Defining what a fund can do, has helped focus and manage equity funds with ease, says R Srinivasan of SBI Mutual Fund...
28-May-2013 •Chirag Madia
Defining what a fund can do, helps focus and manage equity funds with ease, says R Srinivasan, Head- Equity SBI Mutual Fund, in this open discussion on the performance of several funds from the SBI stable.
What is your overall investment approach?
As a fund house, we run a number of funds and each fund has its own approach which may or may not be unique. Each fund has a template, which defines what it can do. The fund managers are required to manage the fund within those limits. For example, SBI Magnum Global is a defensive and quality fund and follows a mid-cap strategy. Whereas in the case of SBI Magnum Multicap, we run an analyst portfolio. This is an allocation-neutral fund, with a plus/minus 2 per cent sector active weight limit focusing on stock selection. Effectively, in this strategy, we are trying to get the best out of the team and at the same time reducing the fund manager and allocation risks and so on and so forth.
So what is your strategy for SBI Magnum Equity?
The strategies for individual funds are locked in fund-specific templates and market timing has a small role to play. On Magnum Equity, there are three distinguishing characteristics of the fund that are important to note. First, it is a pure large-cap fund and only invests in the top-100 companies in terms of market capitalisation rank. If one believes large-caps are inherently less volatile, then that makes this fund relatively less risky. Two, the fund is focused on consistency of benchmark outperformance. This comes from the belief that the Nifty typically tends to lie in the middle of a large-cap peer set most of the time. Part of the fund is hence aligned to the benchmark and the balance excess-return generating component targets the fund to be between the 15th and 45th percentile most of the time. Thirdly, within this framework, the fund runs a relatively concentrated structure in terms of number of holdings and the top-10 concentration. We do not think this adds to benchmark risks because the benchmark itself is concentrated. Over the past two years, the fund has moved from a defensive positioning to a neutral-to-aggressive one. Presently, we are underweight on defensives, including cash and overweight in financials and cyclical. We would like to believe that the fund is broadly neutral to any directional move in the market.
What strategy works for SBI Magnum Global?
Magnum Global follows a bottom-up stock selection process and invests more than 70 per cent of the portfolio in mid-caps. As a philosophy, the fund typically focuses on businesses which have a strong competitive advantage, have consistently generated or are expected to generate high returns on capital and have growth potential.
Thus, the stock selection of the fund is centered on three essential variables: One, a right-to-win which is objectively defined in terms of market share dominance, a brand franchise, cost competitiveness, high gross margins, a superior and difficult-to-replicate business model or a technological edge. Two, the ability to consistently generate a high return on capital, upwards of 18-20 per cent. And three, scalability of the business and its growth potential. Stock selection is further a function of management quality such as integrity and capability besides relative and absolute valuations. We have seen this fund do very well in falling and flat markets but poorly in sharp market upticks. This is because the benchmark typically has its share of non-quality leverage, which moves the highest during bull market rallies.
What actions have resulted in Magnum Contra’s performance improvement?
Magnum Contra is diversified multi-cap fund which may, based on availability and conviction, have a contra bias. More than 50 per cent of the portfolio will be large-cap. Presently, it is close to 65 per cent including cash. Contra is defined as stocks which satisfy majority of the following five factors: negative sell side view, negative fundamental momentum, negative active weight by peers, deep value and event negative; the percentage of contra will be a function of a positive long term view on the stock based on price-value mismatches and the level of conviction. Stock selection picks from our large- and mid-cap philosophies.
What has worked is that we are not playing contra for the sake of it. Contra, as a theme, has not done well in the past. We have increased the large-cap proportion and the benchmark coverage which will hopefully reduce overall volatility. We are also looking to cut risks further and focus on risk-adjusted performance. How is it different from our other diversified multi-cap strategies? I guess, we effectively take higher risks in Magnum Contra.
What drives the performance of SBI Emerging Businesses? Can you share examples of key success and disappointments?
Stock selection. We focus on our high conviction ideas and take high risks. To elaborate further, the fund has three essential characteristics: One, it is a concentrated high-conviction strategy. Two, it is market capitalisation and benchmark agnostic, and three, it runs a pure bottom-up philosophy with a no priority sector bias.
Being market cap agnostic makes it technically a multi-cap fund. However, given that it runs a bottom-up high conviction strategy it is generally seen to have a mid-and-small cap bias which has constituted majority of the portfolio over the past three years. The bottom up philosophy draws from the fund house’s large-cap and mid-cap philosophy.
The large-cap philosophy centers around four factors such as incremental fundamental change, market expectations, valuations and momentum. Investment is typically from a 1-year perspective. The mid-cap philosophy runs on five factors: A right-to-win, return on capital, growth, management and valuations. Investment is from a 3-year perspective. Since the portfolio has had a mid- and-small-cap bias and is concentrated, liquidity risks are managed at a portfolio level. Specific stocks could be illiquid but on a portfolio-wide basis and based on the overall liquidity of the portfolio typically 20-30 per cent of the portfolio is into pure large-caps.
For 2011, the top attributors were SpiceJet, Muthoot Finance and United Spirits. Index stocks, that we didn’t own, such as, ICICI Bank and Larsen & Toubro contributed to negative attribution and Cox & Kings was a stock we got completely wrong.
How do you manage the equity allocation of your balanced fund? How often is the allocation rebalanced?
The balanced fund is run as 75 per cent equity (including cash) and 25 per cent debt. The debt component is dynamically managed. We try and keep our equity portion in between 65 and 75 per cent and not deviate much from this allocation. Of the equity component, 40 per cent is large-cap with an overall benchmark coverage restriction of 25 per cent. The balance 60 per cent is managed like how we used to manage SBI Emerging Business: high-risk, high-return where there’s good amount of small-cap exposure and quality.