Mar 03, 2017 10:09 PM IST | Source: CNBC-TV18

'For increased returns, look at fund house's worst performers'

Speaking at a panel discussion during the Mission Prosperity launch event, Maheswari said that funds that have not performed in a while tend to have a better outcome in the long-term.

Investors should look at a fund house's worst performers in the quest for increased returns, said Anup Maheshwari, Executive Vice President of DSP BlackRock Investment.

Speaking at a panel discussion during the Mission Prosperity launch event, Maheswari said that funds that have not performed in a while tend to have a better outcome in the long-term.

Stating that equities are the best asset class to have exposure to, Maheshwari said that interest rates and earnings matter the most, adding that the current inflation and interest rate environment set up a strong base for equities.

Nilesh Shah, Managing Director of Kotak Mutual Fund, said that the most important thing as an investor was to begin the journey. He said that at times, investment is not just backed up by data but also by gut feeling.

Sunil Singhania, Chief Investment Officer of Equity Investments at Reliance Mutual Fund said that investors should zero in on four or five fund houses. He said it was important look at the experience and track record of fund managers, adding that selling too early is a mistake to avoid.

Dhirendra Kumar, Chief Executive Officer at Value Research, said that if you are watching the markets you will invest and if you do, it will be at the wrong time. "You don't have control on anything but your plan," he said.

Below is the transcript of Sunil Singhania, Nilesh Shah, Anup Maheshwari and Navneet Munot's interview to Latha Venkatesh and Anuj Singhal on CNBC-TV18.

Latha: How to choose a right mutual fund because ultimately, it boils down to that. We are talking about a lot of mutual funds beating index, we are talking about a lot of mutual funds giving 25-30 percent compounded annual growth rate (CAGR), but truth be told, there are laggards as well. So how do we choose the right mutual funds?

Singhania: I will give you a different perspective to it. Unfortunately, an equity investor in India invests two percent of his net-worth in equity and wants to make 100 percent on it and wants to churn every week, every month or so. The better thing to do is to allocate properly and whether then a mutual fund scheme gives you 28 percent or 32 percent, it is not going to matter too much. However, we get fixated a lot by these numbers. And our view is that, I gave that example in the interview that the way a Kohli or a Tendulkar is not going to hit a century every day, the same way, each of us would not be the best fund manager or the best scheme every single day.

So, you have to look, as Madhu said in the previous panel that you have to look at the longevity of the fund manager. You have to look at their experience, you have to look at the track record and then just zero down on four or five fund houses. You are set.

Latha: That does not entirely answer the problem of an investor when he is looking at at least about 50-60 funds, all of them who are equity mutual funds or you have 50-60 debt funds. So, you have of course, a lot of websites, Crisil, Value Investor, which give you 10-year average returns, 10-year best performing first 10 funds, 5-year best performing top-10 funds, 3-year best performing, 7-day best performing, 7-month best performing. It is damned confusing. There are some common elements, but which one should you look at?

Munot: Somebody earlier in my career and a gentleman sitting here told me that you guys are like pharmaceutical manufacturers. You have the antibiotics, you have the painkillers, you have the syrups, everything. Then I am the doctor for the investor, I am saying that I am the doctor and based on what he exactly needs then I choose that what is that I need to buy from each one of these manufacturers.

And how he does it, basically, what you need to do is like two major things ¬– the risk profiling and then your overall goal setting. So, let us say, your kid is a four year old and you will know that he will need certain money if you want to send him to university at the age of 20, in 16 years. You have that much of money and you need that much of money. This is what you can save, this is what you need for that specific goal.

And then risk profiling is important because it is easy to say that equity does great, but you have a 2008 and it can go down by 60 percent also. If you are investing money for two years, not a great idea to put all the Rs 100 in equity alone. So, then you look at, all of us have certain emotional biases, cognitive biases, understand yourself and then look at your goals and then decide which asset you need to put how much money. And within that, maybe then you choose the right fund which basically matches the asset allocation that you need and then the right profile according to your profile, the right kind of funds are chosen.

