A crowd of pedigreed fund managers candidly admit that challenges abound in todays volatile environment, turning point for the market is unknown, and yet equities is the place to be. All agree there is a lot of value n this market which has begun to look attractive.
The participants of Cafemutual Confluence 2015, a panel discussion with fund managers, include S Naren of ICICI Pru, Anoop Bhaskar, head-equities at UTI MF, Anup Maheshwari, DSP Blackrock Investment Managers, Prashant Jain, ED & CIO, HDFC MF and Gopal Agarwal, CIO, Mirae Asset Investment.
Suggesting that one must adapt to today's situation for the best possible returns, Prashant Jain says both economy and market are in a transition phase. Giving an example of changing times, S Narain says midcap funds have found big favours now which was unthinkable two years back. So one needs to invest with a 3-4 year view. Agrees Gopal Agarwal who sees healthy returns in that timeframe.
Anoop Bhaskar of UTI MF said globally funds have matured, however, we are yet to reach that stage in India. He frankly admits one may not be able to replicate returns of the last two years, but still it is possible to get fairly good returns even in this market. Bhaskar believes it is possible to generate alpha in stocks like Hero MotoCorp and Bajaj Auto.
Below is the transcript of Prashant Jain, S Naren, Anoop Bhaskar, Gopal Agarwal and Anup Maheshwari's interview with Anuj Singhal and Sonia Shenoy on CNBC-TV18.
Anuj: The challenge for this market is that the FII flows have dried up but the retail has kept its confidence in the market. We have seen record inflows over the last two or three months. Anecdotally have you seen more inflows when the market has gone down because that would be great news for the market if the retail equity cult is full and truly back or have you seen a bit of tapering of flows over the last two or three days?
Jain: I am not aware of the last few days but flows in India have been extremely healthy and last month was particularly good when markets had come off slightly. It is a very good sign. Having said that I believe that if you think 2-5 years, India is in a perpetual bull market because the economy is displaying such rapid growth. If you look at many funds in the industry. Every five years or so the NAVs have doubled. Our PEs are now down to 14 times. So, I don't think at this stage, at these valuations you can be pessimistic about the markets.
Anuj: From current levels do you think equities will still beat returns from fixed income, real estate, gold because that is what the retail public wants to know that if they have to invest right now, is equities still a preferred asset class?
Jain: Equities to my mind is the best asset class of the ones you mentioned. Real Estate outlook to my mind is not very good even though I am not an expert on real estate because the gap between rental yields and mortgage rates is one of the highest that we have seen in the past. It is also very high compared to other countries. What that means is that your EMIs are equal to five times the rent, which means real estate has become unaffordable.
Gold I think is a very misunderstood asset class by Indians. Returns of gold longer term also are near bank deposits with far higher volatility. So, if you can invest for 5 years, tolerate volatility and still be satisfied with fixed income kind of returns, I think equities are a far superior option. In any case rising US rates I don't think will do any good to gold prices.
Sonia: We haven’t seen any major correction in this bull run up until now. It started at 5100 and now we have seen about a 15 percent correction from the top. Do you get a sense that perhaps we could see some more of a slowdown in this move?
Maheshwari: It is difficult to gauge short term sentiment. On your question of whether we are bullish or bearish, it is also a function of your timeframe. The longer you go out the more bullish you will be on equities. The fact is in near term you will have these sort of volatilities and you can't really predict exactly how much or deep but the fact is most of these corrections whenever you get in excess of a certain level, 10 or 15 percent, it tends to be a interesting buying opportunity. We have seen a lot of people comparing this correction to what happened in previous Septembers in 2008, 2001.
The interesting thing was both of those corrections were covered back, the entire correction was covered back in 3 and 8 months respectively. So, it is a matter of timeframe more than anything else when you take a view on the asset class. I think everyone has to have the right orientation or mindset on time that you are planning to spend with the asset which obviously makes equities very interesting. So, can't predict the short term correction but it is obviously a great chance to buy if you are a good long term investor.
