Fundamentals justify market at current levels and the market needs to consolidate now, says Mahesh Patil, Co-Cio, Birla Sun Life AMC.
Mahesh Patil, Co-Cio, Birla Sun Life AMC and Ajay Garg, Fund Manager, Birla Sun Life, MF in an interview to CNBC-TV18 spoke the outlook for the fund and the market going forward.
The Birla Sun Life MNC Fund managed won Morningstar's best small/midcap equity fund category. The size of fund is Rs 2,500 crore. It has given a return of 22 percent in fiver years and 30 percent in three years. The fund is managed by Ajay Garg.
Speaking on the success of the fund Garg says, they follow a very basic style of investing and try to get in early. They do not chase momentum, he says. Most of the companies that are currently in the portfolio are ahead of times and change their models according to environment, says Garg.
Patil says although the net inflows in the first two months of the New Year have slowed, the retail money continues to come in via systematic investment plan (SIP) and there have been no redemptions.
The fund has a bottom up approach toward the market, says Patil. According to him fundamentals justify market at current levels and the market needs to consolidate now. The fund would bet on companies where there is visibility on earnings growth for the next one year and not beyond that.
Post Budget, the market has been driven by global factors, says Patil.
When asked if he was worried about the domestic institutional investor (DII) selling witnessed in the last few days, Patil is not overly worried and says it could be some marginal profit taking on part of some DIIs but domestic mutual funds have in fact so far seen inflows.
When asked if it was tough to indentify good companies in the pharma space, Patil says there are some company specific issues but the bottom up story is intact over there because most of the companies have good product pipeline. The valuations for some them too look reasonable now. The fund, he says continues to like the sector.
Garg too is not too perturbed by regulatory issues bogging the pharma companies, he also is still positive on the sector.
Below is the verbatim transcript of Mahesh Patil and Ajay Garg’s interview.
Anuj: Tell us how did you manage Rs 2,500 crore in a multinational fund (MNC) fund. It has given a five year return of 22 percent, three year return of Rs 30 percent. That is a startling start for me.
Garg: I would not call it easy, I would not call it difficult, but it is a continuous process. And, the fund follows a very basic style of investing. I will tell you how we define the MNC universe. MNC universe to us are a set of companies that are promoted by global majors and they are present across geographies right from emerging to developed ones. So, they have a basket of products and they know by experience what time the product can be launched and in which market. So, that is where things have been quite successful.
Reema: The MNC universe in that context would be a lot smaller. It would be a subset of course of the large market. So, does it make it that much tough for you to tactically make those switches as and when you see market conditions changing and would that be a restrictive factor?
Garg: Though it is difficult, what we do is we are quite early in the race. So, we do not chase momentum. We try to think of scenarios or what kind of scenario is emerging. Like most of the companies you find in the portfolio are the ones who have changed their model according to the environment. So, once you are early, then you tend to have a good risk reward.
Anuj: Let us talk about some of the sectors where you have large exposures as well. For the last two or three days, you have been talking about pharmaceuticals and how that has seen quite a bit of problems of late. If it getting tough to identify good winners now in the pharmaceutical space?
Patil: In the pharmaceutical sector, we have seen the company specific issues which have come up because of US Food and Drug Administration (FDA) warning letters coming in. And there has been some fear where that can escalate further and that is what probably is weighing down on some of the pharmaceutical stocks or I would say even the sector as a whole. We have seen some derating in the sector happen in the last one year or so. But I still believe that the bottom up story in pharmaceuticals is still pretty good and most of the companies have got pretty good product pipeline which should lead to good growth at least for the next couple of years.
So, there could be some company specific risk which one needs to be aware about, but other than that, there are enough opportunities and the valuations are also now, some of the stocks look pretty reasonable compared to what the multiple used to be around a year back. So, we continue to favour that sector.
Reema: Since the start of the year, how has been the retail response to the mutual funds? Have we seen a redemption albeit slowing down of inflows into equity funds and now, in the last 10 days equities markets have settled a bit. Have we seen a pick up?
Patil: So, if you look at the last two months of this calendar year, the net inflows have slowed down as the numbers indicate and which is likely because we have seen the market over a one year period has not given much returns. But, the good news is that the retail money which has been coming into the mutual fund industry, that continues to come in by way of systematic investment plans (SIP). We have not seen any kind of big redemptions over there. And big ticket money, lump sum investment probably would have slowed down a bit. But, net-net while the net inflows are probably 50 percent lower than what it was at the peak a year back, this current run rate should sustain going forward.
Reema: Rs 3,000 crore, thereabouts?
Patil: Yes, about Rs 3,500-4,000 crore would be the run rate.
Anuj: For last many days now we have seen DIIs selling. They seem to be getting the medium term pulse of the market right. Are you fearing that we could be towards the fag end of maybe a bear market rally. How would you approach the market from here on?
