Scouting for Opportunities

Srividhya Rajesh moved from broking outfit Kotak Mahindra to Sundaram BNP Paribas Mutual Fund way back in 1996. Starting off as a research analyst, she is now at the helm of two of the flagship offerings - Select Focus and Capex Opportunity. In conversation with Mutual Fund Insight she candidly discusses where she went wrong in her theme selection and when she was bang on. And why she is certain that investors can expect a recovery within two years.

You have been managing Select Focus since its start. Can you tell us how it was conceived?
In 2002, the gap between the bond yield and dividend yield was very attractive. And it was the time when equities were not really on the forefront. We had just one equity product and a tax related one. That's when we realised that we needed to position ourselves in equity too.

Prasad, who was our CIO, decided to take the plunge. And in that process we designed a fund that would have either a very limited entry load, or none altogether, to encourage investors. We went around talking about the concept but there were hardly any takers. So, we started off with a large cap fund and a mid cap one. We found that every sector will not respond at the same time. Some sectors will do better than the rest. So our logic was if we concentrate our energy on those sectors and allocate more money to them, it would be a good way to outperform the market. Betting on themes was another option. We had Shrikant Pandey whose pet concept was to anticipate ahead of time which theme would really unfold.

So with a mix of these concepts we launched the equity fund.

How have you gone about emphasising or de-emphasising a theme?
In the past four to five years we focused on themes like consumption oriented, outsourcing, export driven, among many others. When we say consumption - it can be led by, say, telecom, people realising the need for telecommunications and spending more on such products. Or it can be something like banking which gives rise to a sea of products led by the need to have more.

Which one of your themes did not work out according to your expectations?
I would say outsourcing. We based it on IT-outsourcing. On a longer term basis it didn't deliver as well as some of the other themes. During the course we had some sharp rupee appreciation as well as sharp depreciation. And there were a lot of other external factors that affected this particular theme. Since the outsourcing and commodity themes are globally linked, one has to keep in mind that what is happening globally would be bound to affect these particular sectors.

Which was the most rewarding theme for you?
Once we are focussed on particular themes, we narrow it down to the sectors best suited. For us, it was infrastructure and commodities that were very rewarding. In 2006, commodities really did very well. Even within commodities at different points of time, various commodities can do well. We had to identify which commodity would do well at different points of time. Last year we played metals and to an extent energy.

Though cement is also a commodity we avoided it as we realised that it would be very difficult for the sector to reap the benefits. So we didn't take any calls and focussed on just two sectors. Similarly, we had zero exposure to technology in 2006-07. In fact during most of 2007 we were zero weight on technology despite it being very big on the index.
We also take active bets on the other side by keeping away from certain sectors.

Going by the premise of your fund, the Capex Opportunity is no longer an opportunity? What are you doing about it?
Towards the very end of 2007, when we started getting big inflows we were very uncomfortable with it. But we can't actively discourage inflows though we have refrained some of our clients from investing in the fund.

We have a mid- and small-cap exposure because the number of large caps in this particular theme is fairly limited. And this theme, until 2005, was nowhere on the radar. And that was a boom period for that sector. To an extent, mid and small caps have really hurt the fund. And, it is a quasi infrastructure fund and I think, in terms of recovery, infrastructure is in the late cyclical which is not helping the fund. So typically it tends to perform well only when the economic activity is very favourable, the investment climate is very feasible and cash flows are good. A lot of such factors determine infrastructure's cycle.

We have seen a meltdown since January 2008. When did you realise that this is not a correction of the usual kind?
It was probably sometime in April when we figured that this is not the usual correction. In January we realised that things were going down but we had hoped that it was a temporary phenomenon. We had got too used to the idea that India's GDP would grow at 9 per cent plus. Corporate earnings would grow at 20 per cent and India would continue to enjoy 20-22 times forward earnings multiple.

From that kind of a mindset, a correction of probably 25 per cent from the peak was kind of a tempting opportunity to get back. We were looking at it as a correction and we are still looking at it as an opportunity to buy.

But post February and March, we realised that the global recessions were going to be much wider. Oil began to shoot up somewhere around March. Certainly the rise in oil prices was not anticipated and the way it went up took us by surprise. But once we saw it happening we realised that India was not in the best of positions and it was going to suffer. The market discounted this very badly and as the price of crude went higher and higher, the market took cognizance of that.

We had around 10 per cent in cash at the start of the year. We increased it slightly to somewhere around 15 per cent between January and March. And subsequent to that, we hiked it further to 20-25 per cent levels. Moreover, we started getting inflows into the fund during this time but didn't want to deploy these inflows as we were not sure if the correction would be short lived or not.

So from that point onwards we realised that something was amiss and this problem could be deep rooted. And since then we have been adopting a cautious stance.

Was liquidity unwinding there on your radar?
Liquidity unwinding was really not there on my radar. When oil prices went up, that really pinched us. And the way it kept on moving was scary.

Prior to these falls, we were not sure by how much it would dip. It was taking support at every level - $130 - $140 and so on. The direction to some extent was very clear though the support was not. On its climb up, we clearly got the message that it will go on to $140-$150 levels, which eventually did happen. But once oil started correcting we were looking at opportunities to park ourselves and industrials was one such place. Some of the other different segments, apart from cash, were the pharma and telecom sectors.

When do we get out of this mess?
That's a million dollar question. As of now people are anticipating or expecting a recovery by the third quarter of next year.

Do you have a hypothesis how things will look like?
There are three things.

One is what the government is going to do in terms of policy action. As of now we have elections which are scheduled to take place in 2009. By the time the new government is in place and they come out with any meaningful policy statement and provide direction, I think we will lose a good amount of time.

The second is in terms of global environment, based on the demand and supply situation. Most of the economists are getting started on the fact that the easing has begun and will take around 12 months to find its impact. So by the third quarter of next year things will start getting back on track.

The third is on the corporate level; how individual companies are placed. Some companies will have volume growth, others will have existing capacities and, of course, the call will be on their pricing.

What is your take on the global environment?
Growth will depend on both, exports and, indirectly, on commodity prices. Though we are not a commodity driven economy, a lot of our index profits still come from the commodity driven sectors. Two-thirds of our index earnings are not driven by users of commodities or they are companies that are not really too affected by commodities. But the balance one-third are directly linked to commodities. So at this point of time, the forecast for 2009-10 is that commodities are going to contribute to the incremental growth. But if something happens, in terms of crude prices coming off further or other commodity prices falling as much or not recovering, the current forecast can get impacted.

Or, if the demand environment does not improve there would be some problem. So there are lots of variables that are involved.

How much of a downturn do you visualise from here?
If recovery takes place in the third or fourth quarter of next year we will still be better off by 2011. As a lot of it has already been discounted, we will not see any further downtrend.

By 2011 things should look up depending on the capacity that has come up as per schedule. We hear that cement companies are going ahead with their expansion plans. But if it is going to be more prolonged, then India will certainly suffer a loss in terms of GDP growth. It depends on how the U.S. situation turns out. At this point of time it looks like they are going to take a long time to come out of their problems.

And this pumping in and trying to bail out companies will only worsen the situation. It is a temporary solution but will make the medium term phase difficult and delay the recovery. If that is the situation, then some of these developed OCED countries will again face the same problem as the U.S.

Is three years the minimum time frame that one should not expect any positive returns from equity?
No, I think two years is a reasonable period. If there is a down phase from here onwards, then there will be recovery phase going forward. And if we don't fall any further and remain in the sideways zone, then positive return can be a little delayed further. But 2011 certainly looks like a better time for India, at least compared to 2010.