Managing Rs 78,800 crore, Canara Robeco MF's head of equities addresses the dip in fund performance

Shridatta Bhandwaldar, Head - Equities, Canara Robeco Mutual Fund, manages a dozen schemes with assets totalling over Rs 78,800 crore.

In this interview, he shares his investment strategy and the reasons for the underperformance in the Canara Robeco Bluechip Fund and the Canara Robeco Emerging Equities Fund. Here is the edited transcript of the interview.

You were an engineering student. What drew you to the financial markets?
Being from a middle-class Maharashtrian family, I decided to pursue engineering because engineering and medicine are two fields most middle-class Marathi families tend to gravitate towards. In my second year of engineering, I did not get enough interest in the technical part. However, I completed it successfully and, at the same time, decided to pursue business administration. I joined Sydenham College in Mumbai and did my master's in management studies. I am an avid reader. In that sense, Sydenham was a unique college as it was not compulsory to attend the lectures, and I utilised that time in the library. There, I started reading about financial history. I picked up a lot of interest in macroeconomics and, later, the markets. That was a time when I decided to pursue a career in equity. Initially, I joined a bank from the campus, but within six months, I left it and joined a brokerage firm. That's how my journey in the financial world began.

After completing your MBA, you worked as an analyst with various organisations. What were your key learnings on the sell side?
I learned three key points when I worked as an analyst.

First is the importance of financial modelling. If we step back and just think about it, even without meeting management, if you have the past numbers of a particular company and the entire financial model - both balance sheets and P&L (profits and losses) - it tells you a lot about the company. A lot of people tend to focus a lot more on narrative. While narratives work in the near term, the numbers are the hard truths about the businesses and tell you a lot about the underlying things happening in those businesses.

The second lesson is about the quality of business. I learned that you shouldn't focus much on the company's P&L growth but on whether that P&L growth is accompanied by capital efficiency or not.

The third concerns the quality of the management, such as who is fair to the minority shareholders.

You began your career in equity research during the 2006 bull market and experienced the 2008 financial crisis. What were the main takeaways from those early years of your career?
I clearly remember how overoptimistic all of us, including the promoters, were during that period. They (promoters) wanted to be the largest or global player. So, right from the biggest corporations in India, everybody went on to acquire companies. Whenever the market does well, or the economy does well, people give up on the margin of safety. What I also remember from that period is that during the good cycle, earnings were upgraded, and everything was positive. But the most important outcome was that most of the promoters and most of the large corporations in India eventually became too optimistic, almost berserk, and started acquiring global companies and anything and everything. This eventually went bad, resulting in a sizable non-performing assets (NPA) cycle in the banking system.

Since I used to cover capital goods and infrastructure during that period, I would like to share one example. Many players were putting up a coal plant but did not have the necessary coal supplies. It was almost impossible for so many power plants to get coal. While they were getting the letters from the regulator, the ministry, at least as an analyst on the ground, I knew that it was just not possible for Coal India to produce so much coal for so many plants, which is what eventually ended up happening. Distinctly learning from that, when things go that optimistic, as a portfolio manager, start looking at your portfolio and within your 40-50 businesses that you own, get out of the weakest before things turn bad because they do turn bad occasionally.

Managing 12 funds seems like a significant challenge. How do you allocate your time among them, and how involved are you with the co-fund managers?
I don't manage the 12 funds directly on a day-to-day basis. Some are directly managed, while I manage some as a co-fund manager. The objective at Canara Robeco of having two fund managers is straightforward: investors should get continuity of thought process and knowledge of the decision-making in any fund. So, when you have to deal with fund managers, there is a continuity of decision-making, and the other guy always knows what the primary fund manager is doing, which is discussed within reviews from time to time.

Of the 12 funds, I directly manage four: Bluechip, Flexicap, Multicap, and Focused. My role is, as I said, the continuity of the thought process—that you're not changing the styles or strategies. Second, my role is to ensure that there is not too much risk-taking concentration or illiquidity in the portfolio. Third, my role is the review mechanism in terms of the portfolio outcomes, whether they're playing out or not.

What is your investment philosophy and approach to equity management?
As a fund house, we have a simple philosophy: businesses create wealth ultimately. Broadly, the businesses that create wealth over a period of time have the following characteristics: a) they are scalable, b) they deliver products or services that are liked by customers, and c) they have competent management.

This allows them to generate cash, and the business is scalable. These businesses create a lot of wealth because, effectively, they create products or services that will enable them to have capital-efficient outcomes. So that's the core thought process that you focus on. Fundamentally, the focus is on business and not so much on stocks (prices) because the market can remain fairly irrational in the near term, but over a period of time, it becomes more and more rational. Beyond one to three years, you will rarely find businesses that have done badly, but the stock has done really well. That's very rare.

The other way is to look at any business using Porter's five forces model; you know which business falls into which category. Then it comes to the management. The management's ability gets tested in the P&L, and the intent of management gets tested in the balance sheet. There are several financial parameters that we look at when we analyse any new company that is coming into our universe. Ability always has to do with the execution of the management and how the company has done versus the peers in the industry or how the cost structure of the company is versus peers. You can have all the ability in the world; it is useless if you don't have intent. And that's where balance sheets become very critical. In balance sheets and annual reports, your intent gets tested, as does what kind of accounting practices you have, what type of asset quality you have, and what kind of business you're dealing with regarding the working capital cycle.

Then you have accounting practices, such as how the board is constituted, who's on the board, how the independent directors are, and related party transactions. So all these things tell you about the management's intent, which is very critical in my view because intent is of no use from a one-year perspective. However, intent is extremely critical when you take a three- to five-year view or start investing thousands of crores in businesses.

And then comes the valuation. India is probably one of the markets with the highest multibaggers in the world. So, you have to deal with the valuation. From a more intrinsic perspective, you have to force yourself to look at what kind of longevity this business has because you typically get the valuation multiples for three things - near-term earnings growth, longevity of the business, and capital efficiency. If you have capital efficiency and your business will grow for the next 30 or 40 years, you won't get that business at 15 P/E or 30 P/E. You have to pay a little higher, but at the same time, as public money managers, we have to be sensitive to the fact that earnings in the next two to three years will be more homogeneous. So, when you deal with valuations, not the relative valuations or cheapness for expensive valuations, we focus a lot more on, again, the intrinsic nature of business longevity, earnings growth, and capital efficiency.

The performance of your largest funds (Emerging Equities, Bluechip, and Flexicap) dipped after 2020-21. Can you explain the reasons for this and your strategy for improvement?
The performance actually dipped after the middle of the calendar year 2022, and it was predominantly because of two reasons. We have a tilt towards growth and quality versus value, and that style has worked today, and we have a relatively lower allocation on that side. Also, some stocks under public sector undertakings (PSUs), non-banking financial companies (NBFCs), and small caps have done disproportionately well in the near term, and we are under-allocated, so those are predominantly the two reasons.

When we look forward clearly, we've not changed this strategy in probably 10 years, and we're not changing it now. We are focused on finding more individual stock winners within our area of strength. For every problem in the portfolio, the solution is always stock selection. Stock selection is always a function of the predominant tilt of the investment strategy and thought process that the portfolio manager's fund house has. There is no point trying to go and play in somebody else's field and try to actually allocate this opportunity there because you're not convinced about that. So we're trying to strengthen the selection in a way where we think we have the right to win and bring the performance back.

Also read: Interview with Neelesh Surana of Mirae Asset Mutual Fund