Interview

CIO-Equity of India's fourth largest fund house explains the turnaround in his large-cap fund

Sailesh Raj Bhan also shares insights on his investment approach and philosophy

Sailesh Raj Bhan is the chief investment officer (CIO) of equity investments at Nippon India Mutual Fund, India's fourth largest fund house with assets of around Rs 3.77 lakh crore. He oversees assets worth Rs 54,000 crore across three prominent schemes - large-cap fund, multi-cap fund, and pharma fund.

In this latest interview, Bhan reflects on his journey, investment philosophy, and lessons learned. Here is the edited transcript of the conversation.

Your journey in the financial markets is quite impressive. How did you first get involved in this field?
I have been in the equity markets for close to 29 years. I graduated in genetics and later did my master's in business administration (MBA). The early 90s were the start of the equity research culture, and I got an opportunity to work with an equity research organisation in Hyderabad. Later, I moved to Mumbai and continued to research, covering sectors like pharmaceuticals, IT services, and Consumers. Around 21 years ago, I joined the Nippon India Mutual Fund, and since then, I have been managing money with the launch of the Nippon Pharma Fund, which completes 20 years in May 2024. To give a little background, I liked research as the industry was very young. In research, one gets to learn a lot of things fairly quickly and get exposure to many sectors. That's the advantage of being in this role, and I never felt bored with what I was doing. Every day had to be different; we had to be on top of what's happening around us.

Before joining Nippon India Mutual Fund, you worked as an analyst with brokerage houses. Could you reflect on some key lessons you learned during that time?
In the initial phase of learning research, it was not a very established field. So, one had to create a difference from others by reading balance sheets, meeting companies, understanding the competition better, and looking at the scale of the opportunity. I feel there is a lot of noise in the markets due to the various narratives. But the focus should always remain on the long-term picture.

Even though I used to cover the pharma and IT sectors as an analyst, those experiences also helped me analyse other sectors. For example, in 2001 and 2002, engineering and manufacturing companies were trading at distressed valuations, and there were several large companies in those sectors. However, all these sectors were ignored due to the IT boom. One could clearly see the sectoral valuation gaps and cross-sectoral opportunities present at that time. I think the period after the 2000 IT boom was one of the most attractive markets ever seen in India. Good-quality businesses were available at bankruptcy valuation, and the most similar time I saw was again in 2013 after the taper tantrum. Before the taper tantrum, we had seen global financial crises (GFC), and I think these kinds of phases allow us to have time to learn because we really can research and choose the best business. In a typical bull market, the quality of research drops sharply. But we had a long bear market then, which allowed time and attention to be given to businesses.

Can you walk us through your journey from being an analyst to a fund manager to the CIO-Equity at Nippon India Mutual Fund? How has each role shaped your career?
I think the single most important part of the role that I have played has been research because that, I think, is a platform for everything we do. There are many ways to manage money, but if one is doing core bottom-up stock picking, a fundamental understanding of how businesses and industries shape up is critical. My first responsibility was managing the Nippon India Pharma Fund. Then, sector themes were very small. Later, I moved to more diversified funds, and for the last 18 years, I have been managing the Nippon India Multi Cap Fund (earlier known as the Nippon India Equity Opportunities Fund) and Nippon India Large Cap Fund for the last 16 years.

Having a research background across four or five large sectors, which constitute 50-60 per cent of the value of the market, became useful and made it easy to transition into the role. Understanding other sectors is also important to portfolio construction for long-term returns and cross-sector comparisons. All these factors allowed us to take some high-conviction calls because unless one understands different sector valuations and opportunities, taking a contract call in the market is very difficult.

You've been a part of Nippon India Mutual Fund (previously Reliance Mutual Fund) for over twenty years. What has motivated you to stay with the same fund house for such a long time, and how has your career grown during this period?
The market is an ocean of opportunities, which allows us to see the right risk-reward investments. The job itself is very interesting. We can learn something new every day, and every day, we have to realise that we know very little about the markets. We are still in the learning mode, which has enabled the motivation to continue and the interest to be there. As an organisation, we were very small; we had maybe Rs 200 crore worth of equity assets then. Today, we would have a significantly larger share. So, as an organisation, we grew and kept getting opportunities to participate in the growth. I am thankful for the faith the investors and partners have shown in my 20-plus years of investing by trusting us with their valuable savings.

