“We do believe that taking active cash calls is an integral part of fund management...”
Jul 25, 2007


Mr. N. Prasad is the Chief Investment Officer (CIO) at Sundaram BNP Paribas Asset Management Company (AMC). Before joining the fund house in 1996 as CIO, he was associated with Canara Bank, Canbank Mutual Fund and ICICI AMC in various capacities.

In an exclusive interview with Personalfn, Mr. Prasad gave his view on interest rates, equity markets and the investment philosophy at Sundaram BNP Paribas AMC.

Pfn: What is your view on interest rates? Do you think rates have peaked?

Mr. Prasad:  The most significant development of the past month has been the sizeable decline in inflation numbers the headline number as well as key components. From a policy perspective, that the inflation in primary products has dipped by about 4 percentage points from peak levels and is now well below 10% mark, is bound to ease near-term extraneous pressures to hike rates. Headline WPI has also dipped to about 4%, partly due to the base effect.

Though bond market yields have declined, aided by liquidity, we do not expect any policy moves to lower rates. As we have highlighted over the past several months, the Reserve Bank of India (RBI), and, more importantly, the government are likely to prefer a cautious approach to ensure that inflation is anchored at lower levels. This aspect of policy making is also likely to be influenced by the political exigencies for the government, stemming from a slew of elections over the next 18 months; more so, as the all-important Lok Sabha polls get closer by the month. New highs in oil prices and a tightening bias in most major economies will also support a cautious approach.

The comfort zone for the RBI on inflation, which moved from 5%-5.5% to 4%-4.5% a couple of months ago, appeared to move even lower with the RBI Governor suggesting 3% as the level at which there would be a high degree of comfort for the economy. There is also the issue of liquidity flows from foreign investors continuing to stay at healthy levels and posing a threat to the inflation-fighting mode of the RBI.

In this backdrop, unless the RBI is convinced that inflation is firmly under check in a sustainable manner, the room for a lightening of the monetary policy bias is not imminent. We do, however, believe that interest rates have peaked-out or have moved to close-to-peaking out stage. They may remain at current levels for the next few months as a tightening bias is unlikely. The RBI may have to resort to CRR hike as a short-term measure to try and overcome the problem of liquidity due to robust forex inflows.

Pfn: How do you see the stock markets performing from a 5-year perspective? Do you see mid caps outperforming the large caps over this tenure?

Mr. Prasad:  We are bullish on the India story and markets over a 5-year perspective. Returns may, however, not be of the same magnitude as what equities have offered over the past 4 years. Over the long-term, we believe large-cap stocks have the potential to offer annual returns of 12%-15%, though this may not accrue in an even manner on a yearly basis. We expect mid and small-cap stocks to outpace large-caps over the long-term period as they gather momentum from the India growth story. Mid and small-caps may offer 5-7 percentage points higher returns as compared to large-cap brethren. This is at the broad level. Intelligent picking of stocks/funds and a patient approach have the potential to enhance the level of returns by at least a couple of percentage points.

Pfn: Somehow Sundaram Mutual Fund hasn't quite established a reputation for itself in debt like in equities, what are the reasons?

Mr. Prasad:  If one looks back at the 10-Yr history of the fund house, the perspective would be different. For the first 5 years, Sundaram BNP Paribas was renowned as a bond-fund house. Our Bond Saver was consistently a top quartile performer and its asset base rose to about Rs 2,000 crore (Rs 20 bn). The meltdown in bond prices in the early part of this decade led to investors cold-shouldering fixed-income funds.

We did launch several well-defined products such as Select Debt Short Term Plan, Select Debt  Dynamic, Gilt Fund and Income Plus. Investor apathy towards fixed-income funds meant that these funds have had and have a small asset base. We were late entrants into the floating-rate funds space.

In the period between 2002 and 2006, our Select Mid Cap and Select Focus emerged as top quartile performers. This led to the overwhelming view that Sundaram BNP Paribas is an equity specialist with a mid-cap focus.

Over the past two years, we have scaled up presence in Money Fund and Fixed Maturity Plans. Sundaram BNP Paribas Liquid Plus, launched in April 2007, has consistently been the top ranked fund in the short-term funds category and the asset base has risen more than ten-fold since launch to about Rs 2,150 crore now. These aspects highlight the fact that Sundaram BNP Paribas has had its fair share of top performing fixed-income products.

The fund house now probably has a balance between equity and fixed-income on a sizeable asset base in excess Rs 10,000 crore (Rs 100 bn) and this highlights the rising share of fixed income assets. The perception may take time to change, the more so because we have adopted a relatively more conservative approach to asset augmentation in Sundaram BNP Paribas Money Fund and fixed maturity plans.