Anuj: One of the challenges has been to find right stocks because we have seen this market become extremely bipolar -- the quality stocks have become more and more expensive and there are so many stocks which have balance sheet problems, which have become extremely cheap but still nobody wants to buy them. At what point you decide that a particular stock or a particular sector has now reached fair value or is overvalued and I should move from here? Have we reached that stage, where we need to now make a move from the high quality expensive stocks and look at some of the value stocks, are we reaching that stage?
Naren: Clearly that is a situation. I think as the years have gone by, the situation has become more and more acute that today you can easily create a portfolio, which is trading around 10 times 2017 earnings or you can create a portfolio, which trades at about 25 times 2017 earnings. So I would say the challenges that you don’t know the turning point and you know that it is going to work but you don’t know that turning point when it happens, we all thought maybe the election was their turning point but three months after the election that whole process immediately failed.
But if you are an investor, you want the investor to make money, historically you have not made money by investing so I think at the cost of short-term pain, you have to make that switch. We are not talking about small sums of money so you cannot say I will wait for that exact day and I will identify and I will buy. For example Seth Klarman a famous value investor says, there is much more volume on the way down than on the way up. So we cannot afford to wait for the way up because we have to deploy large sums of the money, we have to buy on the way down.
So that is why I think it is not much of a challenge provided the distributors customers also think long-term and don’t link things week-to-week which is our endeavour. Having said that, there are all kinds of customers, there are all kinds of asset allocators, and we have to cater to all. That is why we have to have maybe a wider product set -- a few products set which are still based on quality and set of company stocks where you invest for the long-term and hope that the investor is with you to participate in it.
As most people in this panel have been saying -- since I started working in 1989, equities have done a very good job over the last 26 years but the experience of the investors is much worse than the experience of the equity market. It is primarily because there are years when they chose to stay away when they ought to be and that is our challenge similarly today people are exceptionally happy with midcap funds -- for any largecap fund which today has a lot of midcap but the fact is that in 2013 if you had gone and told people that you invest in a midcap fund, they would say no, midcap is very risky.
Today everyone says only midcap is the way to go. So I think these challenges are there and that is why there are distributors, that is why there are wealth managers, that is why there are fund managers and we hope we will try to communicate and succeed in getting people to make money.
Anuj: We are in curious situation, the Nifty and Sensex are at 52 week low and there are so many stocks at 52 week highs. So, is there intuition to look for high beta high risk stocks right now or should one be comfortable now investing in some of the bluechips where we have seen 15-20 and in certain cases 40 percent correction now?
Agarwal: Market at this juncture is sector agnostic. So, I would say there is value across. So, people should go fairly deep down to find the stock because currently most of the variables which were hurting the so called leveraged balance sheet or the business related issues in India are reducing. As the inflation is falling, interest rates are likely to come down and currency is in support. So I would say that this is the time to go deep and find the stock across the valuation. So, I would feel if you are taking three to five years view, there is a lot of value to be created in the stocks which have been beaten down for the known reasons.
Sonia: Naren made an important point about the midcap fund and I want to toss this question to Anoop Bhaskar because a lot us know Anoop gathered a huge fan following after his Sundaram Select Midcap Fund generated 61 percent annual returns between 2003 and 2007. Is there still scope for that kind of returns in the midcap space in such a market?
Bhaskar: If you see the fund size that I have today and that is Rs 3,000 crore odd and I have peers which are at Rs 11,000 crore, if I say no then I won’t get any more money in my fund. So, I will hedge it by saying that now we have more challenges for the next two years. So, it will not give the same kind of returns and hopefully it will not give negative returns.
However, midcaps, because they are more in number and we go and play outside the benchmark a lot, so there you have more opportunity to go and create alpha whereas in the largecap category, there are total of 80-90 largecap stocks and your ability to go and generate alpha from those is acting much more limited and they are well covered in terms of brokerage research. So, you would have two or three months before the same stock gets into everyone’s portfolio.
If you look at the midcap side, just because of the sheer size of number, we have large number of stocks and because they are same stocks which has got history or past, people have got some kind of judgement about them which gives you a chance if you are more flexible to give them another opportunity from time-to-time and that is one way you can go and find some of these stocks which have not done so well in the past. So, long answer short, we won’t be able to repeat the returns of the last two years but we will still be able to give returns hopefully which are good enough for investors.
