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Aiming For Consistency

DSP BlackRock’s Anup Maheshwari says that over the next 12 months equity markets may stay range bound, but if they were to jump, then high volatility will predominate

The interview first appeared in the November 15 - December 14, 2009 issue of Mutual Fund Insight magazine.

Anup Maheshwari

Executive VP & Head - Equities & Corporate Strategy 

DSP BlackRock Investment Managers

Experience: 15 years

Funds Managed:

DSP BlackRock T.I.G.E.R

DSP BlackRock Opportunities

DSPBlackRock Tax Saver

DSP BlackRock Small and Mid Cap

DSP BlackRock Natural Resources and New Energy

When you compare T.I.G.E.R. with its benchmark — BSE 100, its recent performance has dipped. Last year too it hit a rough patch. Any comments?

The T.I.G.E.R. Fund is focussed on companies that benefit from infrastructure growth and economic reform. This mainly involves investing in sectors such as Capital Goods, Construction, Power, Energy and Banking. Over the past year, we have seen a trend wherein some sectors which do not come under this theme, such as Pharmaceuticals and Technology, have outperformed. These sectors are included in the BSE-100 benchmark index, as a result of which the fund may have slightly underperformed the benchmark. The long term track record of the fund, however, shows out-performance over the benchmark. We remain very positive on the long term prospects of this theme and the fund.

Compared to some of your peers in the infrastructure space, this fund has faltered recently. How do you position this fund vis-à-vis its peers?

The last six months has been quite unusual in terms of the velocity and magnitude of the stock market rally. We had a cautious view at the start of this year, which helped the fund in the first quarter of this year, but resulted in a more muted performance into the subsequent rally. We have also seen very divergent performances from other funds during this period, with some funds exceptionally out-performing while others have exceptionally underperformed. The T.I.G.E.R. Fund performance has been somewhere in between. However, we always encourage investors to take a long term view of the market and the fund. We try to be consistent over longer periods of time.

How do you define consistency?

We would ideally like to perform in the top quartile over longer periods of time. Consistency is the manner in which such performance can be achieved. Considering that most of our funds are open-ended, we try to avoid extreme positioning which could result in swings between the first and fourth quartile of performance. This is important for the overall investor experience with the fund. Our sense is that if one maintains even second quartile performance consistently over periods of time, by default the fund will be a first quartile performer over longer periods of time. Now this is as far as performance is concerned. However, performance is a by-product of stock selection and portfolio construction. While consistent stock selection is critical, we also spend a lot of time on portfolio construction to avoid extreme positioning.

How do you balance the risk? If you have the opportunity to take a fair amount of risk that will put you in the top quartile bracket, how would you decide whether or not to go for it?

We do focus on the amount of risk we are taking to deliver performance. Our preference is to build a diversified portfolio in terms of sector and stock selection, with moderate risk. We try and avoid taking excessive risk, as the shorter term stock market performance is not necessarily synchronised with our fundamental views at all times. 

How closely do you monitor the benchmark when constructing your portfolio?

Quite closely. We look at it from two aspects: Sector weightage and stocks within the sector. Once we decide which sectors we prefer and how overweight we should be on those sectors, we then focus on bottom-up stock selection to build up those weights. If there are sectors on which we plan to be underweight, we explore other sectors to make up for that gap. We need to out-perform the benchmark over longer periods of time, or else we would not be adding any value to our investors.

Why is your Opportunities Fund not very aggressive?

Aggressive is a relative term. The past few years have been very volatile and an aggressive positioning may not have been prudent. So the portfolio positioning has been quite deliberate. Going forward, we are looking to consolidate the portfolio, as we do expect to see considerable sector rotation and value add from bottom-up stock selection. 

Why a micro cap fund in addition to the small- and mid-cap fund?

Our definition of large, mid, small and micro cap is as follows: The top 100 companies by way of market capitalisation are the large-cap companies. The 100th company in India today has a market cap of approximately Rs 9,000 crore. So any company with this market cap and above is large cap.

The next 100 companies are what we define as mid cap. The 200th company in India has a market cap of approximately Rs 4,000 crore. So any company in the approximately Rs 4,000 crore to Rs 9,000 crore market cap range will be a mid-cap company. 

The companies in the 201 to 300 range are the small cap companies. The 300th company has a market cap of approximately Rs 1,400 crore. So all companies in the approximately Rs 1,400 crore to Rs 4,000 crore range are small caps. 