Pfn: In your long-term debt funds (including GSec fund), what kind of maturities are you looking at over the next few months?

Mr. Prasad:  We propose to maintain the maturity at around 3-4 years in the Sundaram BNP Paribas Bond Saver, the flagship income fund.

Pfn: Do you think an equity fund should be fully invested or it should take active cash calls?

Mr. Prasad:  We do believe that taking active cash calls is an integral part of fund management. Our cash calls have cushioned downside for investors in the past and this has more than adequately neutralized the opportunity loss of cash when stocks are on an upward trend. The impressive track record of funds such as Select Mid Cap, Select Focus and Capex Opportunities is encompassed by periods when there was a high cash allocation.

As far as cash is concerned, Sundaram Mutual Fund has different approach for different funds  in Sundaram Select Midcap it holds considerable cash at times, in Sundaram Select Focus, sometimes about 10%, in Sundaram Growth Fund it goes into cash when the market crashes but not otherwise.

Our view on the markets now is more positive than a few months ago as the interest rate cycle may have peaked out or is close to peaking out. In this backdrop, we have moved to a close-to-fully invested status across all our equity funds. We intend to maintain that stance for at least the next couple of quarters barring any exogenous shock.

Pfn: What has been the impact of Anoop Bhaskar's departure on Sundaram Mutual Fund, particularly Sundaram Select Midcap?

Mr. Prasad:  When there is a change in fund management in any fund, it does hold the possibility of style changes. Investors may also be concerned about the sustainability of performance. This gets accentuated in a fund such as Select Mid Cap that has been the top performer by a comfortable margin in the 2003-2006 period. We have an experienced fund management team that ensures that the transition is being handled smoothly.

As far as Select Mid Cap is concerned, its asset base rose by six fold in the space of fifteen months, we have had to go through a period of consolidation. About 60% of the present asset base of about Rs 2,200 crore (Rs 22 bn) has been invested in equity ideas over the past eight months and we believe a time frame of at least 12-18 months would be appropriate to enable the stock selection reflect on performance of the fund.

Pfn: Some funds like Sundaram Capex and Sundaram Rural, have yet to leave a mark with their performance, what are your views?

Mr. Prasad:  Sundaram BNP Paribas Capex Opportunities has provided a holding period return of about 100% since launch in September 2005 and stacks up well against peers. A comparison with the BSE Capital Goods Index is not appropriate (though it is the designated benchmark) as it is a non-investable with 2 stocks accounting more than 55% and 5 stocks for 75%. Sundaram BNP Paribas Capex Opportunities was one of the top performing funds in 2006. We expect this theme to create considerable value over the next 3-5 years.

As far as Sundaram BNP Paribas Rural India is concerned, the fund has adhered to its mandate and the performance has been impacted by the following factors:

  • The fund launched in May 2006 moved to a fully invested status over a six-month period and hence missed a sizeable part of the rally in post July 2006 period.

  • A few dedicated rural themes such as consumer goods, sugar and fertilizer to name a few did not pan out as expected over the past year.

  • Our bullish stance on cement was hurt by measures of an exogenous nature by the government and the sizeable mid and small-cap exposure also had an effect as between July 2006 and April 2007, large-cap stocks were at the forefront of the rally.

The fund's performance has started to improve over the past few months vis-à-vis peers and benchmark and we expect to sustain the pace.

Pfn: What would be your advice to retail investors in current times?

Mr. Prasad:  India is a long-term story with significant wealth creation potential for investors. The central message that investors must bear in mind at all times is to stay invested through good and bad times in the market. That way you do not miss the best days though you will also suffer the worst days. The cumulative effect will always work in favour of investors over the long-term. If you keep moving in and out and miss even a few of the best days, then returns may be impacted adversely.

We also expect significant structural changes to alter the economic landscape over the next decade and this may have potential to create value for investors. In this backdrop, investors should adopt a long-term approach. They must also give any fund manager at least a 3-Yr period to deliver performance. By mobbing in and out of funds and stocks, only transaction costs and taxes tend to be on upward curve.

Pfn: Who are the three people you admire the most?

Mr. Prasad:  Mahatma Gandhi, Peter Lynch and Shreekant Pandey (my ex-boss at the fund house)

Pfn: What are your favourite books?

Mr. Prasad:  The Midas Touch by John Train, One Upon Wall Street by Peter Lynch and The Story of My Experiments With Truth by Mahatma Gandhi



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