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My Challenge is to Carefully Nurture Existing Funds

S.K. Mitra, the new Managing Director at Birla Sun Life AMC shares his insight on a broad range of industry issues and investment strategy for his funds. On his flagship, Birla Advantage fund he emphasizes focus on strong businesses, run by competent management and at a reasonable price. In his priority for Birla Income Plus, safety comes first followed by liquidity and returns.

S.K. Mitra is the new Managing Director at Birla Sun Life AMC. An old hand, he setup the Birla Mutual Fund and spearheaded the financial services foray of AV Birla group partnering with Sun Life. This includes the mutual fund, insurance, financial distribution securities trading business. Prior to this, he setup the GIC Mutual in which he roped in the first foreign partner in the mutual fund business, the Soros Fund Management. His career spans 23 year in the financial services industry with his lead stint in merchant banking in Bank of India, Standard Chartered Bank and American Express Bank.

On learning of 2000-2001 for the fund industry
The first lesson is the reaffirmation of the fact that fund managers, big or small and investors, big or small, tend to follow trends and market frenzy, sometimes ignited by genuine changes in technology, innovation, productivity etc. However, when safe limits of enthusiasm are repeatedly broken, liquidity and speculation further stoke the fire. Exiting in time under competitive glare becomes harder. In the end everyone losses.

The second lesson is that global events have increasingly stronger impact on the Indian stock markets. Also, business cycles are shortening and this has led to shorter investment horizons, resulting in unprecedented volatility in equity markets worldwide. These new realities will be valuable insights for future.

The third lesson is for the fund managers to appreciate that even with huge liquidity, conviction and optimism, booking profit regularly is an essential discipline.

On consolidation in the fund industry
There is possibility that some of the asset management entities may get acquired by strong players. This phenomenon will be like for any other industry. We have been the first one to takeover another Fund. Recently, one more deal has taken place. However, those which are on the block are often not attractive and the attractive ones are not generally on the block!

On whether gilt funds will emerge as a core of a fixed income investors' portfolio against bond funds now for their safety and realistic valuation.
Gilt funds complement income and liquid funds to offer investors a bouquet of investment options. Gilt funds carry sovereign credit risk and are more amenable to active duration management due to higher liquidity in the government securities market. However, gilt funds are normally more volatile. Investors must assess their appetite for risk and volatility for a proper mix of exposure. The extraordinary returns provided by gilt funds in the last 12 months, highlight the need for regular profit booking and careful portfolio mix.

On Birla Sun Life's new product plans
We have recently launched two income funds, namely, Birla Fixed Maturity Plan and Birla Bond Plus. We are working on other product ideas on equity and fixed-income sides. However, we already have a wide variety of funds. Our main challenge is to carefully nurture all the existing funds and reposition them where necessary.

Outlook for technology stocks
We have faith in the long-term attractiveness of this sector. This faith is based on structural and fundamental strengths of Indian IT companies. However, economic turmoil in the principal consumer of our IT services (USA) has had short-term impact on these firms. Our research and coverage of this promising sector continues at a rigorous pace. We will appropriately reweigh the exposure to technology stocks when there is improved visibility of their business fundamentals. Past experience, investor reaction, fair valuation will be the other parameters in our decision making process.

On its flagship -- Birla Advantage Fund
BAF represents a well-diversified portfolio with strong ability to provide consistent returns at a low risk. Despite fairly well diversified portfolio, stock selection strategy remains the same: to pick strong businesses, run by capable management and at a reasonable price. Over the last six months or so, BAF returns have been in the top quartile with low volatility.

On Pharmaceutical exposure
Our current pharmaceutical exposure is at 30.15% with which we are comfortable and is spread over select well-performing Indian and MNC pharmaceutical businesses. All these pharmaceutical stocks not only are available at reasonable prices, they retain high potential for strong above-average growth rates for next few years and they represent high ROI, positive EVA and global presence. They will still be regarded as fairly valued even if growth rates turn out to be just average, therefore providing high margin of safety. We are of course building adequate measures to avoid tech-like slump as far as feasible.

On a large cash position in Birla IT Fund
Given the fact that technology sector globally went through a huge correction phase over the last 18 months, it was felt important to reduce the risk by increasing the cash component of the portfolio. This was done as an essential risk control measure rather than an attempt to time the markets. We continue to have strong faith in long-term attractiveness of Indian software business. Presently, the cash level is less than 15%, which we are comfortable with.

On investment case for Birla MIP vis-à-vis Birla Income Plus
Birla MIP fits in neatly into the risk-return profile between a pure income fund and a balance fund. This positioning is especially important now because we have entered a low interest rate regime. There is a possibility that going forward, if the interest rates continue to be at the current levels, the returns from these funds will at best be average. It is in such a scenario that the Birla MIP becomes attractive. The controlled equity exposure of a maximum of 15% should deliver the icing on the cake over the medium term and should generate higher returns compared to a pure debt fund, albeit with a slightly higher level of risk.

The rationale for waiving load on Birla Income Plus
The waiver of the load for a limited period was a tactical short-term response to competitive action in the market place and is not a long-term strategy.

On the growing size of Birla Income Plus being a barrier to active management. And ways to manage credit risk of the fund in a deteriorating credit environment.
The liquidity in the corporate debt market should significantly improve going forward due to demat and setting up of the clearing corporation and the entry of several new players viz. private insurance companies. Hence large size would not be a barrier for more active management. In terms of our priority in managing BIP, safety comes first followed by liquidity and returns. Our investment process ensures a high degree of safety and consistency. Investments are made only after intense research followed by diligent credit monitoring. We would at no point compromise the credit quality of the portfolio to generate higher returns.

On the Indian Mutual Fund Industry
In a lighter vein, one must learn never to be shocked in this business. More seriously and pleasantly over a limited period of the existence of the industry, it has quickly introduced a fairly comprehensive range of investment options with innovative features. Further, despite significant swings in equity and fixed-income markets over this period, the industry has managed to not only hold on to its assets but has actually grown, displaying healthy resilience. Equity funds gave excellent returns for two years. Then when equity funds disappointed, debt funds started showing excellent performance. Simultaneously, the industry has strived to improve service standards. One important remaining task is to introduce regulation and ethical standards in distribution of funds.