This interview appeared in the December 15, 2009 - January 14, 2010 issue of Mutual Fund Insight.
It appears that his funds are slipping by way of performance. But Jayesh Shroff, Fund Manager - Equity, SBI Mutual Fund, begs to differ. He discusses each of his funds with Larissa Fernand and shares his view on the market.
The market began rallying this year from a very depressed mindset and worldview. Do you think it is just a bubble caused by too much liquidity or just over optimism?
Definitely too much liquidity. Governments across the world introduced stimulus programmes for their respective economies.
Valuations were really low during the market collapse. During that time a lot of companies were trading at bankruptcy valuations. Once that threat was out, valuations jumped. So we moved from a phase of distressed valuations to normalcy.
Did the sudden rally starting March catch you by surprise?
So you were in cash at that time?
We had some cash.
How do you view cash? Would you go heavily into cash if you felt the market was overvalued or were totally unsure of where it is heading?
It is not that simple. After seeing the liquidity crisis late 2008, everyone’s perspective changed. Though the crisis was in the debt market, what would have happened if it took place in the equity market? And if you notice, wave of redemptions occur across fund houses though the actual degree would vary. So that crisis did put everyone on the defensive where cash calls were concerned, at least for the few months following it. So in normal circumstances, I would not take long term cash calls. I would use it tactically. But in extraordinary situations I would be much more cautious.
The market recently welcomed the latest GDP figures. But the reason behind the good numbers was growth in the services sector and a big push in government consumption, almost 27 per cent. What is your take on this?
If one were to look at the composition of GDP few years ago, the economy was practically running on external demand — exports, services, manufactured exports. In the last few years what has changed is that domestic demand is driving GDP and that is a good sign. We are grossly underestimating the power of demographic change that India is going through. So with the current composition of GDP, the base growth in GDP is assured to a large extent.
Is this demographic change not exaggerated? Our education system throws out graduates who can barely speak English. They have no skills.
But they still land up getting a job somewhere. You can debate on the quality but people are still getting employed.
Do you see a market correction ahead?
It’s difficult to say. Till the time you have easy liquidity, there is no reason why the market should fall. Also the quarterly results — October-December 2009, will be very good. So analyst upgrades will take place. On a y-o-y basis, the results will show a steep jump since the market was in the doldrums last year. Fundamentally there is not too much of negative news.
But what are negatives you see right now?
The big negative is inflation. One will have to wait and see how the central bank deals with it in terms of curbing the liquidity flow and money supply. The easy liquidity situation will tighten, not only in India but across the globe. It is more a question of ‘when’, not ‘if’. As long as we are in an easy liquidity situation the market will chug along.
What are you betting on right now?
Domestic consumption, Pharma and Infrastructure.
You make maximum gains when you get into a company or industry which is at its inflection point, in terms of changing industry dynamics. And there are a lot of changes in these themes. In the case of Pharma, the industry is changing globally and domestically. So this will provide great opportunity. Some companies will perish while others will thrive.
What is your view on the Telecom sector? You have lowered your exposure to Bharti Airtel.
The price war has just started and the schemes are not one-time schemes but life-long plans. So this competitive intensity is here to stay. To that extent the profit numbers would remain under pressure. The new players that are coming in have deep pockets and so this price war may go on for some more time.
Do you think the fortunes of the Real Estate sector have improved given that the companies have raised funds, de-leveraged their balance sheets and are launching projects at cheaper prices?
The fortunes definitely have turned around for better. But it is not easy to value stocks in this sector. A company may have acres of land spread across many cities and different locations within the city. But how does one value that land bank? Office space in one building may have a different cost to office space across the road or in the very next building. Within the same plot there may be differences in prices to an extent of 20-30 per cent.
On what basis have you made your real estate picks?
I have mainly opted for a small exposure to real estate companies based on their business model.
Your portfolios reveal that you are bullish on Banking. How big is the threat of restructured debt turning out to be NPAs?
If one is convinced about high growth of our economy, structurally, one can’t ignore the banking space. On the NPA front, six months ago there was no question of restructuring and everything would have had to be classified as NPA. So while there is a slight threat, the situation is much less stressful than it was earlier. Also companies are raising money in the equity market. The threat that you mention is much less in an easy liquidity situation.
Do you not see a high interest rate scenario hitting these stocks?
Let’s cross the bridge when we get there.
Then what is the threat you see to the Banking and Financial Services sector?
Rising interest rates and low credit off-take are both threats. But this is just a passing phase and credit will pick up. In the market, there is always some risk.
What really makes you bullish on Banking?
Banking is a lubricant to the economic engine. An economy cannot function without the development and growth in this space.
India is a very under-banked country. As GDP grows, so will this sector. If you are bullish on the economy, you cannot be bearish on Banking.
In one of your funds you have a high exposure to Metals. What is your view on the commodity cycle?
As long as the dollar is weak, commodities will hold.
In Magnum Multiplier you have a high exposure to FMCG. With the rise in prices of raw materials do you see these stocks underperforming in the coming quarters?
As mentioned earlier, we are extremely bullish on the domestic consumption space. And we feel that Foods & Beverages as a space within FMCG, is poised for some exciting times and that’s largely where our exposure is concentrated. Most of these companies enjoy a monopoly to some extent and are market leaders in their own area. So they are companies that have a huge pricing power. To that extent their margins are protected.
You position your portfolios more as growth portfolios, right?
Broadly growth, but it is also fund specific. Magnum Multiplier would definitely be growth oriented. In larger funds we tend to balance growth and value but we are, by and large, growth investors.
Consistency of performance has not been the norm in Magnum Taxgain. It displayed excellent performance from 2003-06. But in 2007 and 2008 it put up a very average front.
I don’t agree with that at all. I think we have been very consistent in our performance in Taxgain. Last year was an extraordinary year for the global financial system. Even in that worst period we did not under perform the benchmark.
In 2009, when the market bounced back big time, we are still above category average. The biggest USP of this fund is that it is able to maintain consistent performance while keeping volatility in check.
Magnum IT and Magnum Multiplier has been consistently declining in terms of ranking from 2005 to 2008. Why this underperformance?
Magnum Multiplier is an aggressive and concentrated offering where the number of stocks is restricted to around 35. We’ve always run this fund aggressively. While the aggression might have hurt us last year, we’ve more than covered that up with a sterling performance this year. We’ve taken aggressive calls on Domestic consumption, Pharma and Infrastructure plays in the fund which have played out very well this year. And we are confident of continuing our upward march on the performance ladder over the next two to three years.
Magnum Equity did pretty well in 2006 and 2007 but fell harder than the category average in 2008. Is this not a regular diversified equity fund?
It’s an aggressive large-cap fund. Here too the number of stocks is restricted and large exposures are taken to individual sectors and stocks.
The story here is the same as Magnum Multiplier Fund. The performance this year has more than compensated for the fall last year and will continue with this superlative performance.
SBI Infrastructure has not impressed either.
From its launch, as long as the market was on the rise, it was one of the best performing funds. It’s performing very well this year.
The assets of your funds have gone up considerable. Is it more difficult managing a much bigger fund?
I don’t think managing a larger size is difficult, in fact size gives stability. It is a cyclical issue. There will be times when larger stocks outperform the broader market and other times when smaller stocks do so. Over the long run these issues will balance themselves out.
So is that why a few smaller funds in the tax saving space, which can bet on smaller stocks without taking any liquidity risk, are doing much better than Magnum Taxgain?
The question is answered.