Band of Brothers | Value Research The top team at Birla Sun Life Mutual Fund is enthusiastic about the performance of their funds. CEO Mukul Gupta, CIO A Balasubramanian and CIO - Fixed Income Navneet Munot share their views and plans for the AMC
Interview

Band of Brothers

The top team at Birla Sun Life Mutual Fund is enthusiastic about the performance of their funds. CEO Mukul Gupta, CIO A Balasubramanian and CIO - Fixed Income Navneet Munot share their views and plans for the AMC

The energy at Birla Sun Life Mutual Fund was undeniable. We met up with Mukul Gupta, CEO, A Balasubramanian, CIO, and Navneet Munot, CIO - Fixed Income, who seemed extremely enthusiastic about the performance of the funds and their plans for the AMC.

Your equity funds have begun to do really well and have also generated stability. What is the reason?
Balasubramanian: We got our macro calls right in relation to sector and stock selection and appropriate allocations to them. We largely remained invested in high-growth sectors like capital goods, telecom and banking where earnings were supportive and the outlook had remained positive. We also had a handful of multi-baggers like Bharat Bijlee, Welspun Gujarat, Kotak Bank, NIIT Technology, GVK Power, Jagran Prakashan, UB Group, Jindal Steel and Power, Aditya Birla Nuvo, RPG Transmission and Thermax.

We have a pro-active investment approach. When we buy stocks, we keep a long-term outlook on the company purely supported by the earnings and good management. We stayed invested with some of the high conviction stocks in the portfolio for long. This has broadly generated stable returns on the top of the portfolio. At the same time, we had conviction on the commodity space and took advantage of the price volatility to generate alpha on the portfolio. This is where selective dynamic allocation to a handful of sectors like banking, cement and steel has paid off on an ongoing basis.

Your funds were top performers years ago, then they slid, now they back on track. Any plans?
Gupta: Birla Sun Life Mutual Fund has done quite well in the past few years and has been able to grow its business consistently. We are keen on taking the growth further and expanding its business and geographical reach and placing it within the top three positions in the next 24 to 30 months. A lot of wealth is being created in the Tier II and III cities. The industry has to move into these centres to service those investors. When I came on board six months ago, we had around 24 offices - I am talking of physical infrastructure. Today, that number is more than 50 and we are looking at ending this year with anywhere from 75 to 100 offices across India.

How have you tackled the overlap of Alliance and Birla funds?
Balasubramanian: We have positioned them differently. So if we have a Birla Sun Life '95 and a Birla Balanced Fund, the two will have different flavors. To a large extent, we have maintained different portfolio weights in stocks and sectors to achieve this purpose. On a relative basis, the Alliance funds are more aggressively managed.

How do you do it with the same set of people managing both?
Munot: When we say aggression, we mean concentrated bets on a stock or sector and the amount we are deviating from the benchmark index. The focus is on generating higher alpha. A higher percentage of the portfolio will not be constant but utilised to make dynamic sector calls. Few aggressively managed portfolios would also have holdings in concept stocks that have the potential to deliver super normal returns.

Some of the old schemes are conservatively managed with a fair blend of value and growth stocks. At the end of the day, all portfolios are aligned to the investment objective and style of the schemes. But just because some are aggressive, it does not mean that the more conservative funds are not doing well. Both income funds - Birla Sun Life MIP and Birla MIP - are positioned differently but are category leaders. Similarly, Birla Equity Plan has also done very well.

Birla Cash Fund is a liquid fund that has an average maturity of 50 to 100 days. But Birla Sunlife Cash Manager has an average maturity of 30 to 40 days. In every category, every product is differentiated. As a result of this, process discipline helps while individuals keep contributing their best.

A different positioning does not make one inferior and the other superior. If the market turns volatile, the more conservatively handled funds could outperform the aggressive ones over the short term.

Do you book profits in a defined periodic way? When you reach your target, you just exit?
Balasubramanian: We have a dynamic process in place. Even if our price target is achieved but earnings are supportive to continue holding the investment, then we revisit our price target.