Anuj: Mutual fund industry is also facing some challenges. One of the best funds of your house, DSP BlackRock Micro Cap has actually stopped fresh investments. So, there is a bit of a challenge now. With so much investments, how are you going to manage so much money?

Maheshwari: It is a nice problem to have actually. But, the challenge in that particular product is the space that it invests into. By its very nature has very less liquidity. The level of risk that you are taking is a lot higher, obviously and clearly, what you do not want is to set wrong expectations for investors coming in because a lot of investors look at your past, recent performance and then come into the product.

So we just wanted to set expectations right, also the fact that liquidity is a bit of a challenge in this environment, so we would like to not have a situation where because of the money flow coming in, you are influencing prices in a non-fundamental fashion. So the thought was, let us just take a pause, it is a fairly decent size for the space that it is investing in and at the appropriate time, hopefully, we will open it again.

Latha: Let me go back to the question which still needs a little more fleshing out in terms of how do you choose. How do you choose or should you choose the fund manager rather than the fund which means have a portable system where you have to go with the fund manager if he were to change jobs.

Shah: Out of all these three, I have probably worked in more mutual funds and despite my leaving, all those companies have continued to do well. So, by not chasing fund managers, you have made money and if you had chased me, you would have also made money. So the limited point here is that if you have to go from Mumbai to Delhi, there are multiple modes of transport available, you can take as many trains, as many buses, as many cars, as many flights, point is that you should begin the journey.

Now, maybe in the plane you will reach faster, but you will not enjoy the fun of eating batata poha or vada pav on the street. But if you pick up a train, you will probably take a little longer to reach, but you will enjoy the journey. So, just begin the journey. It does not matter in which mode you are. If you have a balanced, some amount of mode then anyway you will be able to reach there.

And as Madhu mentioned and Navneet mentioned, if you do not have that capability, please go to the distributor, please go to the advisor, they will know which funds to choose. They will know which allocation to make and that will hopefully create reasonably good journey for you.

Latha: Is there, for equity mutual funds as well as for debt, a more reasonable period? Should I look at a 10-year return? What is a good way to judge a fund?

Maheshwari: A good way is probably the way we look for companies to invest into. It is possibly a good way to invest in the fund itself, which is you normally look for very stable managements who have a track record of creating value through time, who have a very defined vision of where they want to – in this case, an investment philosophy perhaps – and obviously, the right integrity, ethics, etc.

So, our mutual fund has been very fortunate that we are blessed with a number of players which meet that criteria. So, there is a good amount of selection available. But, I always feel, given all those factors, if you identify a fund house or a few fund houses that you like, you are probably better off selecting the worst performing fund in that fund house at a point in time rather than always chasing the best performing fund because it is the same team, it is the same philosophy, it is the same style, it is just that maybe that product or that group of stocks has not performed for a while and that actually creates potential for them for the future.

So, most people tend to look at the last 1-year and 3-year performance and it works through time sometimes, but a way to increase those returns or actually to look at the underperforming parts of the same fund house and actually investigate more into those funds that just buying what has already performed.

And if I can just add to that, we did one analysis, if every year for a certain period of time, you chose the two best performing funds of the previous year and you kept changing your portfolio every year versus choosing the two worst performing funds of the previous year, you would always have a better outcome of the worst performing funds through time than the better performing funds.

Anuj: So the law of averages may be playing out.

Maheshwari: It works.

Anuj: One thing which I always wanted to know. Reliance\\'s mid and small cap fund has done extremely well. SBI Magnum of course, we all know, the fund has done well. Your both, micro fund and the small and midcap fund have done well and Kotak also has the opportunities fund which has done well. I was just looking at some of the returns over the last three years or five years, all of them have given almost similar returns or 27-28 percent kind of CAGR. Do you guys look at each other's portfolio or do you guys have a bit of a friendly competition among yourselves?

Munot: No, of course, we look at everybody\\'s portfolio. As Ridham was rightly saying a few minutes back that in India, there is so much of opportunity to generate alpha and beat the benchmark which most of us in the industry have been able to do over the last 30 years, this is our 30th anniversary, and the whole industry has grown and over a period of time, consistently, across market cycles.