Sonia: You said that it is going to be challenging to generate the same kind of returns, so, where do you see the alpha in a market like this because even if you consider this being a great time for investors to put in money because we are now at the lower end of the range, what do you think the leaders of this market or where do you see the alpha coming in from?
Bhaskar: The story of last two years has been that companies which had more consistent numbers on a quarterly basis have got rerated significantly and continuously. So, now you have to look at the second and third tier companies of the same industries which have not done so well and hope that when you have more economic growth, then these companies will also be able to participate in growth.
So, you have companies which are priced quite okay. So, you have the case of Hero MotoCorp or Bajaj Auto but people don’t want to buy those, they only want to buy Eicher Motors. I think that once we have economic growth, you will find that these kind of stocks will come back and those are the areas where you can go and generate alpha.
Anuj: What is your call, we have seen Eicher Motors for example generate the kind of returns that it has done for investors, we have seen couple of other stocks become from midcaps to largecaps, any particular areas of opportunities where you think the next big growth is going to take place which the market has still not discovered or if the discovery is in nascent stage right now?
Maheshwari: At pretty much any level of the market whether we are at the top or the bottom or in between, there are always opportunities that will get created for the next three or four years. There are always companies at various points in the business cycle where there is either some turn or some change occurring.
So, it continues to be a very bottom up case. However, essentially for the last four or five years, we have been in a market which has been focusing on growth at any price type of thing. Our sense is growth at more reasonable price is what we are ideally looking for.
Anuj: You think that is changing right now?
Maheshwari: There are opportunities, that is how you have to look at stocks. Where can you find companies where you feel valuations are not pricing in too far into the future but at the same time there is some level of growth.
Anuj: Any examples which you can think, not stocks but maybe if you could give some sectoral themes?
Maheshwari: I will broadly categorise it as when we look at companies at the end of the day as investors or we look at any stock market, anywhere in the world, what we are focused on is what is the return on capital being generated by that group of companies or that individual company. You are always trying to look for companies where the return on capital ratios are rising. There is something in their business that is resulting in better utilisation of their capital and higher returns coming out of it; that tends to follow up with better prices for those companies and better valuations.
So, irrespective of sectors, what you are looking at is return on equities (RoEs) today, how far are they from their normal business RoEs and is there any scope for that to rise or is it sitting at peak and there is scope for it to correct. Wherever you get incremental RoEs rising, that is where you look for opportunities essentially.
Sonia: Come in on this point about valuations, what do you do with companies where the managements are ethical and capable but some of these companies seem to be structurally challenged, case in point say Tata Motors, nothing seems to be wrong but it is just that it is going through a bit of a slowdown. How do you take investment calls at times like this?
Jain: All of us are dealing with uncertainty and that is the good and the bad thing, this is what makes it exciting and challenging also. So, it depends on what view you take of the business. I don’t think there is any clear answer to this. For every share that is trading, there is a buyer and there is a seller. The two of them are taking diametrically opposite views of the same company, same price, same time. So, I don’t think you will get any proper answers, you will get opinions but I don’t think you will get any answers to this.
Anuj: You have been extremely bullish on the private sector banks, some of your top holdings in your funds have been some of the bluest of blue chips in terms of private banks. That has been a sector, which has broken the market's back this year. We have seen massive correction in names like ICICI Bank, HDFC Bank, even couple of other names. Is there something fundamentally going wrong here or is this just one of those periods which will pass and are presenting a very good buying opportunity which we will maybe come to know in hindsight over the next two-three years?
Jain: I think these markets are in transition if you ask me that is what I feel. We have seen a period last four-five years where growth was cash, it was limited to a very few sectors. We faced challenges on the currency front, on the current account front, on the interest rates front and your whole capex cycle was broken completely.
Now the economy is in the transition and markets are in transition. It is something similar to 2007, so before 2007 if you see the consumer, the pharmaceutical, the IT stocks are underperforming -- no one remembers these things but you could have bought many of the consumer companies of today in 12-14-16 P/E multiples. So I think the markets are changing from that phase once again.