Obviously, we learn from people and seniors who have been around us. So that also enabled me to understand the markets a little better. The core reason has been that we've been able to take the right calls and differentiated calls; we've been allowed to make investments across a large cross-section of companies and businesses and run portfolios based on our conviction. That is what keeps us motivated every day. So, even in our team today, we enable fund managers to take calls based on their conviction but within the risk management framework that we have built. So, the flexibility and freedom to operate and take the right calls also keep our mind alert and responsible for outcomes. And that keeps us on our toes in a positive manner. The whole idea is to build an "Institution" that has the resilience to last beyond us.

How would you describe your investment approach and philosophy? Are there specific types of stocks or market situations that particularly excite you?
The most important thing to consider is whether the stock or the company has a sustainable business or if there is growth in the business. Can it become materially profitable? Because profit matters at the end of the day. So, the basic idea is buying sustainable growth businesses at sensible prices.

We also believe in taking the right risks; just hugging to the indices does not lead to differentiated outcomes for our investors. The next approach is not to disproportionately overpay for growth just because there is momentum in the stock. Also, we like to look at extraordinary businesses that are completely out of favour.

Bear markets excite us. We get to buy what we want to buy in as much quantity as we want to buy. Even after buying the stock, there might be a correction of 10-15 per cent, but that is where I think the biggest excitement is because we can own what we wish to have the best quality. In bull markets, one either gets very poor-quality business or very expensive valuations. I think it's just the inverted market we are in. So, while world markets are good in terms of wealth creation, all the effort for wealth creation only happens in bear markets or difficult markets, which I think are the markets that we love. Because we get to do research, we get to understand what's happening in each of the businesses and make sizable bets without incurring any impact costs. Then, we can see a 5-10 year journey for that stock.

For instance, one of the biggest bear markets in the last 10 years was witnessed in capital goods, engineering, and manufacturing businesses. One could buy the whole engineering sector in India at a market cap of maybe one IT services company or one consumer company. India has 1.4 billion people; the infrastructure is to be created; manufacturing must happen here; everything is there. Today, the manufacturing renaissance is a favourite theme for many investors. The same thing happened even in 2007-08 when only infrastructure was booming. One single large infrastructure company had the market cap of the whole pharma sector in this country. I think that opportunity presented where one could sell the infrastructure company and buy the whole pharma sector in our portfolios. The same happened in the private sector vs PSU Banks in the last three years.

So, these shifts are what we like because they really give a greater probability of positive outcomes. In a bull market, when everything rises and you're chasing relative value, mistakes may happen. So, these are markets where we worry about our mistakes because that will determine our medium-term returns. As we see in today's markets, there appears to be large misallocations of capital by investors due to recency bias.

The Nippon India Large Cap Fund experienced some challenging times between 2018 and 2020 but has steadily recovered. Could you shed some light on what contributed to this turnaround?
Interestingly, our belief has always been that alpha is available in large, mid, and small caps. So, we always run a fund by taking high-conviction calls in specific sectors or stocks. If you recall the 2018 and 2020 periods, where there were extremely narrow and dislocated markets, the underlying construct was that the interest rate would remain zero forever. The market was giving any multiple to any company as long as you perceive it as a quality company. I think that was the market where only consumer stocks were valued at 50-60 times that of the rest of the world. Certain private sector banks were valued at the highest level, while the rest of the markets were completely ignored.

In other words around 60-70 per cent of the market was available at disproportionate value or like bankruptcy valuations for many high-quality large businesses as they were ignored because the previous five years were bad. So you could end up owning large public-sector banks and buying the whole engineering and manufacturing sector, all the world-class multinational listed businesses, at very sensible prices. Such anomalies provide opportunities to choose a good cross-section of businesses that are world-class businesses and leaders in their own context. I think those calls played very well. Taking that stand in a bad cycle is, I think, what really helped. Hence, we believe that whether it's large cap, mid cap, or small cap, there is an alpha opportunity or a rolling three-year period if you can take stands versus the market. Hence, alpha is not constrained by capitalisation, based on our experience, at least, I would say, in the last 20 years of managing money.

Also read: Interview with Krishna Sanghavi, Mahindra Manulife MF CIO (Equity)


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