Patil: If you look at the rally what we are seeing in the market in the last three trading sessions specially after the Budget has been also to a large extent driven to what has happened globally. We have seen a rally across global market. We have seen commodities which have fallen down, stabilising, even moving up. So, it is kind of a risk on rally and we have seen flows come again. I would say that assuming that the global environment remain pretty benign we are seeing easing by ECB and a pretty dovish stance yesterday from the Fed also. So, the easy monetary policy will continue and while the market need to consolidate at somewhere around these levels because we believe that the market bottom what it saw was overshoot on the downside the fundamentals would justify markets probably at these levels and while there are no earnings triggers at this point in time as we move forward in the next fiscal year we are seeing as earnings growth starts to kick in and that is what our indication is showing from bottom up perspective and then the market would start to scale newer heights.
Anuj: But what explains this DII selling for last seven or eight days this consistent selling?
Patil: I don't know. It is a combination. DIIs would include a lot of other participants, includes LIC and so we will have to look at it from that context. Because domestic mutual funds if you look at it specifically they have seen inflows. While the inflows are lower I don't see there should be any net selling, probably some profit taking marginally but I wouldn't read too much into that.
Reema: Pharmaceuticals have clearly been the hot topic. There is an overhang. The government banned 344 drugs. There is indication that perhaps they could ahead and ban some more drugs. Pfizer constitutes close to about six percent of your overall holding. Is this current development reason enough for long term investors to exit out of any pharmaceutical company, say whether it is pharma or others like Abbott and Alkem. Is this reason enough to exit out of your holdings in pharma companies impacted?
Garg: Not actually. In fact these are regulations.
Reema: But they impact their inventory and sales.
Garg: They do impact in the short term but the model keeps changing. It is all about how you adopt to the changing environment. So, strong companies are the ones who can adopt to the changing environment and who can be in discussion with the government and the regulatory agencies and that is how I believe they have obtained stay order and the next hearing is next week.
Reema: So, long term investor should not be too spooked out?
Garg: Yes. Pfizer after all is the seventh largest company in the world.
Anuj: From this point on would you now wait for Q4 earnings before allocating large sum of money to stock markets or would you say the stock selection process could continue even at current levels?
Patil: The stock selection process will continue. We have not been really bothered about the market. We think it is going to be a more bottom up approach specially at this point in time we are not seeing any big macro trend emerging and those opportunities keep coming in. Our focus is more on near term earnings. We are taking every year by it because the visibility beyond a year is difficult at this point in time. So, seeing where we are comfortable we are seeing earnings growth coming through and really betting on those companies. Obviously valuation is also one of the benchmark which we will be looking at. So, it is purely bottom up strategy which one should be looking in these kind of markets.
The Birla Sun Life MNC Fund managed won Morningstar's best small/midcap equity fund category. The size of fund is Rs 2,500 crore. It has given a return of 22 percent in fiver years and 30 percent in three years. The fund is managed by Ajay Garg.
Speaking on the success of the fund Garg says, they follow a very basic style of investing and try to get in early. They do not chase momentum, he says. Most of the companies that are currently in the portfolio are ahead of times and change their models according to environment, says Garg.
Patil says although the net inflows in the first two months of the New Year have slowed, the retail money continues to come in via systematic investment plan (SIP) and there have been no redemptions.
The fund has a bottom up approach toward the market, says Patil. According to him fundamentals justify market at current levels and the market needs to consolidate now. The fund would bet on companies where there is visibility on earnings growth for the next one year and not beyond that.
Post Budget, the market has been driven by global factors, says Patil.
When asked if he was worried about the domestic institutional investor (DII) selling witnessed in the last few days, Patil is not overly worried and says it could be some marginal profit taking on part of some DIIs but domestic mutual funds have in fact so far seen inflows.
When asked if it was tough to indentify good companies in the pharma space, Patil says there are some company specific issues but the bottom up story is intact over there because most of the companies have good product pipeline. The valuations for some them too look reasonable now. The fund, he says continues to like the sector.
Garg too is not too perturbed by regulatory issues bogging the pharma companies, he also is still positive on the sector.
Below is the verbatim transcript of Mahesh Patil and Ajay Garg’s interview.
Anuj: Tell us how did you manage Rs 2,500 crore in a multinational fund (MNC) fund. It has given a five year return of 22 percent, three year return of Rs 30 percent. That is a startling start for me.
Garg: I would not call it easy, I would not call it difficult, but it is a continuous process. And, the fund follows a very basic style of investing. I will tell you how we define the MNC universe. MNC universe to us are a set of companies that are promoted by global majors and they are present across geographies right from emerging to developed ones. So, they have a basket of products and they know by experience what time the product can be launched and in which market. So, that is where things have been quite successful.
Reema: The MNC universe in that context would be a lot smaller. It would be a subset of course of the large market. So, does it make it that much tough for you to tactically make those switches as and when you see market conditions changing and would that be a restrictive factor?
