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The Road Ahead

Bhanu Katoch, CEO, JM Financial MF speaks on the disappointments faced by investors, the AMCs strategy going forward and on who is running the show.

In the bull run of 2007, JM Financial Mutual Fund had some of the savviest skippers going. But its shocking descent in 2008 was a complete turn off leaving investors with the feeling that they had probably come down with a bad case of whiplash.

Early this year, Sandip Sabhwaral and Mohit Verma resigned from the fund house. Till date, their positions as Chief Investment Officers (CIOs) for equity and debt, respectively, have been left vacant. Naturally, investors are concerned about their money. With no head of equity or debt, the fund managers report directly to the Chief Executive Officer (CEO) and the Investment Advisory Committee (IAC). The latter currently comprises of the Asset Management Company’s (AMC) board members; 3 independent directors, 2 associate directors and 1 sponsor-nominated director.

Bhanu Katoch, CEO, JM Financial MF, spoke to Larissa Fernand on the disappointments faced by investors, the AMCs strategy going forward and on who is running the show. Here are some excerpts from the interaction.

His message to investors right now...

Our equity funds will stay true to their respective mandates. So funds where the mandate is growth will continue to focus on growth even at the cost of short term volatility. Most of our schemes have a mandate to chase growth and we will stay true to that even in the future. We believe that the growth approach will provide maximum rewards to investors as India continues its path to become an economic superpower.

We believe that in India, growth as a strategy will tend to do exceptionally well over a longer period of time. So a high beta/alpha strategy portfolio will always deliver. We believe that our investment style will offer substantial alpha as and when confidence starts to come back and money starts chasing growth countries and growth stocks! If you look at the recovery period between March 5, 2009 and June 4, 2009 and even the period following, JM schemes have done much better than the indices and even their peers. JM Basic Fund delivered 154 per cent during that period and JM Emerging Fund delivered 135 per cent. Our other equity schemes gave returns in the 70-150 per cent range. During this same period, the Nifty returned 77 per cent and the Sensex, 83 per cent.

On what investors can expect in the future...

We feel that after a bit of consolidation, the market will move up and we may see 17,000 levels within the next six months. In the next two years, we expect the Sensex to rise above 25,000. Our schemes are well positioned to capture this kind of an up move.

On investors’ disappointment about past returns...

Majority of the money that we manage are in funds where the mandate is growth and the portfolio is more mid-cap oriented. You will get a better perspective if you look at the performance both in the bull phase and in the bear phase. The fact is that we had a great 2006 and 2007 and a below average 2008. So far, 2009 has been good for us and if our call on the market goes right, then our funds will deliver a very strong performance in the coming months and the coming years!

When the equity market was in a bullish phase in 2006-2007, most of our mid-cap and large-cap schemes performed extremely well. They surpassed the indices by a huge margin. In 2007, the Sensex delivered 47 per cent and the BSE Midcap index delivered 68 per cent. Our flagship funds delivered returns in the 90 to 111 per cent range. In fact, most of our schemes figured in the top 50 Lipper world rankings.

In 2008 we witnessed the most severe fall in the history of the Indian stock market. The Sensex fell by 52 per cent and BSE Midcap index fell by 67 per cent. Against that, our flagship funds fell by 65 to 75 per cent.

On the reason for bad performance...

Our underperformance was due to our high beta/alpha strategy that did hurt us in an exceptionally bad year and due to the lack of cash. Had we taken a cash call, we would have performed better. But having said that, a 2008-kind of year comes only once in 50 years or so and, therefore, cannot become the basis for any change in our fund management style. We do not believe in taking aggressive cash calls and only in extreme conditions will we use cash as a strategy.

On processes put in place to ensure that there is no undue exposure to illiquid stocks...

All the liquid names in 2007 became illiquid in 2008. And what happened took the entire market by surprise. But several measures have been put in place. We have strengthened our parameters on stock and sector concentration, and stop loss limits. Our risk parameters now have multiple “flag off” levels which are more stringent than the regulatory requirements. We also have a more pragmatic approach towards risk management with multiple checks and balances. All these act as pointers for the fund management team to proactively balance the risk-reward of their respective portfolios.

On his investment team...

The equity team comprises of 10 - 4 fund managers, 2 dealers and 4 research analysts. On the debt side, we have a 5 member team comprising of 2 fund managers, a credit appraisal head, a dealer and a research analyst.

Our fund management team is very strong with substantial amount of experience. Sandeep Neema has 6 years in equity fund management while Asit Bhandarkar and Sanjay Chhabaria each have 5 years. And this is not taking into account their experience in equity research.

The fund managers are accountable to the CEO and the IAC. The team works very closely with the IAC that meets once in every 15 days.

Recently, JM Financial Asset Management Pvt. Ltd. divested 8 per cent of its stake equally to two global institutional investors, Valiant Mauritius Partners FDI Limited and Blue Ridge Affiliates, namely BRLP Mauritius Holdings II and BROMLP Mauritius Holdings II, respectively. These players will add significant value from a global markets’ perspective.

The article was first published in the September 15-October 14, 2009 issue of Mutual Fund Insight magazine. To read the full article, subscribe.