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Agent of Change

According to Sanjay Sinha, Pharma & FMCG are 2 sectors that will not perform so well. This perceptive CIO of SBI Mutual Funds, who has led the company to many awards, speaks about the SBI funds and more

The first thing that hits you when you walk into the SBI Mutual Fund office in Mumbai is the number of awards the AMC has received. Of course, the trophies are proudly displayed. So we spoke to the CIO, Sanjay Sinha, about his team and to get his view on some of the funds.

In the recent past, has a lot of money come into your funds?
Some money, not substantial. Yet, this is reason to feel happy about it. The prevailing psychology of the larger set of investors after SEBI's proposal was put out was that it would lead to a severe market correction. In such an environment, to see money come into the funds is a strong affirmation of the domestic investors to the India story.

And we also saw a lot of interest from our overseas investors too. So people were looking beyond the P-Note episode.

Which are your most popular funds?
Magnum Contra, Magnum Taxgain and Magnum Global.

Why is it that Magnum Contra has lost a bit of steam in its contrarian approach?
It has not. We have always articulated that the contra fund is one that will take a stance contrarian to what the broader market thinks. The broader market feels that engineering and capital goods sectors are overvalued. The contra fund thinks differently. So it continues to retain a high exposure to engineering and capital goods. Mind you, this is a call that the fund has taken for quite a while and the stock price performance has confirmed that.

To say that the contra fund has to buy stocks which are low on valuation is a very limited definition of a contrarian strategy. I would like to describe it as a strategy where the fund manger thinks differently from how the market does. So if the rest of the market thinks that a particular sector is undervalued or even overvalued, the contrarian fund manager would think the opposite. But of course, valuation or ownership will not be the only criterion that he will have for selecting stocks for the fund.

Take metals. This was an example of us participating when the rest of the market felt that valuations were stretched. There is a significant exposure to steel which was down in the dumps and ignored by the market a few months back.

The other sector is the financial sector. We created an exposure to this sector in the early part of 2006 and we kept adding to our exposure at a time when this was a sector which was not looked at positively.

Auto is a sector out-of-favour with the broader market. We believe that interest rates have reached a plateau and the possibility of them going up is very limited. And the chances of interest rates coming down are much higher. So we have increased out exposure to the auto sector.

Technology was not part of the fund's portfolio till a few months back. But we initiated an exposure in a modest way.

Magnum Emerging Business has been volatile its performance. Why?
Magnum Emerging Business slumped in early 2006 because of a large exposure to the textile sector. This sector did not participate in the rally. On the contrary, it moved against the market. This brought down the performance of the fund. But of late, the fund performance has picked up. On a one-year basis, it has moved up to second quartile on the basis of performance. That has been the result of our churning the portfolio. We no longer have any textile exposure and the fund has acquired some new stocks. It also has a new fund manager.

Is it a mid-cap biased fund?
The mandate of the fund is to be in emerging themes. It is not biased towards any market cap. So if you have oil and gas as an emerging theme, you can have large-cap stocks. But many of the emerging businesses are in the mid- and small-cap space. So the fund may have a mid-cap bias.

Magnum Global now has low concentration levels and larger asset levels. Has this not resulted in the fund going slightly out of focus?
No. I don't agree. Many of the top performing funds have a fairly large amount of stocks in their portfolio. In 2006 and early 2007, though our portfolio rose from 30 to 60 stocks, we continued to deliver. The large size of the portfolio and the fund assets did not come in the way of the fund performance.

The fund was sitting on a lot of cash in February. It went as high as 27-30 per cent. We had declared a dividend in that fund and created cash to pay it out. But then we began to get inflows into the fund so we ended up being surplus in cash. That was when the market began to move up. It was our high cash levels that pulled down the performance of the fund.

Magnum Global was a Rs 300 crore fund in the early part of 2006. Now it is over Rs 1,700 crore. The number of stocks also grew. But it did not limit the performance.

SBI Bluechip too began to slump in performance.
For most part of the last one year but not in the recent past. Most of our funds have a fairly large concentration of stocks in the engineering and capital goods sector. We wanted this fund to be different in terms of its portfolio concentration. So it had a higher proportion of pharma, FMCG and auto which did not participate for most of the past year. We have made significant changes in the portfolio and the recent performance has shown an improvement and we will be able to maintain it.

If you look at the diversified equity category, the funds that have really performed well over the past year are those that have a large infrastructure exposure or are infrastructure funds. If you don't have a high exposure to the above sectors in your portfolio, your performance in the past year will be lower as compared to the others that did.

Magnum IT, your tech sector fund, has not done as well as some of its peers. Why?
The last quarter has not been very kind to mid-cap IT stocks. And our IT fund has a fairly large exposure to such stocks. But we are changing that profile. We are moving more into the large-cap IT space.

What is your view of IT going ahead?
If the rupee continues to appreciate, the sector does have some difficult times ahead. We have to view this sector in relation to the rest of the market.

