SBI Mutual Fund has made R Srinivasan the chief investment officer-equity, following the exit of Navneet Munot. In an interaction with Moneycontrol’s Jash Kriplani, he shares what worked for the fund house in the past, and the new investment options it plans to offer investors. He also talks about his view on the equity markets. SBI MF’s equity schemes holds Rs 1.01 trillion worth of assets. Excerpts:
Earlier flows into SBI Small Cap Fund were partially stopped as markets rallied limiting inflows at higher valuations was a good idea. How can investor behaviour be managed?
The reason to stop or reduce flows into the small-cap fund was not so much to manage investor behaviour, as to manage constraints in the small-cap universe in absorbing fresh flows. Limiting flows that were coming in to chase past performance was an element of our decision, but lump-sum investments were stopped because it was getting difficult to manage the larger scheme size, keeping liquidity issues, concentration and the target universe in mind.
Only now, we are starting to think in terms of market timing and asset allocation. However, we have not applied our thought to managing investor behaviour.
ESG (environment, social and governance) funds are becoming popular. Are these parameters not important while picking stocks, even in your other regular funds?
We have been the pioneers of ESG investing in India. We have been running an ESG fund and have dedicated ESG analysts. It is an important part of our investment process.
While ESG seems like a new buzzword, looking for sustainable businesses has always been a part of our investing process. We aim to find strong businesses run by good people at reasonable valuations. Businesses that negatively impact environment have always run higher disruption and regulatory risks. By focusing on the long term, you must let compounding do the job for you. If you don’t pay attention to sustainability, then you need to depend on valuations to do all the job for you. The markets have always been much smarter than that.
Governance, too, has always been a key part of investing. You can never be agnostic to management. We always run forensic checks and try to weed out companies that cook their books or those that are not friendly to minority shareholders. The ‘S’ or the social aspect relating to diversity, inclusion, workforce exploitation and animal rights is probably getting increased traction, which can only be good, as long as it is within the framework of law.
We are not in favour of ESG vigilantism and appreciate the grey shades depending upon the context.
You try to take high-conviction calls and avoid diversifying into too many stocks. Would you change your investment strategy as you take charge as CIO?
I need to start with disagreeing with the definition of diversification itself. There is enough evidence out there to tell you that the benefits of diversification beyond 20 stocks peter out significantly. In other words, most benefits of diversification are well-captured in a focused category that does not exceed 30 stocks.
Personally, I don’t see any reason why all portfolios shouldn’t be run that way. Of course, you need your stock holdings to be liquid enough so that you can exit without significant impact costs when something goes wrong. Hence, it goes without saying that being a CIO does nothing to the existing investment strategy.
What is your outlook on the markets?
Our view is that the market valuations are expensive on most parameters, except when adjusted for a potential earnings cycle recovery and lower interest rates. For instance, the Shiller-PE-bond-yield spread based measure indicates the market is still around its long term median and can deliver double-digit returns even from here. Simply speaking, for markets to sustain and deliver from here, it is important that earnings recover strongly or bond yields decline or stay lower or some combination of both.
Personally, I’d be cautious and wait for the economy to stabilise before concluding on the momentum.