Born and brought up in Mumbai, Shroff is based in Hong Kong. He is a fund manager with JF Asset Management, which is a part of JP Morgan AMC. When asked about his move to equities, he states that he has no regrets and says that there has never been a dull day in his career.
Tell us about the funds you are managing.
We have a number of India dedicated funds in Hong Kong. The Hong Kong based investment trust is about 2 billion doller and is more than 12 years old. The Luxembourg-based CKI fund is our largest with a size of around 5.5 billion doller. It raises money from European investors. Then we have a London-listed closed-ended fund which is more than 10 years old and it is about 1 billion doller in size. To complement these we have two retail products for Japanese investors.
We have also recently launched a fund specifically for Korean investors which is just shy of 150 million doller. Then we have one fund for US investors which is only around 75-85 million doller.
We also have JF India Smaller Companies Fund which is less than a year old. The intention behind this fund was that we didn't want to mix up small companies in a large-cap portfolio. We manage one segregated mandate which is not a fund but is a sovereign account. It is for a government from the Middle East.
On a relative scale, would you say your exposure to India is low?
Our total exposure to India-dedicated funds at the moment is 10 billion doller, which is Rs 40,000 crore. This is not a small sum of money.
Very early on we had identified India as a strategically important nation and an emerging growth market. Not everybody has 10 doller billion invested in the country and not everybody has been doing so since the mid-90s. So we take a sense of pride that we have done it and our India fund at 5.5 billion doller is one of the largest in the group. I think we are the largest single country firm in the emerging markets space.
Do all these funds have the same investing mandate?
The overall mandate is to be a broad diversified equity fund. Historically, the portfolios have been very homogenous so we manage them in a synchronized manner. But in recent times, by virtue of several factors, there has been modest divergence in portfolios. The reasons tend to be two fold.
One is by mandate and their restrictions. For example, several of our funds have a maximum holding of 10 per cent in a stock while others have 14 per cent and even 20 per cent. The other reason is because of the fund's size. Our US fund is less than 100 million doller. Our Europen fund is 5.5 billion doller; 50 times larger.
The JF India Smaller Companies Fund stands apart in the sense that the concentration is not as high and diversification is much more. Our largest holding will not be more than 3 per cent of the assets. After all, these are companies where the coverage and knowledge is less and track record is lower.
What was the thinking behind the Smaller Companies Fund?
We do a lot of company meetings. Even before the fund was launched we did not restrict ourselves only to meeting only the listed large-caps like Reliance but unlisted entities too. So we encountered a lot of interesting ideas which only rarely were we able to execute effectively. So idea generation was already in place. But we found it incorrect and inefficient to execute these ideas in a 5.5 billion doller fund. Additionally, our clients recognised and showed an interest in our small cap expertise. So we decided to launch a separate fund. Though a relatively new offering, it is up around 35-40 per cent since inception. We have invested money very slowly. We have taken great care and had been very disciplined. There is no benchmark to this fund. So it is difficult to compare it with anything else.
How will it look vis-à-vis BSE Small Cap index?
I don't know but I would suspect that it would have modestly underperformed because there is not a perfect definition that we are looking at. And I have not calculated the BSE in dollars because it's a fund for dollar investors. The rupee has also created an incremental source of return for this year.
What's your view on rupee appreciation since it has been a catalyst for your fund inflows?
The rupee is appreciating because India is a high growth economy and is attracting capital flows. The flip side is that dollar is also depreciating and has its own fundamental issues. In this context of global uncertainty, capital is getting more shrewd in identifying growth opportunities. Three years ago people would say reining in rich globally emerging equities is not good. They are a high risk asset class. But there is a subtle shift taking place and emerging doesn't mean it is risky. On core fundamentals, emerging markets are much healthier.
Do you see things changing on the currency front?
I am not a currency expert. We explicitly tell our clients that we don't hedge our currency. We are not going to get into this at our funds level. It's not that we don't look at the currency but we do not have a currency overlay as a source of return.
In terms of impact it varies. For people who are pure commodity exporters and dependent on very thin margins, a 10 per cent exchange rate hit is devastating. For a company having 30-40 per cent margins, it is a setback. Companies will have to reinvent their business model. Some businesses will be rendered irrelevant. Currency should not be a sustaining factor for a business. There has to something more.
What kind of companies will find it most challenging?
