Scripting a Comeback

Equity schemes of HSBC Mutual Fund have taken a beating in recent years. Tushar Pradhan joined the fund house around a year ago and has brought about several changes which he believes will impact performance. Here he tells us why the fund house's schemes will soon be back on track.

You have just completed a year at HSBC Mutual Fund. What do you do to closely track the performance of your fund managers?

HSBC Mutual Fund had an attribution analysis process in place even before I joined. It's just that after joining, I implemented the process more vigorously. We do this for each and every scheme and it is generated out of an international software called Factset. Factset gives an attribution on the portfolio on two parameters: one is the sector allocation within the benchmark and the other is the individual stock selection within the sector. It reveals what worked for the fund manager that month. Let's say that in the market the Oil & Gas sector went up. This software will show your fund's relative under- or over- performance vis-à-vis the benchmark due to the allocation in this sector. Then, it will look at what you owned in Oil & Gas because obviously some stocks would do better than others. This software will tell you about individual stocks which contributed to the outperformance or underperformance.

This process was always in place but we now go more in-depth in using the data. We do it on a monthly basis accompanied by a qualitative discussion with each fund manager. These inputs are used to enhance and share learnings on what went right and what could have been done better.

Further, there is increased interaction between analysts and fund managers on a formal basis. There is an increase in the feedback given by fund mangers to analysts on their recommendations. More focus is given on activity around existing recommendations and changes to views through these interactions.

We have reassigned research coverage among all our analysts to ensure a reduction in duplication of coverage. We have “joined up” the research effort and now encourage the analysts to “pitch” their best ideas to various fund managers within the entire team. This has streamlined the process and has helped us utilise resources more optimally.

The change also encompasses the area of evaluation of stock ideas. The research analyst and fund manager now follow a process where the identification of the investment call is transparent. While fund managers are yet free to disagree with the analyst's view, clear reasons and justifications are being recorded, and in the end evaluation becomes most transparent. We have found that this change has galvanised our analysts to participate more actively in the process. Ultimately we believe this will lead to better investment decision making.

Will these changes that you brought about impact fund performance?

I have not reinvented anything. I am seeing to it that the process is channelised better and hence becomes far more efficient. It took me a while to settle down, to understand how things work and bring about adjustments. As the processes get more streamlined, they could definitely get reflected in fund performance.

HSBC Mutual Fund always said they follow a top down approach. How does this go with your investment style?

Generally, when fund managers look at the top-down approach, they tend to look at it from the benchmark perspective.

At HSBC Mutual Fund, when we say we take a top-down approach, we say it from an investment potential point of view. Say, I am taking a top-down view on reforms. My next parameter will be on which area are reforms most likely to occur. Which companies are then most likely to benefit and outperform? So when we look at the top-down approach, I want to say it is not from a benchmark perspective.

So there is scope for active fund management in India?

Yes. I think India is still very far away from a totally efficient market. What I mean is one where information is freely available to every single participant. I am not saying this is particularly good or bad. For instance, if I have worked in the textile industry, I might know more than someone else. Such advantages do exist. In a global scenario, information is much more readily and easily available. Everyone knows what there is to know. In India, there are regional differences, difference in cost of funding for different areas, access to markets, methods of financing, etc. All this does make a difference. Our markets are not uniform. A cement manufacturer in the South will have a different plan and face different issues than a cement manufacturer in the North. Such discrepancies still exist in India, but not in the developed markets. Due to better infrastructure abroad, pricing there would be similar. But in India it matters - there is information infrastructure, social infrastructure and physical infrastructure to deal with. It will be a while before we get to where the West is. Hence, there is great value in investing with an actively managed mutual fund.

HSBC Equity, your flagship fund, is a large-cap tilted one. That space is well researched. What edge does your team bring?

Our primary approach was that we decided to, first of all, focus on quality. We want to position it as a quality large cap fund. There will always be a debate on what is 'quality'. All large caps are not high quality. Over longer periods of time, high quality large caps will reward investors. On this specific aspect, we stand out. We aim to remain focused on consistent wealth creation over the medium to long term.

Is that why the fund faltered in 2009? HSBC Equity held the downside well in 2008 but was a bottom quartile performer in 2009.

For a brief period of time, in the first half of 2009, we got some of our calls wrong. Now, that gap has started to narrow. 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, Pharma and Staples.

The elections turned out to be a strong victory for the Congress and with that, expectations of reforms also resurfaced. 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 market 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 the portfolio quality, the risk profile, 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. We were able to limit downside - we did well that year.

So is the fund house 'not-so-conservative' anymore?

I won't say that. In fact, nothing has changed barring our view on cash. We took a view on no more high cash calls - beyond 10 per cent of the portfolio. Since this may 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.

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. 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.

Is this conservative streak reflective of the entire HSBC group?

The HSBC ethic is conservative from the perspective of managing risk and being compliant. Our funds are managed in terms of the mandate defined in the fund objectives and we have a range of offerings spread across the risk-return trade-off spectrum. Our constant endeavour is to keep the best interests of our investors in mind.

So you feel HSBC Equity is now coming back on track?

Yes of course. I am confident that the processes that we have streamlined and channelised are showing results. We have beaten the benchmark in the current year.

There will be ups and down in fund performance over the lifetime of a fund. When a call goes wrong, it rolls over for a few quarters till the effect begins to wear out. On any particular day, a fund's performance can be good, bad or ugly. But investors must buy the product knowing that equity as an asset class may be volatile in the short term and he should approach it from a long term perspective. Over 3-5 years or longer, at the very least, any investor should get a reasonable return.

We have done a study over the 3, 5, 7 and 10-year periods. We took various time frames within the broad period and found that only once in the 10-year period would an investor have lost money. So equity investors must go in for the long haul.

When did you reposition your portfolio?

From October 2009, we began to reposition our portfolios.

That late? The rally began in March 2009.

What did the elections or Budget really change? Nothing much had changed fundamentally. 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. Fundamen-tally, little changed.

Very recently your mid cap fund has been showing a pick-up in numbers, after a not-so impressive performance, relatively speaking, last year. Why?

We may not want to chase short-term performance when we are unconvinced about the quality of the company. 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 are certainly convinced about what we own, why we own it and its impact on consistent performance over the medium to long term. First of all, mid caps are the risky side of the equity story, and to take further risk is unreasonable. It is my observation that over longer periods of time quality mid caps outperform others. All mid caps do not necessarily perform well. This is becoming evident in the near term performance in my opinion.

How is your Progressive Themes fund positioned?

HSBC Progressive Themes Fund has been revamped. 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. These are the themes based on our current view, but it is a flexi theme fund. The fund has the flexibility to look at different themes in the future based on the view of the fund manager.