Our selling decision is driven by valuations. We have developed an internal valuation matrix for our investment universe to help in the decision making process.

However, if the stock is being bought for short-term trading purposes on the basis of some technical/fundamental development, then we stick with the price target. So this strategy is applicable only for a limited part of the portfolio.

Price target is more strictly followed in Birla Dividend Yield Plus. The mandate is that we cannot have a stock that is out of the dividend yield spectrum. So if the stock appreciates and the dividend yield goes below the threshold limit, we generally have the tendency to book profits and look for other opportunities. This brings in some amount of discipline and consistency on our investment approach.

Tell us about your team.
Balasubramanian: In equity, we have four portfolio managers and six research analysts and each has sector responsibilities. Few of our analysts act as back-up fund managers for the primary fund manager. The analysts have higher weightage for research while the fund manager for portfolio performance.

On the fixed income side, we have three fund managers and three credit analysts. We track close to 340 companies as part of our equity universe and more than 200 companies as part of our debt universe. We have divided equity investments into adequately covered (extensively covered by sell side research) and inadequately covered (closely monitored by internal research) companies. The analysts maintain their own individual model portfolio with their best picks and inform the fund managers on their selections at regular intervals.

Why three credit analysts?
Munot: The importance of credit risk management cannot be undermined even though most of our investments are in high-grade instruments. We have seen several credit cycles over the years. Some of the good credits of 95-96 were on the verge of default in late '90s. We always had the benefit of pro-activeness on the credit front. We were ahead of the market in terms of identifying upgrade and downgrade candidates. We always leverage on our understanding of credit.

How do you do that?
Munot: A recent example - real estate companies were offering 50 to 100 basis points credit spread just a few months back. Most of the market took it. Not taking that exposure has helped us because the credit spread has expanded sharply to almost 400 basis points in such a short period. At that time risk was not properly priced. It is a new and growing sector so we will continue to look at it. The RBI and finance ministry have reservations on the credit flow to the sector so we decided to wait for some more time. How must we look at collateral and value such companies? What are the regulatory developments?

Your view on the real estate sector?
Balasubramanian: While we more or less hold the same view for equity, we do have exposure to the real estate sector selectively. Birla Infrastructure Fund has a 5 per cent exposure but the stocks include quasi real estate companies like Bombay Dyeing, Century Textiles and companies like Mahindra Gesco.

How important is rate outlook in credit evaluation?
Munot: We have a research-based approach rather than momentum based trading. So we take duration calls based on our view on macro-economic fundamentals and within the framework of each scheme's risk-return profile. We had a very high duration in the month of June and July - 7 years in income funds and up to 10 years in gilt funds. So we increased from 1½ year to 10 years, and then booked profits and took it back to 2 years. So we take aggressive duration bets in funds where investors expect us to take advantage of opportunities in rate markets.

We have double digit returns on our income funds for the last one-year. The funds have done very well. Calls on interest rates, sector allocation and yield curve positioning have all contributed.

In the month of June and July we took lot of exposure to 5- and 10-year AAA corporate bonds. The spreads were 200 basis points. Now they have come down to 130-140 basis points. So we benefited from the downward movement in interest rates and the spread compression. That was reflected in the returns of the bond funds.

For the last year we have said that investors with a risk appetite and a long-term horizon must have some part of the portfolio in long-term bond funds. These funds are in a position to take advantage of the movement in all segments of the bond market.

So what bond fund should an investor choose for the long-term?
Munot: Birla Income Plus or Birla Sun Life Income.

Going forward what is your stand?
Munot: In the very short term, the outlook slightly bearish as the RBI seems to have a very hawkish stance. They would use all possible tools to ensure that excess liquidity is sucked out. Their immediate priority is to manage liquidity arising out of large capital flows. Interest rates have moderated substantially over the last few weeks and the fall was more pronounced at the short end. As the overnight rates are brought back into the 6-7.75 per cent range, the entire curve would shift upwards. The global environment is also very hazy. In the medium- to long-term, we believe that interest rates would settle at lower levels as the economy integrates with global markets.

