Interview with Satish Ramanathan of JM Financial Asset Management Ltd | Value Research Satish Ramanathan, MD and CIO - Equity at JM Financial Asset Management Ltd., talks about equity markets, the AMC's goal for the next five years, and lessons learned over the last three decades

'Markets will likely be range-bound for a while'

We speak with Satish Ramanathan, MD and CIO - Equity at JM Financial Asset Management Ltd about equity markets, the AMC's goal for the next five years, and lessons learned over the last three decades

We have seen equity markets witness range-bound intermittent phases of relentless rallies and steep declines in recent months. Is this what you meant when you reckoned last year about market corrections being more time-based? How long do you see the markets continue to be this way before we see the next phase of growth?
Yes, we have been vocal about a time correction. There could be volatility for some more time until we have clarity on inflation and the Fed fund rate trajectory. Domestic equity markets have provided significant returns in CY2021 and valuations have moved to the higher end of the historic range. Much of the surge in equity prices is likely due to an increase in domestic liquidity and savings, while FPI continues to be sellers in the market. In our view, we could see this trend play out for the next 6 months, if not longer.

Sometime mid-last year, you were of the view that the high valuation regime will continue as long as the interest rates remain low. Now that the US Federal Reserve has signalled hiking interest rates this March onwards and a likely change in policy stance by RBI, do you see markets correcting further from here, thereby cooling off valuations?
Currently, market valuations are factoring in a high rate of growth in earnings. We need to bear in mind that commodity price inflation and lower provisioning by SOE banks drove much of these earnings. The US Federal Reserve signalling rate increases could affect markets, to an extent, as also inflationary pressures that might hit corporate earnings growth. We expect valuations to come off a bit to reflect a higher cost of capital as also a lower trajectory of earnings growth. It is hence likely that markets will be range-bound for a while.

You've had stints with AMCs such as Franklin Templeton AMC, Sundaram BNP Paribas (now separate- BNP Paribas and Sundaram) and then with Tattva Capital. What is the mandate given to you at JM Financial, and how do you plan to leverage your past experiences in your current role?
My job is one of continuous learning. The mandate at JM Financial Mutual Fund is to enhance processes and research, thereby bringing in an enduring benefit to our investors. My previous stints at Templeton AMC, Sundaram Mutual Fund and my own entrepreneurial stint at Tattva have contributed in building a disciplined approach to the portfolio management process. We are continuously improving our systems and processes at JM Financial Mutual Fund to get there.

Can you provide insight into the stock selection process you follow for the funds you manage? What are the red flags for stocks you evaluate for your fund portfolios, and what do you do when you encounter these warning signs for stocks that are already part of your portfolio?
We are growth-oriented and our stock selection process is to select companies, which have high visibility, sustainable earnings and strong cash flow growth. While we prefer to hold on to long-term growth stocks, we may consider some companies where there is a perceptible change in fortunes for the medium term such as in metals. Our key focus in analysing companies are on three parameters - growth, sources and uses of cash flow, return on equity and NPLs for financials. We expect high corporate governance standards in the companies that we invest in and any dilution thereof is a red flag for us.

When we encounter a red flag, we engage with the company to determine the gravity and impact on minority shareholders. If the company manages to convince us, we may hold on to our investments, else we sell out. Our maxim - when in doubt, leave it out. We can take earnings risk and volatility but we cannot let corporate governance issues in our portfolios.

In the last six months, since you've joined the AMC, what are the changes you are bringing about in terms of investment framework, portfolio composition of your funds and plans for the future? What are your goals for the next five years for the equity fund offerings of JM Financial?
I joined JM Financial Mutual Fund in January 2020, and ever since we have followed a rigorous process of stock selection, portfolio risk analysis and performance monitoring and corrective actions, if any. We have been very disciplined in monitoring risks and commensurate returns. Our continuous monitoring system of weekly analysis of portfolios helps us understand as to which active bets are paying off, which are not, and as to whether we are missing some new trends. Additionally, we have also stepped up interactions with corporates and other Sell-side research to scan the environment for ideas. This helped us detect industrials as a theme early on.

Our goals for the next five years are: Enhance consistency of performance and bring in new funds into the fold. We are enhancing our research team and also considering new fund offerings to widen our offerings to existing and new investors. We are considering launching a mid-cap fund at the appropriate time.

Given that the JM Core 11 fund portfolio (focused fund) has most of its allocation to large-cap stock, how is it different from your large-cap fund other than the number of stocks and the resulting concentration? Which fund caters to which type of investor?
Core 11, is a focussed 11 stock portfolio, which can invest across the cap curve. However, given the volatility in the market, we have chosen to maintain a higher proportion in large caps. It runs a more concentrated portfolio as the mandate is to hold only 11 stocks. This leads to a higher degree of volatility of NAV. We do try to control the volatility by monitoring the Beta of the portfolio but even so, this portfolio could be more volatile and is for the investor who has more risk appetite.

Our Large Cap Fund on the other hand, has to have a minimum 80% in large-caps as defined by SEBI, and the rest as cash and mid/small caps. There is no restriction on the number of stocks in this Scheme and hence tends to be diversified with lower volatility due to the stock selection process and the presence of large-caps. We have differentiated this product offering by having a higher degree of conviction in the top 10 names, which offers investors the benefit of our research.

What do you consider a value stock when you manage your JM Value fund? Which stocks of your value fund portfolio would never be a part of your flexi-cap fund portfolio, given that both have the flexibility to invest across market-cap segments? Our factor analysis study suggests that earnings growth and earnings momentum are among the primary drivers of stock returns. Our Value Fund focuses on current value vs "intrinsic value" by factoring multi-stage growth metrics. Our stock selection process in our Value Fund focusses on the company's ability to grow and if the current price is mispricing that potential. We also look at MIRR (market-implied rate of growth) v/s what is possible. Our Value Fund, therefore, is not guided by conventional metrics such as low PER, low P/BV and low EV/EBIDTA alone but by the ability of the business to improve growth and reinvest for a higher growth rate.

Which sectors would you bet your money on for 2022? If you had to pick the top three themes for investing in India for the next decade, what would it be?
A difficult one. We see a recovery in infrastructure and manufacturing businesses over the next few years, even though in the initial phase, it could be patchy. We also expect potential new investment opportunities with listing of many of the new-age digital companies. Areas such as fintech, logistics, online retail and other services offered on or by the internet would be an interesting growth opportunity for investors.

With close to three decades of experience in the Indian equity markets, can you please share your learnings from evaluating businesses and managing portfolios? If you had to share a piece of advice with a new investor in today's equity markets, what would it be?
Some of the learnings that I have gained from my three decades of experience are:

  • Focus on learning about new businesses and companies. Look at their valuations and growth potential and also their cash flows as also return on equity.
  • Be prepared for sharp pullbacks in equity markets and maintain adequate liquidity for the same.
  • Equity builds significant wealth over time and the power of compounding is immense. 'Big things have small beginnings' holds true in equity assets. I have seen companies grow manifold times during their course and it fascinates me.
  • And to finally quote an old piece of advice - Time in the market beats timing the market.

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