ratios low. The big difference is in the distribution expense. We do not use any distributors, so we save on distribution costs. Investors can apply through the web or they can call us for the forms. Large distribution costs can eat into returns. On our website (www.quantumamc.com) there is an article on the impact of costs. You will notice that substantial benefits can accrue to the investors if costs are kept low.
Pfn: On high cash allocation - one group of investors maintain that they give money to a fund manager to invest in stock markets not deposit it in a saving account. What are your views?
Mr. Subramaniam: It is not our desire to have high cash at all times. But having said that, there are few things we would like to avoid. For example, if we have raised money in an expensive market, then in that case we would not like to rush into the market but will rather try to build the portfolio slowly. For example if the market is really frothy then it is not necessary that if you give me Rs 100, I will deploy Rs 100. In such a scenario I may want to hold back and invest only after some correction.
Pfn: Any new fund on the anvil?
Mr. Subramaniam: We have applied for a balance fund. Currently, this is the only product, which might be launched depending on market appetite.
Pfn: Does Quantum AMC have any plans to launch real estate funds?
Mr. Subramaniam: The regulations for real estate funds have just come in. We have the expertise within the group to do that. But we have to wait for detailed guidelines from SEBI.
Pfn: Do you think over the long term (5-10 years), index funds/ETFs may outperform actively managed funds?
Mr. Subramaniam: Active fund mangers should be able to outperform index funds, given the choices available. However over a long period of time the return differences between index funds and actively managed funds may narrow down.
Pfn: Can you tell us about the personalities who have had an influence on your personal/professional life?
Mr. Subramaniam: There are lots of people who have influenced and motivated me throughout. I definitely admire Ajit Dayal (CEO, CIO of Quantum Advisors), both in terms of professional learning experience and in terms of many other aspects of life. Mind you I am not saying this because he is the boss or the founder of this company. At personal level I find so many good traits to learn from him. Apart from Ajit the other big influencers have been Mr. Tom Hansberger of Hansberger Global Investors for whom I had the opportunity to work through Quantum and my friend Mr. Ram Mohan.
Pfn: What kind of books do you like to read?
Mr. Subramaniam: All types, from fiction to philosophy to books on investments. Also autobiographies interest me.
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