It was nothing less than a trial by fire. Neelesh Surana has been with Mirae since 2008, a year that brings back the memories of financial Armageddon as the US housing-mortgage crisis exploded. The assumptions of any business, conceptualised in 2007, were challenged strongly by the slowdown that followed. Domestic equity flows were negative for six years straight. But when the going gets tough, the tough gets going. As CIO - Equity at Mirae Asset Global Investments (India), Surana has helped his fund house carve out a niche among the constellation of asset-management companies dominating India. His fund house today is highly respected by investors.
In an interview with Kumar Shankar Roy, Surana says that when time horizon increases, 'price' and 'value' converge. He talks about his admiration and respect for Bharat Shah and he reveals why he is a stickler for diversification across sectors and stocks.
You joined Mirae in 2008 at the height of the global financial crisis. How has your thought process evolved since then?
In investment, you are constantly learning. However, the core investment approach of buying decent-quality businesses up to a reasonable valuation and holding them patiently over an extended period remains the same, irrespective of the ever-changing macros since 2008.
Is volatility a function of the quality of business? When external factors are at play, how do you get a handle on volatility?
Generally, volatility is inversely proportional to the quality of business. Short-term market volatility cannot be handled as it's driven by various factors apart from the fundamentals. It's important to note that volatility is about the 'stock price' of a business, whereas the 'estimated value' does not obviously change frequently. We all work on the assumption that as time horizon increases (say over five-seven years), price and value converge, thereby reducing volatility.
How do you go about looking for companies with moats? How do you measure moats?
Businesses with moats would mean some barriers to entry vis-a-vis the competition. If such is the case, logically, the ROCE (return on capital employed) should be high.
Intrinsic value is the price we think a business will have in three-five years. Many say the best investors are those who can buy and then forget. Do you consciously practise that in the interim three-five years and why?
Generally, one would buy only if the assessment of the intrinsic value is significantly higher than market prices and thereafter wait for the same to be matched. As regards to the time frame, it could be perpetual if the value increases linearly with time. However, many times the markets misprice businesses on both sides. In cases when the market price is significantly more than the value, investors need to reassess and sell, if required.
Is there a benchmark for the minimum return on capital you expect?
We look at a minimum pre-tax ROCE of 15 per cent.
In bull markets, there is a lot of hope. How do you go about removing the optimism embodied in the stock price?
The discipline in buoyant markets gets tested as the margin of safety generally reduces.
Prior to Mirae, you were with ASK. What has been Bharat Shah's influence on your investment style and thinking?
My thinking evolved significantly under Mr Bharat Shah at ASK. I admire him for his ability to identify growth-oriented businesses. In addition, his words of wisdom show the correct path to investing.
Do publicly listed firms, in recent years, provide as much value as stocks did two decades back when you joined the profession? Isn't a large part of value already skimmed off by PEs, VCs, etc. investors?
India is a growing economy, and growth pillars now are better than what they were two decades back. In this context, there are always good opportunities available.
How has the concept of value impacted your investing style?
The learning is that value should be hunted in growth-oriented businesses. Value in non-growth businesses is a trap. Growth should be a subset of value.
Investing is not a zero-error profession. How do you avoid value traps?
Value in low-growth businesses should be avoided. As regards to errors, they could arise both from external variables or research assumptions. Herein a diversified portfolio helps mitigate risks.
For a market like India, where GDP is growing and so corporate earnings rise, do you assume that equity markets are always cheap?
We cannot generalise. The advantage in a growing economy is that the choice of businesses increases. For example, there were only 30 companies between $0.5-3 billion 15 years ago, and now the choice is more than 15 times. Also, given the sectoral dispersion, there could always be businesses available which are reasonably priced.
When you identify a particular stock, do you think about it in terms of your overall portfolio? How do you construct portfolio?
From a portfolio-construct perspective, the approach is to have diversification across sectors and stocks for an optimal risk-adjusted return. While we are size and sector agnostic, there is no drastic variation vis-a-vis the benchmark on a sectoral basis. The idea is to have higher stock-wise active share.
In some sectors, valuations have been historically higher, for example, consumption. So, is value a relative term than an absolute truth?
We always look at absolute value. In pockets where valuation is not in sync with the fundamentals of growth, it's better to skip the company, as buying high is also one of the risks.
At the end of the day, successful fund managers regularly beat benchmarks. Is that why you rarely deviate from the benchmark? What priority would you accord to benchmark beating, relative ranking, and absolute return?
Mutual funds' priority is to (a) beat the benchmark in the long term, (b) have a decent relative ranking, and (c) generate satisfactory absolute return. While for investors absolute returns are most important, the key assumption is that if a fund is able to meet the first two objectives in a growing economy, absolute returns ought to be higher.
If a given sector is hot and people are making money in it, the tendency of justifying higher valuations is very strong. How do you avoid getting influenced by what everybody else is doing?
Discipline is important in times of such exuberance.
Does the macroeconomic or political outlook have a bearing on your portfolio?
While we try to understand the macros and political outlook, they have relatively less importance. More important is a bottom-up approach in valuing individual businesses, and stress testing the results with an outlier assumption of variation in macros.