Improved government finances, buoyant capital flows, increasing domestic savings rate and well-anchored inflationary expectations in the range of 4-4.5 per cent will ensure a benign interest rate regime in the long run.

To sum up, in the short-term, markets will be volatile but in the medium to long-term, rates will drop.

Do you outsource your research?
Balasubramanian: No. The reports we receive from various broking firms are used as a reference point or to validate our own assumptions. We recently designed an internal software package to tracking down the earnings estimates of various companies vis-à-vis market consensus.

What scares you in today's market?
Balasubramanian: Global concerns such as sub-prime, funding of leverage buyouts and currency movements could be the key deciding factors in the short term. Increase in wage cost could remain an area to watch from the overall corporate earnings perspective. However, we do not see the earnings momentum slowing down in some of the key sectors given the underlying momentum on the overall economy. We also feel the current orderly movement in interest rate should not have too much of negative impact on the earnings of corporate.

Any credit blow-ups?
Munot: The credit market is going to be very interesting for the next few years. We see two sets of companies. One will be those with substantially improved operations and de-leveraged balance sheets. The other will be those whose ambitions are running ahead of current capabilities and are leveraging more for expansion. So we can expect a series of upgrades and downgrades over the next few years. In the last few months we have seen high profile names downgraded.

Is downgrading impacting the price of the bonds?
Munot: As of now, most portfolios are at the short end. As the bond funds get bigger, the impact of credit upgrades and downgrades would be much more pronounced.

How do the two of you resolve a difference in call?
Munot and Balasubramanian: The idea is not to always have a uniform view. A difference of view is good. It leads to a healthy debate. We eventually reach a consensus. Our biggest advantage is the synergy between the debt and equity teams.

Our debt team has developed core strengths in credit research, economic research and trading. Fixed income research provides insight on companies that are turnround cases from the equity investment angle and vice versa. We took an initial exposure to Greaves Cotton. In the same way, we decided to lend to Orient Paper on the basis feedback received from equity analysts. While both of them would look at different financial ratios, many times it has helped in taking informed decision ahead of time, thus, having the early mover advantage. We start the day with a morning meeting where all investment members assemble including our trading members. This helps in overall decision-making as well creating a cohesive team.

Have you faced a deployment issue in the debt market?
Munot: Last few weeks, overnight rates were close to zero. So some money kept as cash was hardly adding any value. Most of the money is at the short end where supply is not an issue. Banks are a big issuer of Certificates of Deposits. Lot of companies are now likely to issue debentures. There is not much of money under management in the long-term funds. But, the supply of bonds will not be an issue when money starts flowing into income funds, considering the demand that will come from PSUs and the corporates that are embarking on large capex plans.

You want to bring the fund to the top three slots. Don't you think that it is too ambitious after the momentum slowed down for a few years?
Gupta: We have been around for the past 12 years. The brand name is extremely strong. Having Sun Life as a partner is also beneficial. We have the infrastructure and building blocks in place.

Some of our equity funds have started doing very well and are getting recognised. Our debt funds have consistently done well. We have picked up the momentum and if we carry it on, we are confident that we will meet our long-term goal of being in the Top 3. By reaching out to more investors, more distributors and improving our connectivity with the distributors we will get where we want to be.

What changes did you make when you came on board?
Gupta: I noticed that we did not have a flagship scheme for the fund house. Birla Sun Life Equity is now the flagship scheme. We are focusing on trying to increase the AUM for that scheme and also of Birla Sun Life Frontline Equity, Birla Mid-cap and Birla Sun Life '95.

We treat all the schemes the same where attention to each is concerned. These are just in terms from a sales focus not from an investment or fund perspective.

This interview appeared in August 2007 Issue of Mutual Fund Insight.





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