And the reason is there are a lot of arbitrafges. So you have a research arbitrage where let us say the large foreign investors who own 23 percent of the market, their universe is maybe 100 stocks and there is a large part of the universe which is not there. Or you put more resources, there is so much of inefficiency in the market, you can make more money. There is a time arbitrage. There will be UP election result on March 11, market will go up or go down. Donald Trump victory, Brexit, some or the other news flow, market goes up or goes down.

If you have a longer term orientation, you can look at companies very differently. So there are those arbitrages still available and for a long period of time, all of us who have invested in research resources, who have invested in processes, who have invested in the right kind of people, would be able to generate that alpha for a long period to come.

Latha: Let me come to how you guys handle your business because that is always interesting for those of us who watch you. What do you look for in companies?

Singhania: I do not know whether I will be able to answer that in such a short period of time. But very clearly, the basics are the same. You have to look at the business, you have to look at the potential, you have to look at the management, but somewhere down the line, you also have to look at what is already discounted in the price and that is what equity investing is all about. So, we are here to not buy the best company, we are here to buy the best stock and there is a difference between buying the best company and buying the best stock. So sometimes all the ingredients might be present but the company might be priced to perfection. So we are here, as Navneet mentioned, to buy the imperfection, whether it is the time imperfection, the thought process imperfection, the imperfection related to future outlook and that is where most of the money would be made.

Frankly, specifically, when you are touching upon the small and midcap side, you do not have too many external resources to help you out and that is where experience, being on the ground, having a team, having a process really helps. So, it is a combination of a lot of things. But, just one thing, we have to buy the best stock, not necessarily the best company.

Anuj: Just one thing I wanted to ask, do fund managers also act out of impulse at times new flashing and reacting. Have you done that in the past?

Shah: In my career I would have done it many times, but over a period of time you realise that it just doesn’t make any sense, so now probably – we really don’t watch day-to-day minute-to-minute news as much. If FOMC meeting is there and I have to sleep – I will go to sleep. I can read it next day morning it is perfectly fine. So impulsiveness is going away, but if impulsiveness can be correlated to cut, so is all your investment decisions backed by data and judgement – yes, but there is always that gut also.

Anuj: Give an example?

Shah: Let me talk about one of the newspaper company – when we invested in that company, our fund manager, analyst had actually gone and visited how they were distributing newspaper, are vendors picking up the bundles or not and we went and visit their factory and did everything – that stock become a seven bagger in no time and then one day an outside analyst came and told that this company actually reporting advertising revenue, which is more than what is being generated in that particular centre.

Your instant reaction was, “Oh because you are owning so much of a stock someone is trying to malign the reputation”. Second you want, you went and check with the management and management gave their reply to convince you – no, no everything is perfectly in order. It required a gut that if someone is telling you there must be something, there must be some logic - - so what we did was to pick up that newspaper for 10 days and measures how many advertisements were coming on an average. Based on that we divided the revenue with number of advertising space and we realised that this company is charging in a southern market more than what Times of India is charging in Mumbai.

Now it can be called data and judgement or it could be called gut that you respected someone’s opinion and did your due diligence and analysis and then we sold off that stock – we still get away with profit and when we were selling – there were some mighty people who were buying on the opposite side, which again created self-doubt. Are you the only person who has done this kind of measurement, aren’t other people doing it but we backed our decision, we backed our gut, we backed our analysis and today in the hindsight that turn out to be a good decision.

Anuj: That stock fell 90 percent after that?

Shah: 99 percent now.

Anuj: Your best investment and the story behind it?

Singhania: I actually can’t take names, but I think Madhu has already mentioned a few. I think what basically we can say is that the period between 2002 and 2004/05 was actually the best period for stock pickers and the reason was that at that point of time, there was so much fear because of recent past at that point of time which was between 1999 to 2002 that no one wanted to invest in any company leave alone smaller company and I think at that point of time companies were available at 1x cash flow, 2x cash flow, but having said investments keep on coming.

