Interview

Meet DSP Mutual Fund's Charanjit Singh. He manages around Rs 27,600 crore.

Co-managing three schemes at the fund house, Singh shares his career evolution from an analyst to a fund manager, and more.

Charanjit Singh, a fund manager at DSP Mutual Fund, oversees three prominent schemes - the DSP ELSS Tax Saver, DSP Equity Opportunities, and DSP T.I.G.E.R. Fund - with assets totalling approximately Rs 27,600 crore.

In this interview, Singh delves into his foray into the financial markets, elaborates on his investment philosophy, and discusses the current market environment. Here is the edited transcript of the interview.

What sparked your interest in equity investing? Given your extensive experience as an analyst, what prompted the shift to fund management at that particular stage in your career?
Equities research intrigued me because the markets were all about the smartest individuals trying to learn a lot while also making money. Equity research is all about ongoing learning; you're evolving, the data points are changing, and you need to comprehend both the global and domestic macros. As a result, I believe that equity research provides a unique opportunity for knowledge enrichment. I believe few other professions provide such extensive learning opportunities.

Equity research allows you to use your analytical skills, handle large amounts of data, and examine behavioural elements. So, these things piqued my interest when I considered equities research as a career possibility.

Regarding the second question, as someone who has worked in sell-side (analyst) research for over 16 years, I believe it is all about covering a particular set of stocks, doing extensive research on those stocks, and consistently making recommendations. So, you are an opinion-maker and not a decision-maker.

I believe each analyst must go through the process of moving from opinion-maker to decision-maker. So the transition for an equity analyst is as follows: initially, you are on the sell side, covering stocks; next, you become a buy-side analyst; and finally, you enter the buy side, or the asset management business and start covering the companies which are suggested to internal fund managers. As your hit rate (outperformance of stocks) increases, the fund manager's responsibilities become more apparent. And I believe that going through this learning period is a crucial step for everybody. You need to go through that grilling to make the correct decisions. You will be unable to make important decisions, which are necessary when you are managing money.

What were some of the pivotal lessons you learned as an analyst that have proven invaluable in your current role as a fund manager?
That's a really good question since those learnings are useful when managing money. You cover stocks and interact with their management as a sell-side research analyst. You can see how the management is acting, providing direction, and operating the company. Finally, the promoter or top management plays a critical role in each business. That is one thing you will learn as a sell-side research analyst.

The second essential factor is how the industry dynamics are organised. So, the industry is a critical component because if your total market size or market is not expanding, you may not have stocks that can rerate. You cannot generate money in non-growing sectors since the stock market solely focuses on growth. The other consideration is the quality of the financial metrics. So, as a research analyst, knowing forensics and aggressive accounting is crucial while doing sell-side research. When you go to the buy side, you utilise the same methods to assess businesses.

On the sell side, you may focus only on the good calls and even forget about your bad ones. But on the buy side, your bad calls will come to bite you as much as your good ones. Your bad calls can lead to a lot of underperformance. So, the hit rate is one of the most essential factors that the buy side company must focus on. Because if my hit rate in terms of making the proper judgments is high, I will be able to earn higher returns. So, it is vital to use the techniques I gained on the sell side in terms of business cycles, valuation cycles, the quality of management's forensics, and the behavioural element. Then, on the buy side, it's time to improve your hit rate, allocate funds, and size up your holdings. That is what creates a difference in the asset management sector.

You co-manage three funds alongside Rohit Singhania. How do you collaborate and divide responsibilities effectively?
We co-manage the DSP T.I.G.E.R. Fund (which is an infrastructure-related fund), the DSP Opportunities Fund, and the DSP Tax Saver Fund. Various funds have distinct philosophies and directions for how we manage them. Now, the idea is that these funds span a wide range of sectors. So, frequently, we need to monitor how various sectors are doing, whether a sector seems to be underperforming for an extended period or a sector where outperformance might begin to emerge. Later, you establish your underweight, overweight, or equal-weight positions within the sectors included in the individual funds. While the T.I.G.E.R. Fund is a thematic fund, others have more precise standards that must be met in terms of how sectoral allocation takes place. So, regarding our method, we have a team of research analysts who will provide suggestions to us in various areas. So, responsibility is divided among us, and some sectors are divided between me and Rohit.

