VR Logo

Treading Cautiously

Given the current environment, we would continue our defensive stand, says Lahiri, Canara Robeco’s new fund manager…

Though he recently took charge of the equity schemes at Canara Robeco Mutual Fund, Soumendra Nath Lahiri has refrained from making dramatic changes to his predecessor’s portfolios

You earlier mentioned growth and value investing. Do you put yourself in any one category as an investor?
In India, given the strong economic growth over the years, people have taken to investing with growth being the central theme. I would think growth and value are two sides of the same coin. The way we look at businesses is essentially trying to buying growth companies at relatively cheaper valuations.
Growth at a reasonable price - popularly known as GARP, is what we stick to.

Have you made any major changes to the portfolios after you took over around two months ago?
No. The portfolios have a defensive bias and given the current macro environment, we would continue our defensive stand.

Over the past few years, Canara Robeco as a fund house was always bullish on the domestic consumption theme. Are you?
In this country, the market provides you with three broad areas of opportunity where you could invest in. Infrastructure is one of them. This sector is plagued with problems like delays, scams, land acquisition issues, regulatory hurdles and host of other issues. When we need to grow at 8-9 per cent consistently, we will need better infrastructure. Once issues surrounding this sector are resolved, we will have many opportunities in this space. Outsourcing is the next big opportunity where we are showcasing to the world our capabilities at reasonable costs. This growth engine is however dependent on how the global economy performs. My take is that given where we stand today we will benefit from our positioning of being a “Low Cost - High Skill” destination.
The third theme is that of Domestic Consumption and this is one theme which we as a fund house have been bullish about. The consumption theme is driven by number of many factors, notable among them being favorable demographics, increased urbanisation and rising incomes.
Over the next 7-8 years there will be over 100 million people coming into the working community. Per capita income has been growing at a CAGR of 10 per cent over the last 10 years. So with income moving up and more people working, the demand for goods and services increase. People today are far more aware of what is happening in other countries and the lifestyles abroad and this is also positively impacting spends. This will lead to increased consumption and hence is a theme no one can ignore.
One needs to be careful in that consumption related stocks have performed very well and may be pricing in a very low probability of growth expectations not being met.

What triggers do you see that will cause the market to resume its upward trend?
Rising input prices, especially raw materials, have put a check on earning growth. Any let up in input prices could help markets. The consensus earnings estimate for the Sensex is around to `1,200 - 1,250 (FY12). Today, the Indian market is trading at around 15x FY12 earnings. If the market corrects by 5-7 per cent , it will provide investors with a good opportunity to enter.

Where do you see the market headed in 2011?
The macroeconomic fundamentals continue to remain robust and provide confidence on the long-term India growth story. However, on the corporate performance front, while the revenue growth has been encouraging, the profit margins across sectors have been impacted largely on account of rising competition and escalating input costs. Also, margin compression was seen across the board with manufacturing companies being the worst impacted. Thus, as macro headwinds continue to remain strong and support long-term growth; the market may remain range-bound in the foreseeable future. Some near-term news flows which would guide the market performance would be policy decisions, inflation peaking out and the monsoons.

As a fund manager, what advice would you give to investors right now?
Recent disappointing data on the jobs, housing and manufacturing front over the past few weeks has highlighted the current fragile nature of the US economy. The US unemployment rate jumped back to 9.1 per cent in May. The recent rating outlook downgrades to some Euro countries like Greece and Italy has further raised concerns on the burgeoning debt crisis in the Euro region.
On the domestic front, the economy continues to tackle high inflationary trends as it operates in a negative real interest rate regime. A key challenge for the government also is to arrest the issue of high inflation without hampering GDP growth. However, we believe that there would be opportunities which would emerge as the economy deals with these macro challenges. Amidst such global and domestic uncertainty, the investors are thus advised to spend time in the market rather than timing the market. In the long term, stock prices inevitably reflect the true fundamentals of the underlying business eventually leading in to wealth creation over the long term.
In terms of our advice to investors, Systematic Investment Plans (SIPs) is something that we have advised for some time now and we continue to recommend the strategy to investors. We believe that it provides a delicious combination of long-term investing and the power of compounding. And especially in the current volatile and uncertain times, SIP offers a desirable refuge for the retail investor.

In all the years of fund management, what has been your biggest learning and what have been the biggest mistakes investors tend to make?
Over the last 15 years we have seen many themes or fads come and go in the equity markets. However, one key mantra which I have learnt is that Valuations Matter. If one were to point a key variable which made the difference to the performance across cycles, it would be valuations. Paying attention to value ensures that one has a reasonable margin of safety at the time of investment.
The Quality of Business is another key aspect which is important and often indicates the difference between good performance and bad performance of stocks. Key indicators which act as lighthouse towards the same can be predictable revenues, dominant market position, strong franchise and increasing cash flows, superior pricing power, etc.
Along with the above mentioned factors, a Good Management is also equally crucial as commitment to business is required to ensure sustained value creation.