Garg: Though it is difficult, what we do is we are quite early in the race. So, we do not chase momentum. We try to think of scenarios or what kind of scenario is emerging. Like most of the companies you find in the portfolio are the ones who have changed their model according to the environment. So, once you are early, then you tend to have a good risk reward.
Anuj: Let us talk about some of the sectors where you have large exposures as well. For the last two or three days, you have been talking about pharmaceuticals and how that has seen quite a bit of problems of late. If it getting tough to identify good winners now in the pharmaceutical space?
Patil: In the pharmaceutical sector, we have seen the company specific issues which have come up because of US Food and Drug Administration (FDA) warning letters coming in. And there has been some fear where that can escalate further and that is what probably is weighing down on some of the pharmaceutical stocks or I would say even the sector as a whole. We have seen some derating in the sector happen in the last one year or so. But I still believe that the bottom up story in pharmaceuticals is still pretty good and most of the companies have got pretty good product pipeline which should lead to good growth at least for the next couple of years.
So, there could be some company specific risk which one needs to be aware about, but other than that, there are enough opportunities and the valuations are also now, some of the stocks look pretty reasonable compared to what the multiple used to be around a year back. So, we continue to favour that sector.
Reema: Since the start of the year, how has been the retail response to the mutual funds? Have we seen a redemption albeit slowing down of inflows into equity funds and now, in the last 10 days equities markets have settled a bit. Have we seen a pick up?
Patil: So, if you look at the last two months of this calendar year, the net inflows have slowed down as the numbers indicate and which is likely because we have seen the market over a one year period has not given much returns. But, the good news is that the retail money which has been coming into the mutual fund industry, that continues to come in by way of systematic investment plans (SIP). We have not seen any kind of big redemptions over there. And big ticket money, lump sum investment probably would have slowed down a bit. But, net-net while the net inflows are probably 50 percent lower than what it was at the peak a year back, this current run rate should sustain going forward.
Reema: Rs 3,000 crore, thereabouts?
Patil: Yes, about Rs 3,500-4,000 crore would be the run rate.
Anuj: For last many days now we have seen DIIs selling. They seem to be getting the medium term pulse of the market right. Are you fearing that we could be towards the fag end of maybe a bear market rally. How would you approach the market from here on?
Patil: If you look at the rally what we are seeing in the market in the last three trading sessions specially after the Budget has been also to a large extent driven to what has happened globally. We have seen a rally across global market. We have seen commodities which have fallen down, stabilising, even moving up. So, it is kind of a risk on rally and we have seen flows come again. I would say that assuming that the global environment remain pretty benign we are seeing easing by ECB and a pretty dovish stance yesterday from the Fed also. So, the easy monetary policy will continue and while the market need to consolidate at somewhere around these levels because we believe that the market bottom what it saw was overshoot on the downside the fundamentals would justify markets probably at these levels and while there are no earnings triggers at this point in time as we move forward in the next fiscal year we are seeing as earnings growth starts to kick in and that is what our indication is showing from bottom up perspective and then the market would start to scale newer heights.
Anuj: But what explains this DII selling for last seven or eight days this consistent selling?
Patil: I don't know. It is a combination. DIIs would include a lot of other participants, includes LIC and so we will have to look at it from that context. Because domestic mutual funds if you look at it specifically they have seen inflows. While the inflows are lower I don't see there should be any net selling, probably some profit taking marginally but I wouldn't read too much into that.
Reema: Pharmaceuticals have clearly been the hot topic. There is an overhang. The government banned 344 drugs. There is indication that perhaps they could ahead and ban some more drugs. Pfizer constitutes close to about six percent of your overall holding. Is this current development reason enough for long term investors to exit out of any pharmaceutical company, say whether it is pharma or others like Abbott and Alkem. Is this reason enough to exit out of your holdings in pharma companies impacted?
Garg: Not actually. In fact these are regulations.
Reema: But they impact their inventory and sales.
Garg: They do impact in the short term but the model keeps changing. It is all about how you adopt to the changing environment. So, strong companies are the ones who can adopt to the changing environment and who can be in discussion with the government and the regulatory agencies and that is how I believe they have obtained stay order and the next hearing is next week.
Reema: So, long term investor should not be too spooked out?
Garg: Yes. Pfizer after all is the seventh largest company in the world.
Anuj: From this point on would you now wait for Q4 earnings before allocating large sum of money to stock markets or would you say the stock selection process could continue even at current levels?
Patil: The stock selection process will continue. We have not been really bothered about the market. We think it is going to be a more bottom up approach specially at this point in time we are not seeing any big macro trend emerging and those opportunities keep coming in. Our focus is more on near term earnings. We are taking every year by it because the visibility beyond a year is difficult at this point in time. So, seeing where we are comfortable we are seeing earnings growth coming through and really betting on those companies. Obviously valuation is also one of the benchmark which we will be looking at. So, it is purely bottom up strategy which one should be looking in these kind of markets.
First Published on Mar 17, 2016 04:42 pm