Playing by the Book

A. N. Sridhar joined Sahara Mutual Fund in October 2004 as Head — Equity Dealing. He then underwent a change in profile to become a fund manager in February 2007. But his experience prior to this has been quite diverse.

He worked as an advisor in the institutional business at Dalal & Broacha Stock Broking for a year. This was after a 14 year stint with UTI Mutual Fund where he gained exposure to equity dealing, equity back office, mutual fund operations, the money market and forex market. Prior to UTI, he was with Central Bank of India for five years.

While he is the fund manager for all the equity funds at Sahara AMC, the Sahara Growth Fund has been in the limelight in the recent years for its good performance. Here he talks about what led to this fund being a success, what sectors he is shunning and where he is placing his bets.

Recently, Sahara Growth Fund has managed to fall by much less than its peers in the diversified equity category. What has been the reason for this?
There are many reasons why this fund has performed well.

First, the overall stock investment discipline was followed. It was ensured that as far as possible the limit in any single stock never exceeded 5 per cent of the portfolio. If so, it was only for a temporary period. This discipline was followed during the good times, and bad. So let’s say a stock which accounts for 4 per cent of the portfolio currently has rallied and the weightage increases to 7 per cent. Profits would be booked and measures would be taken to bring the weightage in the portfolio within 5 per cent. With high weightage the portfolio gets exposed to more of stock specific risks, affects returns and increases volatility. By maintaining such strict discipline, the portfolio is under control.

Second, the fund invests in around 30 to 40 stocks. Portfolio management studies and surveys have shown that it’s sufficient to invest in around 25 stocks for diversification and elimination of unsystematic risks. This increases the focus towards less number of stocks and helps one to perform better. At any time this portfolio had a minimum of 25 stocks and a maximum of around 42.

Third, a cap at 20 per cent per sector was generally the norm. If there was a lot of choice among sectors, the cap was lowered to 15 per cent. Right now, with a number of out-of-favour sectors, the maximum sector exposure cap is 25 per cent.

Fourth, this has been a very extraordinary year as far as global and domestic economic events are concerned. Any market veteran would admit that these situations were not seen before. Owing to lot of uncertainty, markets were highly volatile with almost all sectors underperforming significantly at various points of time. Owing to limited exposure in each sector or stock, the portfolio was protected whenever any stock or sector corrected significantly. Last but not the least, the global events were read better. The fund got out of those sectors which underperformed the most much before they crashed — realty, IT, metals. The fund also rode the rally in these sectors at the start of the year. Today, the fund invested in outperforming sectors — FMCG and oil — ahead of the market. In fact the fund rode the entire rally of oil stocks.

Has your high cash allocation not helped in cushioning the fall?
No. The cash level began increasing only from November 2008. Right now the cash allocation may be high but it is to protect the investor interest. These are very extraordinary and unpredictable times.

Generally, the fund believes in maintaining lower cash in the portfolio during normal times, only to deal with unanticipated withdrawals. We believe that the investor has given us his money to invest and has already done his asset allocation.

You say it was your discipline that got the good results. But it was only from 2006 onwards that Sahara Growth began to beat the category average. The fund was always a category underperformer prior to that.

Sahara Growth Fund is positioned as a large cap fund with predominant investment in Nifty stocks. So the focus of the portfolio is mostly on Nifty growth stocks. The fund is oriented towards large caps to provide a steady return (as seen from its standard deviation). With better management the fund has consistently outperformed its benchmark Nifty over so many years. Whenever mid-caps perform better than large caps, the funds appears to have underperformed against those funds which are also invested in mid caps.

One should be actually comparing this fund with index funds and dedicated large cap funds.

So is it that you shun mid caps?
No. We do invest in mid caps when we find opportunities. But the exposure is limited to a maximum of 20 per cent. We have a few mid cap stocks in our portfolio even now.

You mentioned that there are a number of “out-of-favour sectors” currently. Does that mean you follow a top-down approach?
The approach in picking up stocks will depend on the market situation. For example, during early- and mid-2006, adopting the top-down approach would help. During those times, every sector was expected to perform. But towards the end of that year, adopting the top down approach would not have helped, as it was infrastructure sector which was market favourite. Right now the market believes investing in the FMCG sector. The approach changes with the market situation and opportunities. We currently adopt the bottom up approach of investment.

Are there any sectors that you are bullish on?
We are bullish on some sectors where the government support is available and fresh investments are bound to happen - like power and infrastructure. Owing to shortage and as a prerequisite for growth, India has no choice but to invest in these sectors. This would create more jobs and the demand already exists. These sectors we believe would do well. FMCG is another sector that is likely to do well.

The ones you are bearish on?
We are bearish on the IT sector, as of now. The sector is highly dependent on the U.S. and the developed economies for its growth where the predicted economic growth rates going forward are lower.

Which sectors have you invested in recently?
Auto is one sector we have invested recently, though stock specific. We believe that as the interest rate falls and consumption begins to rise, this sector would be the first one to bounce back.

You have a natural resources fund. Do you see potential in that sector?
Sahara Power and Natural Resources is a long term investment fund. Over a longer period we believe that the supply of natural resources will not match demand. Companies engaged in the production, processing etc. of natural resources stand to benefit and would ultimately provide gains to investors.

In this current meltdown which started in January, when did you realize that it was not like any other temporary correction?
Only after April 2008. Till then we believed that India would not be hit hard by the global turmoil. The over ownership of stocks by the FII’s across some sectors, was one of the main reasons for market fall. With global turmoil and failure of firms overseas, we witnessed huge selling and were not supported by buying. The events that later turned out in the global and domestic arena punctured the markets, and now we are convinced that we are in bear market.

Where do you see the market in the next one year?
This is not an easy question to answer. There is lot of uncertainty in the market. Possibly this question can be answered somewhat satisfactorily in April 2009 once we see the quarterly results of December 2008 and March 2009. The market is awaiting these results for a fresh cue forward. Currently we are in a phase where companies have shelved fresh plans of expansion, demand has died and inflation and interest rates are not at the right levels. The managements are adapting to the changed atmosphere by resorting to several measures and the effect of this would be seen only when we see the next two quarter results.

There will a stability phase, period when no investor would expect great returns. After this, possibly a rally in select sectors could take place. This rally could take place anytime perhaps after June 2009 once the market stabilizes. Perhaps strong investor sentiments may return after the next two quarterly results.

What would be your advice to potential investors?
We believe that investors should hold on to the current investments in the stock market. However, this is the time to begin investing for a long term. One can invest systematically over the next few months. It is expected that the market would go into a stabilization period by then and volatility would reduce. But an investor must be prepared to stay put for at least 3 years. This rally will take place only when the market believes that the companies would perform going forward.