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Stick to the desired asset allocation: R. Srinivasan
Thu, Nov 27, 2014
Source : Jeni Shukla, Citrus Interactive

R. Srinivasan is the Head of Equity at SBI Mutual Funds since June 2011. He has an experience of over 19 years in capital markets. The funds managed by him - SBI Magnum Balanced, SBI Magnum Equity, SBI Magnum Global 94, SBI Emerging Businesses, SBI Small & Midcap and SBI Contra have beaten the respective benchmarks in the last 1 year, 3 years and 5 years.

In an exclusive interview with Citrus Interactive he shares his views on his funds and the sectors.


Please describe the investment process followed by you.

As a house, our investing philosophy can be broadly bucketed into two broad frameworks - a relative return framework and an absolute return framework.

The relative return framework targets relative out-performance against a specified benchmark over a 1-3 year period. It is generally applicable for large caps but not necessarily so. The philosophy uses a combination of a top down and a bottom up approach. The top down view is catalysed by the macro and the strategy team and impacts portfolio decision making in two ways: one, the cash call (to a very limited extent) in the portfolio and two, the active weight on Defensive sectors vis-a-vis Cyclical sectors and Financials. The bottom up view or stock selection is catalysed by multiple inputs, key among them being, a 4-factor model (for large caps), the independent analyst view based on qualitative and financial analysis and the external positioning derived from consensus.

The absolute return framework is in a long only context and runs from a 3-year plus, perspective. This is largely bottom up, the limited top down element being the idea generation driven by long term themes that we believe will drive stock performance. The bottom up process is driven by a 5-factor model (Competitive Advantage, Profitability, Growth, Management and Valuations) combined with a qualitative and quantitative analysis by the research analyst.

 

How would you differentiate between SBI Emerging Businesses Fund, SBI Magnum Global Fund 94 and SBI Small & Midcap Fund?

SBI Magnum EBF is run as a concentrated high conviction philosophy focused on generating reasonable (4-5% over cost of equity) absolute returns in a long only context. The fund is purely bottom up and 90% invested at all times. The strategy is market capitalization agnostic, sector agnostic and benchmark agnostic.

SBI Magnum Global is run as a quality mid cap strategy focused on generating above average returns from a 3-year plus, perspective. We believe the combination of ‘quality’ and ‘mid cap’, in a way, optimizes the risk-return trade off for investors. The fund does not focus on short to medium term relative performance consistency. The nature of the philosophy, we believe, lends reasonable capital appreciation in a rising market and capital preservation in a falling market. The fund runs a bottom up strategy (subject to risk overlays on stock and sector active weights) and is 90% invested at all times.

SBI Small & Midcap is a predominantly small-cap strategy with a minimum of 50% in small caps and a minimum of 20% in mid caps.

We define large caps as the top 100 stocks in terms of market capitalization rank. it is a dynamic number with the current cut-off at around INR 18000 crore. Mid caps are the next 300 stocks and small caps form the balance; the current small cap market cap cut-off is around INR 2100 crore.

 

Funds managed by you – SBI Contra, SBI Mangum Emerging Businesses, SBI Magnum Balanced, SBI Magnum Equity, SBI Magnum Global and SBI Small &Midcap have managed to beat their respective benchmarks across different time horizons.  What has contributed to this performance?

Markets have been favourable. In the last one year, specifically, benchmark out-performance has been facilitated by the sharp out-performance down the capitalization curve; this has helped our multicap strategies where we are far more over-weight on midcaps vis-a-vis the benchmark. A focus on bottom up stock selection, as a philosophy, has also helped us.

 

What is the philosophy of SBI Magnum Equity Fund?

SBI Magnum Equity is run as a pure large cap strategy focused on consistency of benchmark out-performance over a 1 to 3 year period. The target is on superior risk adjusted returns with an eye on tracking error. Portfolio construction revolves around active weights. Since the benchmark typically hovers around the middle of a large cap peer set, it is expected that benchmark out-performance will lead to above-average returns within the peer set too.

 

Which sectors are you currently bullish on?

It is tough to outline that for the fund house in aggregate and depends on the individual fund strategies. Excluding the pure bottom up strategies, the consensus over-weights are Health Care and Consumer Discretionary. Selectively, Financials and Industrials.

 

Which sectors are you avoiding in your portfolio at this juncture?

The consensus under-weights are Consumer Staples and Metals.

 

How is risk managed in your portfolios – especially in the small and mid cap funds?

Most of our large cap strategies have a target tracking error and are managed within that range. The focus clearly is on risk-adjusted returns.

On the small and mid-cap funds, we do not manage risk in the traditional context. While there are broad risk overlays in terms of sector and stock active weights, we are largely benchmark agnostic in these strategies. We would rather look at risk here in terms of the risk of going wrong in the business or the price; this we try to control by looking for competitive advantages in the business or a meaningful margin of safety.

It is pertinent to note that we do not meaningfully attempt to time markets in our funds. Cash is largely capped at 10%, lower in some cases.

 

What is your advice to retail investors at this point?

Stick to the desired asset allocation.

 

 
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