Ultimately, stocks rise when there is tremendous momentum and earnings, and this momentum must be more than what the market anticipated. That is where rerating occurs, and we have to do continual work in terms of looking at the financial models and the industry models and then deciding on the areas that we may have to go. So, I believe a combination of all these factors influences our decision-making. So, you'll need to form a team to distribute these duties. Keep track of your portfolio, holdings, and potential new ideas daily.

Considering the volatile market conditions, especially during the March-April 2020 correction, what key lessons did you take away from that experience?
Equity market corrections are part of life. If you look at the market history also, it is not that a correction has happened for the first time; multiple corrections have happened in the past. When such events happen, there's a fast reaction from the government and the central banks so that the recovery starts happening. So what happens is that if you're a seasoned investor and you have seen the cycles, you will see corrections as a very important opportunity. Now, I'm saying that is an important opportunity because a lot of times, maybe I like a stock, but it's too expensive. Quality stocks are generally very expensive, and during these corrections, everybody should use them to improve their hit rate by adding good-quality stocks. That is when a lot of these stocks are actually at a discount; there's a sale going on, and if you get fearful, you will not be able to improve your returns. I think then, if you have a very clear thought process, that these companies will survive; these are good quality companies, and these companies can rise. Why will that happen? Because their balance sheets are strong, their management is very strong, and these companies have built their brands or product portfolios, which no other product can replace. So, when you have that kind of understanding and own a business, when that correction comes, you will not be afraid. I'll use corrections as an important entry point. And some of these are very good, high-quality stocks.

As an investor, how would you describe your investment philosophy? What types of stocks, contexts, or opportunities are particularly intriguing to you?
If you look at my investing style, it is based on two approaches: an analytical approach and a visionary approach. Now, why I'm saying that is because you need to analyse a lot of data before taking any kind of call on a particular stock. That will only help you build the position and size. Also, whether I want to hold 1 per cent of that stock, 2 per cent, or 5 per cent of my fund, that allocation will depend on my conviction, which will come from the data. So, data will tell me what has happened in the sector or the companies in the past. But the vision is talking about what can happen in the future. For example, now, when we talk about the power sector, you could participate through transformer companies, cable and wire companies, and utilities. So, as an investor, I'll see where there is the least risk and better profitability, which is a segment in which I need to participate.

So, that is what defines my philosophy. It involves, one, constantly looking at how the megatrends or trends are evolving in the market, ensuring that we are ahead of time in those trends because then only you will be able to capture the right valuations. If we have the wrong entry price, we will not be able to make the amount of money that we can make when we are ahead of the market. Second, looking at segments that are not fragmented in consolidated markets will help you make your profitability more sustainable. The third is that the market is definitely growing; if the market is growing, most of the players will benefit within those segments as well. But as an investor, I would like to be conservative, ahead of time, and very cautious about the valuations.

The DSP T.I.G.E.R. Fund has underperformed compared to the benchmark over the past four years. What factors have contributed to this underperformance, especially given the sector's rally during this period?
When looking at a benchmark, it is necessary to consider its constituents. As a house, we have a very stringent structure for the types of companies we invest in. We have a forensic analyst who ensures that all of these companies pass specific requirements. What's happening with the benchmark is that the constituents are so skewed towards specific companies with very large weights that we're not comfortable with the valuations or the financials. So, it's more about the index. However, the fund has performed significantly better compared to the broader markets. We have decided not to invest in lenders. And in the recent past, you will see that certain lenders in the benchmark have gone up significantly. So, we always stay away from narratives. We always avoid companies with questionable financials or that fail our forensic tests. And those factors could explain the underperformance compared to sectoral indices, but that is the nature of indices.

Also read: Interview with Sailesh Raj Bhan of Nippon India Mutual Fund


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