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The Conservative Tilt

Chief Investment Officer Tushar Pradhan defends his funds’ performances and discusses HSBC Mutual Fund’s style of investing

Chief Investment Officer Tushar Pradhan defends his funds’ performances and discusses HSBC Mutual Fund’s style of investing.

HSBC Equity held the downside well in 2008 but was a bottom quartile performer in 2009. What led to the poor performance last year?
There were two major events in 2009 — the General Elections and the Budget. The investment team was of the view, which was also pretty much the consensus view at that time, that the result of the elections may be a hung parliament with no reforms being pushed ahead. Hence, with that view in mind, a defensive approach was taken. At that time, the portfolio was almost 15-20 per cent in cash with an additional 15% per cent position in Consumers — Durables and Staples. There was a Pharma allocation also.

The elections turned out to be a strong victory for the Congress and with that, expectations of reforms also surfaced. As a result the market began to move up. Apart from this call, there has not been any inconsistency in performance. Till February 2009, we were one of the top quartile performers. It was only when the market began to rally that we lost out in that brief period of time.

Our endeavour is to ensure consistent performance over the medium to long term while ensuring appropriate risk controls to limit downside in a downturn. As a result, we are more risk-averse and focus on consistent long term performance. The focus of HSBC Equity Fund is large-cap, liquid and high quality stocks. The investor may just see the numbers, but one has to look at how the fund manager thinks and whether he stays true to his mandate. Post Budget what went up was not really Telecom or FMCG. It was Real Estate, Metals and other sectors which did not do well last year. We still have long term credit concerns on the real estate sector and believe that all these sectors may not be out of the woods yet. So on the upside we did not have them but neither did we have them in 2008 on the downside, and we were able to limit downside — we did well that year.

So when did you reposition your portfolio?
From October 2009, we began to reposition our portfolios. So if you look at the 6-month period from October 1, 2009 to March 31, 2010, you will see that our funds have put in some good performance numbers accompanied by a change in our ranking.

Why did you wait till October to make changes in the portfolio?
What did the elections really prove? Nothing much had changed fundamentally. Nothing was proven in the Budget that was announced subsequently. The reason the market continued to go up was because it was moving out of a phase of extreme pessimism. Optimism began to come in when people realised that the world may not be coming to an end. Tremendous FII inflows also pushed up the market as the global scenario began to get positive. Fundamentally, little changed.

HSBC ELSS was a second quartile performer in 2008 but third quartile in 2009. Is it that the same call that you took for HSBC Equity is what hit your tax saving fund too?
Yes.

What learning did you glean from this experience?
We took a view that high cash calls beyond 10 per cent of the portfolio tend to create high performance volatility. Having said that, our focus is on consistent performance over the medium to long term and risk controls to limit downside in an adverse market situation. We will still stick to our conservative tilt.

I am not against taking strong calls or bets, but I do believe that it needs to be done on an incremental basis. When you take a call which goes in your favour, you enjoy four quarters of that benefit. Similarly, if you take a wrong call, you pay for it in the months to come. And investors may then begin to fret at the performance. It’s not that we went terribly wrong, it’s just that the echo of our call has continued. Our call was clearly in view of the broad macro-economic scenario at that time.

What are your other risk parameters?
We follow stringent risk control measures which are more exacting than the industry standards.

Your mid cap fund delivered 99 per cent last year. Compared to the category of mid cap funds, it was a third quartile performer.
A key reason is that we are a more conservative mid cap offering. Just because two companies fall into the same category of market cap does not mean they are similar and have the same risk profile. They cannot be clubbed together. One could be a decent investment option, the other a bad one. Yet, the latter may perform extremely well over short periods of time. We may not perform as well as other mid cap funds in the short term but we are certainly convinced about what we own and why we own it and its impact on consistent performance over the medium to long term.

Does the performance of the above mentioned funds not worry you?
No. In my opinion, we are not unduly perturbed about it. We have a robust investment management process. We also do a monthly review of our portfolio positioning and performance.

We invest keeping the fund mandate and the risk profile involved in mind. It’s impressive to give great short term returns, but at what level of risk? When I look at the reasoning behind our stance and why fund managers acted in a particular way, I do not get concerned. It’s not that the quality of our portfolio was in question. Now that we have repositioned our portfolios, the numbers are there for all to see.

HSBC India Opportunities and HSBC Progressive Themes were both fourth quartile performers in 2009. Can you explain their strategy?
HSBC India Opportunities Fund follows a flexi cap strategy. It takes the best picks from the large cap fund — HSBC Equity Fund, and the mid cap fund — HSBC Midcap Equity Fund.

HSBC Progressive Themes Fund has been revamped from its earlier days. From being a highly diversified offering, it now invests in two main themes, amongst others — Infrastructure and Economic Reforms, and within that three sub-themes.