VR Logo

Comprehensive View On Risk

Risk is dependent on weightage & is also proportional to price, says ICICI Pru's CIO, Sankaren Naren….

Value Research Stock Advisor has just released a new stock recommendation. You can click here to learn more about this premium service, and get immediate access to the live recommendations, plus new ones as soon as they are issued.

Managing growth, value and thematic funds over various cycles can be quite a task. Sankaren Naren, Chief Investment Officer, ICICI Prudential AMC, has done a fine job in adapting to various investment styles.

Are there stocks or sectors you would never touch?
If I find something totally price attractive I would consider buying it. But it is a question of pricing. If the valuation is too high, even if I like the stock I will not buy it.
Normally we are comfortable with sectors where we are sure of the quality of the business and managements. But we do not have a total exclusion principle.

Would you agree with the statement that risk is not inherent in an investment but is relative to the price paid?
I have a more comprehensive view of risk management today than I did in 2004.
In a portfolio, risk is dependent on the weightage. I could have 0.5 per cent allocation to a particular stock, which will not be worrying at all. However, if I have an 8 per cent allocation to that stock it could be detrimental depending on how the call goes.
Risk is also proportional to price and is a function of valuation.
If a stock is extremely cheap, at that time one does not get too worried about risk as the downside is low. However, if the stock is very expensive, then risk is an issue. For example, large-cap technology stocks right now for me are relatively more risky than they were two years ago. This is because the valuations have expanded over the past two years significantly.
You have to look at risk of the sector relative to valuations of the sector.
If you look at Construction, it was very risky in 2007 but at this point of time it is not as risky a sector. In 2007, the sector would trade at 25x PE, now it is at a single digit.

How do you manage risk in your funds?
We look at sector deviations relative to the benchmark.
We also compare the daily traded volume of the stock and see how many days it would take to liquidate the stock in the portfolio. But volumes of stocks keep changing.
The third aspect is the top five weightages.
The fourth is the debt-equity of that particular company. The longer the history of the company, the more comfortable I am with the risk. So if it is a tobacco company and one has seen it perform in its industry over the past decade there is a comfort level in terms of risk. The stock price can fall but if you have been watching a sector over many years, it gives one a better idea of the risk.

How closely do you monitor the fund’s benchmark in terms of risk management?
Again, that is at the level of the product. Funds like ICICI Prudential Top 100 and ICICI Prudential Top 200 monitor the benchmark closely. But in the case of ICIC Prudential Discovery, which is a value-oriented fund, the benchmark does not play a very important role in portfolio construction. In such a case, we look at individual stock weightages. For example, if we have a weightage of more than 5 per cent in any mid cap, we construe that as risk.

From your journey from a fund manager to CIO, what has been your biggest learning? Are you still very hands on?
To answer your last question first, initially I was managing six funds. Now I am no longer a fund manager. I am an advisor to all the equity funds that we are either managing or advising.
In 2006 and 2007, I did a fair amount of introspection. I was very clear on what I had to do and what I should not be doing and in which direction I am heading. The market always humbles you and you cannot avoid making mistakes. But it is wise to introspect and see what worked and what did not work and learn from that.
I learnt from the past few years that just having a bottom-up approach to investing does not work, a top-down view is needed. I also learnt that it is important not to get attached to any company that you own.
One also appreciates that there is something called cycles. One also comes to terms with the fact that the market will go ballistic periodically. Warren Buffet said that over a 30-year period, there will be four occasions during which the market will go crazy. How you handle those four occasions will determine how much money you eventually make.
Between 2004 and 2007, I managed the funds in a particular way. From 2007 onwards I managed it differently. One must keep learning.

SEBI: Securities & Exchange Board of India / AUM: Assets Under Management