I think the best investment which give us joy is an investment where we are alone as far as investment is concerned, where none of these guys are there and I think those kinds of investments give us the most joy I would say that way.

Latha: If you can name, what gave you the greatest joy which pick of yours?

Munot: I think it is not a sprint – I think it is a marathon, it is not about I bought that stock and that has gone up 20 times or 30 times. The proof is that over the last 25 years if you compounded your money at 20 percent that is far more important than getting too excited by because I bought Eicher – I can say we bought, my fund manager was an amazing stock picker. At Rs 600 you got Page Industries which has become Rs 14,000 or you bought MRF at Rs 2,000. It is not about that I think that the whole process behind it and I think that 20 percent over a longer period is a lot more important than talking about some of those 50 times or 100 times, because there would have been some stocks where we lost money as well otherwise the fund return should have been ever greater.

Anuj: What’s being your best investment, what’s the best learning out of that investment?

Maheshwari: So we all evading the question as you can see in terms of naming names, but there have been many good experiences, many bad ones. I think we sort of caught them and miss them sometimes for the same reason oddly enough.

I think some of the best ones we have made are actually at times of management inflection. Very often we have seen that is a very important variable. There is a good business and there is a new management or some change at the top that has occurred. We have seen a lot of businesses actually start acquiring another level of momentum – so as long as there is a same business economics but there is an added impetus of more drive, more ambition more effort we have seen a lot of interesting ideas come out of that.

In terms of missing opportunities, the one that we have missed on hindsight are once that – I wish we have the foresight to see scale of opportunity and I will probably name one here – so HDFC for instance was a big miss for us over so many years – I mean we own it at various points in times, but again it would have been a great name bought a long time ago and stayed through, but in the 90s there were high interest rates. You didn’t really envisage what low interest rates could do to people investing into houses and taking housing finance loans – so those are probably some big ones which happened right in front of us, but there will always be such opportunity in future as well –so that’s the beauty of our market. There is so just so much entrepreneurship and ideas that keep coming your way that I don’t think we will ever really run out of ideas.

Latha: You said that your inflection point is when managements change. Do you also buy when governments change?

Munot: I think governments play a role at a certain level. I think governments matter a lot, we always say when you are looking at markets, if you take out all the noise and there is lot of noise as we all know in our markets like events globally but if you take out all the noise the only two things that really matter are interest rates and earnings. You have to have a view on that in terms of how you view the asset class. Earnings of course we all look at and earnings are driven by corporates but the government does play a role somewhere down the road in influencing interest rates and for that you need to have proper Budget that you are running, which keeps inflation under control etc. I think in the last two or three years we are very happy with what we have seen in terms of the inflation and the interest rate environment. It sets a very strong platform for equities through time because inflation, interest rates are the big enemies of equities in a way in terms of taking away returns.

Anuj: One investment where you told yourself I was contra, I was buying something which none of the others were buying and you are happy about it today?

Shah: That investment is my relationship with investors and distributors. I will give you a example, very recently one of my family member was ill and I needed a connect in a cancer hospital. I was not able to get through the right level and then I called up a Parsi distributor saying that can you help me in reaching out to that hospital and get me the right connect. I did not accompany my relative ever to that hospital but he accompanied my relative to that hospital and ensured that she was treated properly. So, that is contra investment. It is beyond money. Those are the relationships which I have gained working in this and that is the real wealth.

In another example, sometime back I had gone to RPG House and when we were entering there was a watchman who kind on kept on looking at us and we were too busy to notice it and went up because we were little late for our meeting. When we came down, that watchman was there saying that are you Nilesh Shah? I said yes. He said I watch you on CNBC-TV18 and I do SIP investment. He showed his statement of accounts saying that this is how I put Rs 1000 or Rs 1500 a month and that is where you realise that all these hours which you spent on CNBC-TV18 is worth because there is that person standing right at the bottom of the pyramid and he has become a long term investor. Then I sent a mail to RPG Group saying that if your watchman’s are s intelligent then I can really think what will be the ambition for your group and this was RPG Harsh Goenka group in Mumbai. They were actually happy to capture that and put it into their internal mail and then next time when we all met Harsh Goenka, he said that because of my watchman so many other people have started doing SIP. So, those are all the wealth which we have gained. You can call it contra investment, you can call it wise investments, you can call it anything else but the love and affection and respect which we are getting from our friends, investors, distributors, advisors, partners, I think that is unbelievable.