Take the textile industry. We don't have too many textile companies in our portfolio not because of currency issues but because this industry in India has not geared up. The scale of several Chinese and Hong Kong-based textile companies renders many Indian companies uncompetitive. When you are 50 times larger than an Indian company, you provide your clients a sense of stability. Then you have the infrastructure advantage in China.
Will IT services companies survive?
By sheer virtue of having higher margins, yes. Their businesses genuinely are value that is not entirely sourced from a currency variable. A lot of them in the Tier -I space are moving up the value curve. If they were only rewriting codes and it was based only on labour arbitrage supported by a favourable currency, then obviously they would be affected. I think they have some ability to sustain.
Are you finding enough compelling opportunities for your funds?
I find compelling opportunities where there is growth but they may not necessarily be cheap. We bought Bharti in 2003 and since then it has gone up 30 times. If anybody had sold at anytime in the last five years he would have made profit. We didn't sell because we bought into the growth of the sector and the management's capability of delivering that growth.
There are many differences between India and China in the telecom space. But looking at the cellular penetration in China is showing me what can happen. As the competition reduces rates, millions and millions of people will get connectivity.
How do you justify that sitting in Hong -Kong and taking call on a company based in Gurgaon?
It's a task that requires a keen sense of hands-on research. Being located in another country offers a lot of advantages. It keeps you away from a lot of noise, distraction and speculation. The Indian media can be an exceptional distraction, if you allow it to be. And one of the biggest advantages of being away in another country, particularly for us in Hong Kong, is that we can interact with teams tracking other markets like China. You gain tremendous perspective.
It does not disadvantage us from meeting companies. This calendar year the JF/JP Morgan team of analysts and portfolio managers would have done 700 company contacts, which is more than two companies a day.
In which sectors do you find compelling growth?
Rather than sectors I would say we are focused on themes, which covers many sectors. One is infrastructure spending. Its growth is unstoppable. Telecom is another example of having several hiccups along the way. Despite hyper-competition and lowest rates on the planet, the Indian cellular companies are highly profitable. The other theme is domestic consumption. There is more money in the hands of more people. How do you play consumption? You play it by someone having a cup of tea, someone smoking a cigarette, someone buying a fashionable mobile phone, buying a new house, a car or a financial services product. BSE will classify HDFC Bank under financial services but I think it is a play on consumption.
We look at individual companies' ability to capitalise on growth. Does the business mode differ from company to company? Is someone able to grow at the expense of someone else?
Yes. Our premise for being positive is our confidence in India's economic growth, which is leading to higher disposable income and the much-needed infrastructure development leading to efficiency in the economy. India has a very vibrant corporate sector. The operating environment is improving for them.
Do you think India is overconfident?
The fundamental competitiveness of businesses is much better now than it was, say, 15 years ago. Companies are today genuinely demonstrating capability of competitiveness not only within India but externally as well.
But I think there is an element of overconfidence. There is easy availability of capital. Fives years ago if you wanted 2 billion doller, you would have been kicked out of a bank and every mutual fund house. Today capital is not a constraint. But equally there is a 'can-do' attitude.
Are you scared of the market conditions today?
Is the market outright cheap? No not in the least bit. There are certain pockets in the market that do worry me. I am not scared about the aggregates because valuations are to be viewed in the context of growth. The Indian economy has not grown at 9 per cent for the last 20 years. It has been growing at 8-9 per cent for the last 2-3 years. I believe 8 per cent is sustainable. The global liquidity dynamics and the profitability of corporate India must be taken into account.
Do you fear any banking blow up in India due to partial sub prime in India?
No. It's not about bad loans. It's about anticipating bad loans correctly and pricing loans correctly. We don't see any problem ahead.
Is the participatory notes issue cause for concern?
There is a large pool of money that's invested in India through PNs. SEBI has said that they are not against the people coming into the country but they are uncomfortable with the opacity of some players. So they are creating a framework whereby an FII license will be given faster to people coming through PNs, hedge funds etc.
What must an individual investor be wary of in this kind of market?
If a market gives you a 50 per cent return in a year, you should understand that it is an exceptional return. It may repeat itself but it is not a best case premise. And investors should also be wary of people who tend to suggest that it is expected. Individual investors should be aware that the job of the media is to attract their attention and often sensationalise news.
This interview appeared in December 2007 Issue of Mutual Fund Insight.
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