As the Chief Investment Officer (CIO) for equity at Mahindra Manulife Mutual Fund, Krishan Sanghavi oversees four equity schemes with total assets worth Rs 11,500 crore, including the four-star rated Mahindra Manulife Focused Fund. Sanghavi, with 27 years of experience managing money through mutual funds, is astute in his assessment of market conditions.
In this interview, he shares a seasoned perspective on the current market dynamics, explains why some consolidation in mid-and-small caps is ideal and discusses his investment approach. Below is the edited transcript.
What sparked your interest in equities?
Growing up in Mumbai helped as the equity market seems to permeate all walks of life. If my memory serves me correctly, I was in college when the equity boom of 1991 began, and it piqued my interest. Eventually, I pursued formal education and ventured into the financial markets.
You have worked in both asset management and life insurance. Which industry offered you the biggest learning curve?
The primary similarity between the two industries is the underlying asset side (equity market), which is the same for both. It has the same role of tracking economy, earnings, valuations, etc., with a focus on beating benchmarks.
However, the fund management style differs based on the liability side (customer market). Both the mutual fund and life insurance segments have different time frames for investors. In mutual funds, we offer monthly systematic investment plans (SIPs), whereas in life insurance, the premiums are paid annually. Therefore, if an individual purchases a 20-year policy, they are obligated to continue paying the premiums for the duration of the policy, thereby adopting a long-term perspective. However, with mutual funds, the investor profile differs significantly, as the investment horizon typically spans two to three years. Clearly, investors' expectations and time frames differ between the two types of products.
Mutual funds provide a much broader platform for investing. It allows you to invest in various categories, such as large-cap, mid-cap, and small-cap stocks. Partly, these mandates allow us to go deeper into some of these sets of companies or stocks, and we try to create wealth within the boundaries.
With the recent market corrections, do you think valuations are attractive now, or are they still high?
Anything that is slightly cheaper than yesterday is usually attractive. That said, let's look at the two underlying variables associated with understanding the valuation of the markets.
The first is earnings, which experienced some misses in the second quarter of the current financial year. If I delve deeper, the financial sector has consistently outperformed the non-financial sector in terms of earnings growth in the markets. Financials have contributed significantly more to the profit pool than the non-financial sector. To some extent, the earnings situation is not entirely dire; certain sectors have experienced a significant boost, while other stocks that failed to meet expected earnings have experienced a more significant decline—usual profit pool participation across sectors.
Secondly, if you look at flows or liquidity, a clear challenge has been the sharp round of selling by foreign portfolio investors (FPIs) in a very short period of time. They have sold nearly $17-18 billion in a period of seven to eight weeks, starting in October.
Therefore, to some extent, the market correction is influenced by both those selling and the disappointment in earnings. But are markets attractive? Perhaps the answer is yes, especially when it comes to the large-cap category. The only challenge in large caps is that we got sharp selling by FPIs, and on average, FPIs own far more large caps than small caps or mid caps in their portfolio. Therefore, we can assume that the demand-supply dynamics in the stocks are also at play.
Do you still think mid- and small-cap stocks are richly valued?
The mid and small caps remain expensive. However, we've learned over time that some of these elevated valuations adjust with time or price corrections. Even if we look at India as a whole, we've seen that market cap-to-GDP ratio swing between 80-85 per cent on the downside and 130-135 per cent on the upside. These ratios typically indicate potential excesses on both sides. Perhaps there is potential for that 135 per cent ratio to decrease and the 85 per cent ratio to increase.
However, we believe that a range of 100-110 per cent represents a favourable ratio, particularly when considering the next 18 months. So mid and small caps have had their own sharp rally, and that's the nature of the market. They've done so well in the last 12-15 months, and it's partly good that they take a little bit of a consolidation phase, where the earnings catch up and the next leg of the rally can begin.
Many sectors have good growth prospects, but few offer attractive valuations. Which sectors, do you think, strike the right balance?
When I consider profit pool participation, the names that immediately come to mind are financial and non-banking financial companies (NBFCs), where the earnings are concentrated.
Outside these categories, the power and utility sectors may present attractive opportunities. The valuation may not be as comfortable in this space as the financials. However, in the long term, the thought remains that manufacturing and the entire manufacturing ecosystem are interesting areas where things are improving.
As CIO of equities, what core principles guide your investment strategy?
One of the advantages of having a team of fund managers who are specialists is that the knowledge exchange is fabulous. Everybody has their own awareness about the stock or the sectors they cover, which helps the entire team. We have implemented a few rules, such as the primary stock selection process, in which I am responsible for adding the stock to the fund universe. Post this addition, each fund manager independently constructs their portfolio based on their style and core market insights. Also, it's important to acknowledge that each fund manager has a specific mandate, which typically involves managing mandates on specific market caps (mid-cap, small-cap or multi-cap fund).
As a CIO, I also oversee the risk management part-monitoring the overweight or the underweight limits on the stocks or at the sector level. Fund managers can seek deviation after considerable discussion with the CIO.
Some top stocks in your portfolio are down 10-15 per cent this past month. Would you double down on them now or wait for more clarity?
It is subjective. We have to first look at the data points, such as the quarterly results of those companies and the management commentary, to gauge whether the core investment thesis remains intact. If we are confident, we buy or add weights to those positions. However, if we are not confident about the earnings in the near term, we will wait for clarity before adding more weight.
Therefore, we look for many data points to assess any additional actions that could be taken. However, during the recent market correction, many stocks we do not own have also experienced declines, suggesting that there may be other attractive opportunities in the market.
Can you walk us through your approach to sectoral bets in equity and hybrid funds? How does the benchmark influence these allocations?
The primary perspective begins with our preferences within the specific industry. Therefore, if we prefer a specific sector, the fundamental outlook would be the first consideration in our analysis. The next step includes the top companies that we like within that space. The final variable measures our deviation from the benchmark after applying these weights. Occasionally, we may be underweight in the sector due to preference for only three stocks, even after adding all the weights of those stocks. So, we rebalance, review and decide whether we want to continue with that sector weight or add more weight.
Therefore, the weight assigned to those three stocks alone can increase the sector weight. Generally, if we like three to four stocks in a particular sector and there is a sector tailwind in place, we would not like to massively go underweight. The exception can be when we are negative on the largest weight in the sector.
Also read: Interview with Neelesh Surana of Mirae Asset Investment Managers (India)
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