Anuj: What would you want to avoid as a fund manager, what are the things that you want to shut out?

Singhania: I think we have done a lot of mistakes, one is, selling too early. I think lot of times we get carried away because we are first in it and the moment the price moves up 2 or 3 times, you are very tempted to sell. We don’t realise that after selling we are going to buy something else which might have also gone up 2 or 3 times but because it is new you tend to jump on it. In fact that is what is also happening in the IPO market – because they are new, they are trading at significantly higher multiples than some of the listed stocks.

I think by nature sometimes you tend to get too conservative. So, that is a difficult trait to change but that is something I would like to change.

Anuj: What is the biggest lesson market has thought you?

Munot: One of the most important quality is humility. It is so important, I think any time you start thinking that I have arrived, now I know, you can be rest assured next quarter or next year will show you, you haven’t. I think that is very important. In our entire career there would have been several moments where the minute you start thinking that you know everything, that is the day you make a big mistake. So, that discipline and that humility is very critical.

Latha: What is the biggest lesson you have learnt?

Shah: We carry burden of expectations of people. We are not in the business of money alone, we are in the business of managing trusts and confidence of people. So, one thing I have learnt that in 2008 when I was actively managing money, we had lost about 50 percent of client’s money. It was not on the actual value but it was definitely at the notional value from peak to bottom. In 2000 when I was just a small fund manager there were posters of fund managers on the street of Mumbai saying that these are the people who have looted our money and they should be prosecuted. I don’t know how many of you remember that but in 2000 there were posters. There were agitations in fund houses to arrest fund managers.

In 2008 we had lost far more money than 2000 but no one doubted our integrity, no one doubted our capability. If at all wherever we have gone in that period, people actually give us more money to manage. That creates even further pressure in terms of trust credibility. Whatever we do, we have to ensure that the trust and credibility is maintained on us. We are managing the trust and confidence, we have to manage it well.

Anuj: Your biggest lesson, it could have been from mistake, it could have been from a great investment but the biggest lesson that you have learnt over the last many years?

Maheshwari: There was a nice saying I read recently which Steve Jobs had said, which is, simpler is much harder than complex. If you work hard enough to make things simple then at the end of it you are very clear. You have to really work hard to clear things up to make things simple. However once you get there then you can move mountains.

So, simplicity of thought in investing, simplicity of thought in terms of how you approach the asset class, don’t complicate what you are doing through timing, through variety of noise etc. Just keep it very simple. Warren Buffett used to say, the best investments are like watching grass grow or letting paint dry. I think you have to keep life very simple, both investing as fund managers as well as people investing into funds.

Latha: Do you think we are anywhere near over valued terrain at this point in time or at least fully valued terrain?

Singhania: The beauty is in the eye of the beholder. If you share our view that we are going to be a USD 4 trillion economy in 6-7 years then there is miles and miles to go. If your horizon is one month, we are slightly overvalued. However that will always happen in the market. I think as has been put by everyone else, you have to bet on the growth, you have to bet on good investment and then just let the grass grow. I think we are in that phase as far as India is concerned where the economy is looking good. I think just invest and forget about it.

Anuj: It is all about greed and fear. Last year Budget day it was all about fear, do you think greed has taken over now or are markets fairly valued now?

Maheshwari: We don’t think greed has taken over. There may be pockets of overvaluation in certain segments but as a whole we don’t feel markets are overvalued by any stretch of imagination. I think there is a fair amount of maturity in the way people are investing, in the way prices are behaving. So, this continues to be to my mind one of the best asset classes to still have exposure to and should be for quite a while. We are just at the start of a journey of ownership. So, this should last for a fairly long period of time.

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