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Chartering New Territory

Anand Shah, CIO, BNP Paribas MF, talks about replicating the success of his previous position…

It has been a little over three months since Anand Shah took over as CIO at BNP Paribas Mutual Fund. While he was pretty successful at his last stint at Canara Robeco Mutual Fund, it waits to be seen if he can replicate a revamp here.

You turned around the equity schemes at Canara Robeco Mutual Fund. You now have the same task here. Not one single equity scheme at BNP Paribas Mutual Fund has a 4- or 5-star rating?
Our aim is to provide sustainable outperformance with regards to the benchmark and lower volatility. At the end of the day, investors want low volatility and returns that are higher than the market. We intend to achieve this with a good quality portfolio that invests in the best businesses in the country run by the most adept people.

Any dramatic changes to the existing portfolios?
We have certainly shifted gears. With a view on the global markets, we have moved our portfolio to accommodate stocks that cater to the growing Indian middle class. We believe that this consumer focused theme will remain resilient to the domestic and global turmoil. If the market falls, these stocks may not fall as much. And these will also be among the first to bounce back. Over the past three months, where markets have fallen, these stocks have actually gone up. The FMCG index is up. Telecom stocks are touching 52-week highs. So, there are inclusions in consumer focused businesses like Consumer Staples, Telecom, Pharma and Media.

Are margins not being squeezed in the FMCG space?
Yes, theoretically margins should get squeezed for FMCG companies. We have been witnessing this but not across the board. A few FMCG companies have actually succeeded in increasing margins over the last one year despite of rising commodity prices. This is due to pricing power of individual brands that have successfully passed on raw material price increases to customers.
Nevertheless, as the global economy slows down, commodity prices will fall eventually. This will more than compensate in the long-term, for any near-term margin squeeze that these companies experience.

You don’t believe higher interest rates and high inflation is having some impact on households?
Yes, we believe that these factors will have some impact on household spending. The consumer discretionary space is witnessing a slow down like a visible dip in sales of cars, white goods and housing. There are clear signs of consumers postponing big-ticket purchases.
However, even as high inflation in bad news for the economy, it is also an outcome of wage inflation. With wage inflation running high, we have seen higher salary growth for many people. There is also a trend from single income families to double income families.
This has lead to continued growth in consumption of FMGC, Pharma, Media and Telecom. Households have not reduced their expenditure on small ticket items. With increasing penetration, an increasing number of families have started using these goods and services.

What sectors do you have your eyes on right now where you feel there is going to be growth for the next few years?
The India growth story is centered around favorable demographics. The Indian middle-class household moving from single income to double income, from no savings at the end of the month to some surplus money and from negligible leverage to leverage. This Indian middle-class household is driving consumption growth that will eventually increase the need for more infrastructure translating into GDP growth.
As this middle class segment grows, various sectors will benefit. Over the past three years, there has been a significant transfer of wealth from urban India to the rural segment through government programmes and rising soft commodity prices. This, in turn, has further fuelled the rise in middle-class households in India.
Our investment focus over the next few years will be on companies benefiting by catering to this rising middle-class population in India that is expected to rise from 160 million this year to 547 million by 2026 (source: NCAER). The sectors include FMCG, Pharma, Telecom, Auto and Media that are in consumption space. We will also look at select infrastructure companies that benefit from rising needs of Indian middle class households.

You mentioned inclusions. What’s gone out?
What has gone out is global commodities. We continue to remain skeptical of the robust global growth as China continues to tighten credit and US and European governments try to reduce their fiscal deficits. Infrastructure exposure in India too has been reduced a bit as we expect the tightening monetary policy and delayed decision making to slowdown the growth in this sector.

What is your view on Metals?
In Metals, one cannot have only an India-centric view. We need to have a global perspective as well. Globally, the scenario is not very encouraging. China, one of the largest consumers of metals, is slowing down and the global recovery led by US also seems to be faltering. We are apprehensive about the sustenance of high global commodity prices, be it metals or oil.
However, the silver lining is that India stands to benefit from a scenario where commodity prices and crude oil fall due to the global turmoil since India continues to suffer from high inflation, high fiscal deficit and large current account deficit as it imports most of its oil requirement.

Are you buying a lot of mid caps now?
No. All the mid-caps we own are leaders within their categories. Our focus is to buy the best companies within every sector and hold them for long-term.

Are you heavily into cash now?
We are running more cash than earlier. We are around 8-9 per cent in cash. In the consumption space, valuations are very expensive. So, we are waiting for some sort of correction to increase our holdings.

How big is your investment team?
We have a nine-member investments team across equities and fixed income. Going forward, we have plans to expand the team in line with our long-term business plans in the country.

As the new CIO, what is the message you give your team?
I drive home just one point to the team. India offers tremendous growth opportunities for many businesses. But, with rapid growth also comes increased risk. We need to be aware of all the risks that exist and its impact on our investments, both equity and debt. If we can mitigate the risk, our investors will benefit from the growth.

You always positioned yourself as a growth investor. Are you continuing with that view in this AMC?
Yes. India offers tremendous growth opportunities across a wide range of sectors. Thus, for growth investors like us, there are bottom-up stock picking opportunities that will benefit from the growth and also enough diversification opportunities to minimize risk. We would endeavour to deliver superior risk adjusted returns.

Tell us something of the risk processes followed.
We have a three layered risk management process. The first level of risk management is within the funds management team where our investment philosophy and investment process guide us to deliver superior risk adjusted returns. The second level consists of an independent risk management function within the AMC, guided by our global risk management team. This team follows an integrated and pro-active risk management approach that ensures all policy and processes are implemented effectively and monitored on an ongoing basis.
The third layer of risk management includes an independent assessment of the risk function by internal audits.

PMS: Portfolio Management Services / FMCG: Fast Moving Consumer Goods / GDP: Gross Domestic Product / AMC: Asset Management Company / NCAER: National Council for Applied Economic Research