In his current role, he will manage Morgan Stanley A.C.E. Fund, which recently opened for subscription. A.C.E. Fund marks Morgan Stanley's entry into India after 14 years.
Morgan Stanley ACE Fund is not specialization across capitalization. What is the idea behind it? The design is a conflict what you are aspiring for-specialization.
What will eventually come out will be our style of investing in terms of sector allocation and stock selection. We did not want any constraint in terms of market-cap or sectors in our portfolio construction process. Our top-down approach will define the sector allocation and bottom-up fundamental research will drive individual stock selection. We will look at companies with business models that are scaleable and managements with focus on shareholder wealth creation. Our stock picking style will be reflected in the portfolio composition.
I believe the flexibility is important; to play the mid-cap area more through the multi-cap strategy. Mid-caps have given higher returns but I know of the times when mid caps valuations go totally berserk and subsequent volatile correction. At the same time, you cannot ignore the large-caps, which is over 75 per cent of the market-cap. Investment decision should be driven by attractiveness of the stock and not constrained by market-cap or sectors restrictions.
Which all funds you used to manage at Birla?
Birla Mid Cap, Birla Sun Life Long Term Advantage, and their two ELSS schemes - Birla Tax Relief '96 (November 2005- September 2006) and Birla Equity. Then there was Birla Sun Life Buy India. I also managed Birla Genext and Birla MNC, the two thematic funds. I was also the co-fund manager for Excel India fund, an offshore fund.
What's your view on the current market state? Are we heading towards the bear market?
My belief is that it is a shorter-term consolidation/correction. The recent correction had been very sharp. Just after the May 2006 crash, the market is likely to take a couple of months to recover. I don't think its going to be a bear market but we could go sideways for a couple of more months. The India Growth story remains intact. We may not have 30 per cent earnings growth now, but still we have 15-20 per cent growth in earnings, which is decent. Valuations of companies have come down, which is makes them more attractive. From an Indian investor point of view equity markets at 16 times forward earnings is a good level to enter from a long term prospective
What happened to Reliance Power is very simple - greed overtaking investment rationale
Why did the retailers got interested in the issue?
Short-term expected arbitrage opp-ortunity over commitment may have happened. At that point of time markets were doing very well and there was a huge speculative build up.
Do you feel very pleased with the decline in the markets, on the eve of the launch of your fund?
I wouldn't like to use the word 'pleased' but I would be comfortable investing the fund at these levels
Do you think investing will be less challenging?
Investing is never less challenging. Having said that, opportunity for me to buy stocks now is far better now than December 2007. In December, to get a quality name, I would have to chase the stock price, today I could get offers for many names. A typical fund manager will have 60-70 stocks to look at. Say I have 80-90 stocks that I am looking at, quite a few of them were out of my buy range but now prices are more reasonable.
Do you think it will be improper to run a focused mid cap or a large cap fund because market will drift on occasions? Should every fund have the flexibility?
I do believe that a multi-cap strategy would bring consistency in return for investors over the long term. Returns leadership keeps rotating across sectors and market-cap and flexible strategy should bring consistency and delivery better risk adjusted returns over the long term. Having said this, you may want to give options to investors. Large-cap, mid-cap and small-cap segregations are globally recognized market segments, valid options for investors. What is important is to communicate the investment strategy to the investors. You offer a mid cap or a small cap to investors and tell them: “Hey look this is the expected risk and the likely returns based on historic data”. Make things very clear to them. At the end of the day investors, take a call on your investing style.
If you believe in contrarian, IT could be the biggest bet.
Which part of the IT?
When you take a contrarian bet, you than do-not have cap or other constrain, select the best companies in the sector. So in IT you have the top service providers and you also have some product companies. Look at the amount of de-rating done to the IT sector. Companies have continued to grow, they are still the best employers and amongst the best run companies but the market sentiment is totally negative on them. One could argue that isn't it similar to what Reliance Energy was one year ago? It was a decent company available at very cheap valuation, virtually called a value stock. I am not saying that software services is totally out of woods in the short term, but the fact that there are still a lot of opportunity for IT companies in terms of organic and inorganic growth / acquisition. April guidance of Infosys and others will be very important event to watch in this respect
What is going to be the future of companies likes BHELs and JPAssociates, which operate in the very 'fashionable' segment?
BHEL continues to be a multi-year growth opportunity. If you see the last three months, some of the engineering companies like ABB, BHEL, Siemens have actually underperformed. The underperformance could be because high valuations, which have since corrected. In the construction space, the problem is that the beta for the stocks is high and every two years companies want to dilute. In construction, the key is how you manage working capital. You have to find companies where operating cash flows are positive. I am bullish on the sector in terms of business opportunities. The companies in the sector will still grow at 35-40 per cent.
What are the sectors you are avoiding right now?
No, we are not avoiding any sector; we will look at all sectors
You could say infrastructure. That is where the maximum amount of money was flowing in. However, one could also argue that it is has been across industry, whosoever could raise money did it. Examples include telecom companies raising money for tower infrastructure and banking and financial services companies.
Which will be your top banking pick? You can say that before you launch your fund.
The scenario keeps changing. The next one-year challenge for banking would be how you grow your assets because credit growth is slowing down. That means that the bank's business model has to be so robust advances growth that inspite of a slowdown in overall credit growth and that you have to do without disrupting your credit quality. The other challenge for the bankers would be to manage the interest rates volatility, which is likely to occur in the next few months
What's the target you have set for your new offering?
We have a conservative target to start with.
This interview appeared in February 2008 Issue of Mutual Fund Insight.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
