In this special interaction with Mutual Fund Insight, Sivasubramanian KN, Chief Investment Officer, Franklin Equity - India, Franklin Templeton Investments, goes back in time to recount his journey in the asset management industry.
A lot of water has flown under the bridge in the past two decades. The city where I was working is no longer Bombay, it is Mumbai and the city that I moved to as an investment professional is no more Madras but Chennai. Two decades ago, when I was working with IDBI as a credit analyst, I enjoyed my stint analysing the potential of companies over the long run. The environment provided me a good grounding on companies' ability to generate cash flows with a factor of safety.
Looking back, the entry into mutual funds was bit of an accident. I was keen to go back to Madras and be with my family. At that time, Vivek Reddy of Kothari Pioneer was looking to hire people in equity research, with the posting in Madras. I jumped at the opportunity. While Vivek may have had his doubts about me, it did not require much convincing on anyone's part for me to take up the offer. As an equity analyst, the basic analysis of companies and identifying emerging opportunities in a sector were the same. The difference was the different hat that I was wearing now; that of an owner, representing the unit-holders than that of a lender, which I did when I was a credit analyst.
The journey through the years (especially the 90s) was an insightful one for all of us. One could say it was a bit of wild-west-ish, as sustainable business models were being formulated that could work in the post-liberalisation era. The principles and guidelines that form the core of our investment philosophy today have their origins in those years. The economic liberalisation had seemingly liberated the animal spirits, but then Harshad Mehta happened, which was followed by other scams later.
In those days, for a fledgling mutual fund industry, which was still finding its bearings, it was certainly frustrating to see quality stocks being punished along with the overall market when the scams broke out. But, the lesson from those times has remained and the conviction in the investment process only got strengthened. The feeling of déjà vu has been there a few times over the past 20 years through several stock market events and market cycles. But, for me (and the core investment team), these events and market reactions have only validated the core belief of investing across market cycles and that tougher environments amplify the difference between better quality managements and those with inferior governance standards.
Several positives too have emerged from such incidents. The exposure to events, learning new skills, the dotcom era and experiencing the changing market environment are just some of them. More asset management companies have got into business and the market has matured a lot more since the time we had started. What has been extremely satisfying is to see the regulatory environment evolve in response to the scams and bubbles. While the earlier scams dented investor confidence, the sea change in the regulatory environment and improving corporate governance has vastly improved investor perception of the stock market now.
Over these years, we have seen various market cycles and been through quite a few bull and bear phases. I have always maintained that bull markets are tougher to handle than normal or even bear markets. That is because during a bull market a fund can achieve better performance through either increasing the risk profile (market beta) or through stock selection (alpha). The former could work very well during the rally, but is likely to result in sharp declines during the bear markets. At Franklin Templeton, we have always avoided this approach and tried to capture the potential through stock selection. This approach has led to consistent returns across market cycles.
Looking back, in 2007, it was very difficult to deal with investor and distributor expectations due to relative performance comparison over short periods. Subsequently, the 2008 crash and return to reality helped restore our faith in bottom-up stock picking. As an investment professional, it makes sense to remember the saying that one needs to prepare for war during peace and prepare for peace during war.
The regulatory changes over the years have only strengthened the system and increased the confidence amongst all stakeholders in the markets. From a capital market perspective, the changes on the corporate governance and minority shareholder protection along with liberalisation in various sectors, have been the important changes which have impacted the Indian stock markets. At the same time, the mutual fund industry too has seen several changes. Some of the key changes in the mutual fund industry include the increased disclosure norms, prevention of NFO expense amortisation and uniform guidelines for valuation or trading.
Some of the more recent measures announced should help boost the prospects of the industry, but we still strongly believe that a structural shift will only happen if mutual funds get open access to long-term savings pools such as retirement and insurance. If mandatory savings find their way into mutual funds, they will give a big boost and also help India divert savings into productive sectors. There is tremendous scope for investors to make long-term wealth in the markets through mutual funds. Also the industry needs to do a better job in communicating the consistent track record of older equity funds that have exhibited the value-add brought about by active management through their track record over these two decades.
When I look back over the past twenty years, it has been an eventful journey and also very fulfilling. It has been painful at times alright, but overall it has been very enriching.
As a portfolio manager or an analyst, you can understand the portfolios of several businesses. My role has provided me with the opportunity to meet so many people with so many different ideas. The key lesson has been to focus on good businesses or good managements and try to ignore the noise.
Patience is essential to become a successful investor, but that is easier said than done. Our approach is to filter the noise and stay focused, which is very difficult, especially, when you get research inputs through the day. In my experience, investors who have stayed invested for long period are the ones who have made the most money in India as well as in other markets. In the past two decades I have been through periods of chills, spills and thrills, but hardly a moment of boredom.