All the residual companies, whose market cap is less than Rs 1,400 crore, are the micro caps. The universe of micro cap companies is quite large, and hence we have a separate fund for investment into this segment. It is also the only closed-ended fund in our range of equity funds. 

How fragile is the global market now that there is a second round of bailouts by the U.K. government?

The global macro indicators are still very fluid. Currencies are at extreme levels. The dollar is weak while the Euro and Yen are strong. Interest rates in the developed markets are at an all time low. This is prompting the dollar carry trade. Commodity prices have gone up substantially and this is not backed by fundamentals alone. Global equity markets are up anywhere between 60-200 per cent from their lows. The excess liquidity in the system has clearly found itself inflating various asset classes and not enough has gone into physical asset creation. At some point of time, things will have to normalise. The stimulus packages will have to be pulled back. Interest rates will have to go up and commodity prices will have to moderate. Equity markets will have to stabilise.

Central banks across the globe are concerned about the excess liquidity. If it remains in the system, it could eventually lead to inflation. To control inflation, interest rates will have to be hiked. But interest rate increases need to be managed in a way that the resumption of growth does not get materially affected. 

Our sense is that over the near term (next 12 months or so), equity markets may stay range bound. If equity markets keep rising dramatically, then we are setting ourselves up for another round of high volatility.

Even in March 2009, the sudden rally took your fund house by surprise.

Yes. Simply because we had concerns on the currency front. Our fear was that the stimulus package coming into the system was fuelling another bubble. The dollar was being printed liberally and if there was a disorderly reaction in currency markets, there could be implications for equity markets. So that was our fear in the early part of the year which made us cautious. Then we had the elections too and were unsure about the outcome. So we did not want to be overexposed before such a big event. We were late participants but nevertheless, we did participate. 

Does the sudden run-up not bother you?

Yes it does. What happened in six months normally would take three years. Each month was like a six-month period in terms of stock price movements. While it is good to see the fundamentals stabilising and improving, there does seem to be an element of liquidity driven momentum in the markets.

Isn’t the current burst of IPOs a warning signal?

For the last few months there have been large issuances and if market conditions remain good, that trend will continue. A lot of international investors are happy taking exposures in large blocks. This market is not all that liquid. If one wants to invest $100 million in one stock, there is a significant price impact. So while companies are coming out with such issues, there appears to be ample liquidity on the other side to absorb it. 

What are your views on the last quarter results?

They were more or less in line with street expectations. The Automobiles sector clearly did better than expected. IT too did relatively better than expectations. Banking sector results were mixed. The Construction and Telecom sector results were below expectations.

Analysts look at the index and make predictions based on it, for instance, saying that the next year earnings could be in the range of 1,080-1,120 for the Sensex. But there are a lot of sectors that can change that forecast significantly. The consistency of earnings is not all that straightforward. Oil and Gas stocks can influence earnings a lot and they depend on government policy and energy prices. The Metals sector has a big swing factor on earnings as well. Similarly, Banking and Real Estate also influence overall earnings growth quite significantly. These four sectors can completely distort earnings predictions.  

What is your take on the real estate sector? You do have investments in real estate stocks. 

We do not have any significant positions in the real estate sector. The sector is fairly complicated and earnings variability can be quite substantial. We would prefer looking at real estate stocks in a market down-turn, if we see enough value in the form of a significant discount to their asset value. 

The Telecom sector has taken a hit due to the intense competition, price wars and the investigations launched into spectrum allocation. Will valuations continue to fall?

When we look at a sector, any sector, the first aspect we focus on is the pricing power of that sector. Pricing power is a big influencer of profitability and return on incremental capital deployed in the business. When pricing is under pressure, sectors tend to under-perform to a point where stocks could fall below intrinsic value. We would prefer to look at companies in this sector when they are deeply undervalued with a high margin of safety. 

You have a fair amount of exposure to FMCG. With raw material prices rising do you see FMCG stocks underperforming in the coming quarters?

Some areas of the FMCG sector could come under earnings pressure because competitive factors are building up. In the attempt to increase market share, some companies are likely to increase their advertising spend and this could impact margins. Generally speaking, in this sector, we are heading into a more competitive and price intensive market. It may be more interesting to look at media companies which could benefit from the increase in advertising intensity. 

Though you had a high exposure to Financials, it was lower than some of your peers. 

We could definitely have done better on this call. The average allocation was 25 per cent, whereas we were less. We felt it would be too aggressive and our portfolio is generally more diversified.