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“Inadvertent focus on buying quality stocks has worked for us”: R. Srinivasan
Mon, Jul 15, 2013
Source : Jeni Shukla, Citrus Interactive

R. Srinivasan has been heading Equity at SBI Funds Management Private Limited since June 2011. He joined SBI MF as a Senior Fund Manager in May 2009 and manages various Equity schemes. He brings with him over 19 years of experience in capital markets. He has earlier worked with FCH, Principal PNB AMC, Oppenheimer & Co, Indosuez WI Carr and Motilal Oswal, among others. He has been ranked as the “Best Equity Fund Manager” in Business Today’s rankings for two years in a row.

His and his team’s stock-picking skills led to SBI Magnum Emerging Businesses being the best performing open-ended equity diversified fund with a whopping 56 per cent return in 2012. It is also the top ranking fund in terms of compounded annual growth rate (CAGR) for 3 years (14%) and 5 years (16%) as on June 30, 2013. SBI Magnum Global also has had an impressive 36% return in calendar year 2012 and a 5-year CAGR return of 12%. SBI Magnum Equity grew its NAV by 30% in 2012 and 11% CAGR in the last 5 year period.

 

How would you define the investment philosophy for the four funds managed by you?

I guess you are talking of Magnum Equity, Magnum Global, Magnum Emerging Businesses Fund (EBF) and Magnum Contra.

Magnum Equity has three distinguishing characteristics. First, it is a pure large cap fund and only invests in the top 100 companies in terms of market cap rank. If one believes large caps are inherently less volatile that makes this fund relatively less risky. Two, the fund is focused on consistency of benchmark out-performance. This comes from a belief that the Nifty typically tends to lie in the middle of a large cap peer set most of the time. Part of the fund is hence aligned to the benchmark and the balance excess-return generating component targets the fund to be between the 15th and 45th percentile, most of the time. Thirdly, within this framework, the fund runs a relatively concentrated structure in terms of number of holdings and the top 10 concentration. We do not think this adds to benchmark risks because the benchmark itself is concentrated.

Magnum Global is run as a defensive mid cap strategy focused on generating above average returns from a long term perspective. We believe the combination of ‘defensive’ 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 but rather on healthy but stable capital appreciation in a rising market and capital preservation in a falling market.

Magnum EBF is technically a multi-cap fund running a concentrated strategy of high conviction ideas. It just happens that most of the high conviction absolute-type return ideas have been in the mid-and-small cap space. The fund has three basic risk characteristics: One, it is benchmark agnostic. This tends to lend it a higher volatility relative to the benchmark. Two, as mentioned, it is a concentrated portfolio focused on high conviction ideas. As a consequence of this, it has no market cap bias but has tended to be skewed towards mid and small caps probably given the sheer size of the population available in this space and the price-value arbitrage due to lower coverage. Three, on account of the second factor, liquidity risks are technically higher and investment is made from a 3-year perspective. To offset this liquidity risk, between one-fourth to one-fifth of the portfolio is into large caps (including cash).

Magnum Contra is diversified multicap fund which may, based on availability and conviction, have a ‘contra’ bias. More than 50% of the portfolio will be large cap; presently, it’s close to 65% (including cash). ‘Contra’ is defined as stocks which satisfy majority of the following five factors – Negative sell side view, Negative fundamental momentum, Negative active weight by peers, Deep value and Event negative; the percentage of ‘contra’ will be a function of a positive long term view on the stock based on price-value mismatches and the level of conviction. Stock selection picks from our large cap and mid cap philosophies.

SBI Magnum Emerging Businesses has outperformed the benchmark in each of the last 4 calendar years as well as in the last 1, 3 and 5 years (as on July 1, 2013). What do you think has worked for the fund which has led to such a consistent outperformance?

The fund is not consciously built with consistency in mind given the fact that it’s purely bottom up and agnostic to the benchmark, to market caps and even sectors. So, consistency was probably providence.

In retrospect, when you analyze what went well for us, I think, it was an inadvertent focus on buying quality stocks which also seemingly had a decent upside when we bought them. I mention inadvertent because the primarily driver of stock selection for this fund has been return expectation within which quality is a preferred characteristic not a necessary one. The actual returns in these stocks turned out to be way higher than our most optimistic projections made then. In other words, we were able to identify quality at a reasonable price and, in addition, probably made fewer mistakes, due to the concentrated philosophy.

Lately, year-to-date this has worked against us - the scarcity of quality at a reasonable price and a consequent shift towards higher risk (business risks) for higher returns.

SBI Magnum Emerging Businesses held an average of 9 per cent cash in last year. Would you like to comment on this?

Some part of the cash is tactical. But, I guess, it is also a function of what is mentioned earlier on the non-availability of risk-return trade-offs not unduly skewed towards the risk side. It is important to note here that we have an internal cash cap of 10% across all funds including EBF.

SBI Magnum Emerging Businesses has attracted lot of investor interest owing to its exceptional performance in 2012. Should they be concerned about the slight dip in performance Year-to-date (YTD)?

Investors, who do not fully appreciate the fact that the fund is high-risk-high-return, should be. We are concerned too but for different reasons. Our conscious high risk bets like JPVL, JSPL and Wockhardt have done very badly ytd which makes us relook the whole philosophy of chasing returns in the context of investor expectations now, on this fund.

Having said that, it is pertinent to add that despite the dip in performance we are still outperforming the popular midcap indices which form the benchmark for the category we are typically clubbed into.

How is the positioning and management of SBI Magnum Global 94 Fund different from that of SBI Magnum Emerging Businesses?

Quality as defined by a right-to-win characteristic, return on capital and growth are necessary factors for stock selection in Global (for a predominant part of portfolio) but not so in EBF. Some overlap, however, is inevitable given the fact that EBF is heavy on mid-and-small caps and quality is always a preferred characteristic. Also, EBF is a concentrated high conviction strategy and the reason it is heavy mid-and-small caps is just because we seem to be finding more stocks in this space

Except for SBI Magnum Equity and SBI Contra funds, none of your funds hold public banks. Would you like to comment on that? Do you think the grant of new bank licenses will have any impact on the banking sector – especially private banks – which form a significant portion of your portfolios?

No, we don’t think the grant of licenses, in any way, impacts our view on the sector. Having said that, within the banking space we prefer the private sector due to lower risks on asset quality.

How do you manage liquidity risks that are prevalent in a typical mid- and small-cap portfolio?

We have liquidity filters for each fund. Liquidity is also managed from an overall portfolio perspective

Do you have a cap on the assets under management (AUM) beyond which you think it will be difficult to perform consistently?

Yes, we do have a sense of capacity constraints applicable for each strategy we manage. This is a function of variable factors such as required coverage within the specified category, numbers of days’ traded volumes assumed and the minimum required exposure as a percentage of the fund.

Which sectors are you overweight and underweight on?

As a house, we are overweight Financials, Health Care and Consumer Discretionary and underweight Consumer Staples and Commodities.

Is the fund manager important or are the processes important for a mid cap fund?

Both are important in my opinion.

 
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