I think going forward it will be investment led but as you rightly said, yes, in transition -- it is not about quick transition, it is time for the markets to give up slowly what has worked so well for seven years and to move onto the next cycle. So I think what you referred to in banks is part of same process but this is my feeling that if markets have to move higher, it would be difficult for markets to move higher without banks.
Sonia: Which was your best investment decision and your worst investment decision?
Bhaskar: It is quite public. I bought and sold out on Unitech Group and made 100 times on it.
Sonia: That was your worst? So what was your best?
Bhaskar: That was the best.
Anuj: If you could tell us at what price you managed to sell out because now it is Rs 6?
Bhaskar: It doesn’t matter but I sold off before I left my job in 2007.
Sonia: What was your worst?
Bhaskar: That is every year. There is one stock which keeps on haunting. Every year there is one trading stock I take a bet on and lose 60 percent on it. This year was Tata Steel, last year was something else so it is quite embarrassing but it is very public.
Anuj: That is interesting because not many people would believe that Unitech could be your best decision in terms of buying a stock and then selling out and then seeing the kind of bear market that we have seen in Unitech. Lot of people want to know what is your investment strategy for picking a stock like Unitech for example or Tata Steel for that matter? What would have gone to your mind before picking a stock like Unitech and what would have made you sell that stock?
A: I sold it because I made 120 times on it so which is why is sold it. Again I am saying that it has taken a long time to build any kind of a philosophy because we have tended to be swayed by markets pulls and pressures for a large part of our working career. What you can do at best is make sure a certain percentage of your portfolio at all times has certain discipline that you would want to have.
Your ability to have that discipline is usually decided by your rank within your peer group. So, if you are doing well you are more discipline and if you are not doing so well you are slightly less discipline because you are trying to run and cover up your loss ground. I am not a big believer of value unlike S Naren. S Naren is an expert at value so I believe in India value plus growth is what matters so, value for the sake of value really doesn’t work. Therefore you can’t overlook growth as such.
We generally tend to buy companies which are more reasonable in valuation but that doesn’t mean we have an Eicher Motors or something like that is in our portfolio but when we bought it, it would be based on that philosophy. Our selling is based mainly on what kind of weights we want to have of those stock or sectors in your portfolio. So we keep on trimming them as such because it is very difficult to take an absolute call on stocks because you don’t know how much they can move up until and unless it becomes a blinder and you have seen something. So you would always want to protect your portfolio by ensuring that it doesn’t become 5-6-7 percent of the portfolio and you keep selling it based on that. If you look at price level which are more absolute that I will go and exit at x price or Y price.
What you want to ensure is that the risk to your portfolio keeps on going down with the price rise. People tend to think the opposite. They actually want to concentrate more with price rise; we want to reduce the stock weight with price rise. That is what we do especially in terms of midcap fund the focus is that the top ten should never become 40-45 percent of the portfolio so you run more diffuse portfolio. It shows a lack of conviction but then it gives us more liquidity and less worry in case of bad days.
Anuj: You did say Tata Steel as one of your mistakes, it has fallen a lot so have you sold out or is there a temptation to buy more?
Bhaskar: I don’t want my investors to be the prisoners of my conviction. If it was my own money I would do what I feel like but when I am going and now managing money for others I have to ensure that the risk of that is minimised and try to go and preserve capital as much as possible.
Sonia: Anup Maheshwari, come in on, that Anoop Bhaskar saying you don’t want to perhaps run concentrated portfolios because you become a prisoners of it overtime, but what do you do with winners? If there is a one winning stock in your portfolio and then the market starts to see a downtrend do you book profits or do you continue to hold on into that story?
Maheshwari: It is just a function of whether your investment thesis is still the same. What I have realised over time is valuations should not be the only decider of your view. If you have a good business with a good a management, with good economics they will be points where the stocks become overvalued, undervalued depending on the mood of the market. However, you are better-off just holding those businesses overtime.
The longer you hold them the better-off you are the more you participate in that growth; you will have some good times with them some bad times. However, over the time doing less is probably better and trying to react to every valuation episode in that business. To our mind unless valuations become really stretched to the point where your next three or five years growth seems to be priced in you would normally live with the stock even if it is overvalued from a one year perspective may be.