While the rupee appreciation has hit margins negatively, one also sees very strong top-line growth. Net of rupee appreciation, there is also fairly strong bottom-line growth. The top line continues to growth by 30 per cent plus and bottom line by between 25 and 27 per cent. If this level is sustainable over the next few quarters, despite rupee appreciation, the confidence will return.

Which sectors are you bullish on now?
Engineering, capital goods, cement, metals, finance.

Which sectors are you running away from?
Pharma as a sector will not perform though there may be specific individual stock performances. I would say the same holds for the FMCG sector.

How do you deal with fund manager changes since there have been quite a few in your organization?
More than changes, there has been a re-allocation of funds to the managers. In the last two years till I became the CIO, I was the co-fund manager in all of the actively managed equity funds. Since I also head the off-shore and PMS business, it is not possible for me to be a hands-on fund manager anymore. So the funds have now been re-allocated to the rest of the team.

Also, we have grown in terms of size and the funds managed. As a result, the team size also increased.

A number of your team members are pretty fresh in the investing business. Is that why some of your funds have two fund managers?
Anyone managing a fund here has at least six to seven years of experience in the industry. We have also put into place processes to ensure that there are checks and balances in the investing process.

The funds with two fund managers are, by and large, huge in size. Magnum Taxgain is a Rs 3,000 crore fund. It is the largest tax saving fund in the industry. The SBI Infrastructure Fund is around the same size.

Magnum Global is a mid-cap oriented fund close to Rs 1,700 crore in size. The fund follows a bottom-up stocking picking strategy. We decided against a concentrated portfolio for this fund to tone down the level of risk. We prefer a more diversified offering. So logically we need more resources to manage a mid-cap fund of such a large size.

So it is a matter of size and strategy. Rs 1,700 crore is not huge in itself, but its mid-cap, bottom-up bias needs two managers.

How would they resolve conflicts amongst themselves?
If you have a common strategy which is acceptable then it is just a matter of execution. And of course, one needs to revisit the strategy. All our funds are driven by a team effort.

As a fund house, our equity assets are Rs 20,000 crore on the domestic mutual fund side and Rs 3,000 crore on the PMS side. So it cannot be a one-man show.

We have five fund managers in domestic equity, three in the PMS, and one for the off shore fund. Our 10-member equity research team includes a quant analyst and an economist and now also has a head of research. We have a two-member dealing team.

On the debt side, we have three fund managers, one dealer and two supporting staff.

Your One India Fund has five fund managers and it has not been a successful one.
The One India Fund has four asset managers and one asset allocator. It has not done too well relatively speaking. This fund was not able to participate in the fall the market saw in February. In the initial few months, the high level of cash in the fund brought the performance down. Thereafter we had a significant allocation to the southern region which has a large number of companies in the pharma and IT sector. These sectors have not been doing too well in the last few quarters. We subsequently re-allocated the weights to the four regions and made some fund manager changes. From the current levels, this fund should pick up.

Your research team is huge. Do you also outsource research?
We created a three-tier structure on the level of coverage we want for a stock. At the first level - level A, we only look at what our in-house research analyst has come up with. Our decisions will be based on these inputs. On level B, active monitoring of the stocks takes place and we also rely on the sell side analysts' coverage of the stocks. Level C is more in terms of maintenance research where we monitor the quarterly results of a company to see if our expectations are being met. The entire list of 294 stocks in which we are invested today has been divided into these three levels of coverage.

How involved are you in the investment process?
Till the time we took on board the head of research, I was driving research within the organisation. I am now part of the fund level strategy which the fund managers discuss with me. In addition to the daily morning meeting, the entire investment team meets on a fortnightly basis to participate in what we call the investment committee meeting. At these meetings we review our exposure across stocks. We identify stocks or sectors in our exposure which has moved differently from the direction of the broader market.

We are exposed to a huge universe of around 290 stocks. We may not have to review each one of them every fortnight. But there will be few stocks in a few sectors which will be deviant from the broader market. We zero in on those stocks and try to identify why the movement has been different from the market. I am very actively involved in this process.

You offer PMS services to investors outside India. What is the perception that foreigners have of India as an investment destination?
We have encountered a wide variety of responses which range from trying to have a basic understanding to a more indepth analysis of India.

Some of the geographies have not invested substantially in India. And for them it is more of an exploratory investment in India's growth story.

Others have invested in India and earned good gains. Some of them are are concerned about the strong rally that India recently witnessed. They are looking at the valuations at which India is trading.

The third category are those who have seen India but not been able to participate in the past but would like to do so now because they believe in the growth story. This category has committed to invest in India through the mandates given to us.

Do you feel there will be a total unwinding of P-Notes?
The complete unwinding of P-Notes may not be a possibility. A more likely scenario is that some of the accounts will consider registering as FIIs.

Any investor who has participated in India - either via a P-Note or as a registered FII - would be attracted to this market because of the sheer growth opportunities it offers. I think the perception that all of it is short-term, speculative flows is misplaced.

Now that SEBI has come out with far more liberal guidelines by which they are prepared to register FIIs may encourage many of them to covert into a full fledged FII account. Of course, they have a fairly long time of 18 months to do so.

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