VR Logo

'We Have a flexible investment style'

Pockets of volatility in the coming year should only be treated as investment opportunities, since the fundamentals are in place for a sustained uptrend in the longer term

Anup Maheshwari completed his Bachelors degree in Commerce from Sydenham College, Bombay University and did his Post Graduate Degree in Management (PGDM) from the Indian Institute of Management (IIM), Lucknow in 1993. Today, he heads the equities team at DSP Merrill Lynch Fund Managers, and is the fund manager for DSPML Balanced Fund, DSPML Equity Fund, DSPML Top 100 Equity Fund, DSPML Opportunities Fund, DSPML T.I.G.E.R. Fund and the DSPML Technology.com Fund. He joined DSP Merrill Lynch Fund Managers in July 1997, and has been managing domestic funds since May 2001. Prior to joining DSP Merrill Lynch Fund Managers, he worked at Chescor, a British fund management firm that managed three offshore funds, investing into Indian equities.

What's your view on the market?
The value of the US dollar will be the driver for most investment trends in 2005. With the dollar continuing to weaken, global investors will increasingly diversify their dollar assets toward non-dollar assets; a trend that will benefit emerging markets in general. We expect that domestic economic growth in 2005 will continue to remain robust, i.e. around 7 per cent, aided by good monsoons. There is a substantive scope for an increase in India's market capitalisation as the world begins to realise that we are very serious about reshaping the direction of our economy and accelerating the pace of economic growth. Enhanced infrastructure investment and increased consumption constitute the main growth triggers for Indian markets. The continued emphasis on infrastructure growth and capital expenditure will spur domestic demand for cement, steel and other capital goods, which will not only benefit companies operating in these sectors, but the resulting infrastructure will also contribute to efficiency and increased aggregate demand across the entire economy.

With return expectations ranging between 10-15 per cent annually, equities are likely to outperform other asset classes in the medium term, and hence remain an investment avenue that the individual investor must consider, bearing in mind his or her investment goals, risk appetite and time horizon. Equity investments, however, are predominantly for individuals who are prepared to withstand the loss of capital in the short term for possible gains further down the line. The markets may display pockets of volatility in the coming year, but these should only be treated as investment opportunities, since the fundamentals are in place for a sustained uptrend in the longer term.

Where do you expect the market at the end of the year?
We expect corporate earnings to grow at an annualised rate of 10-15 per cent over the next three-five years. Historically, over the long term, equity markets have tended to deliver returns that are in line with or better than the underlying rate of growth of corporate earnings.

In the near term, strong FII and domestic fund flows and relatively stable macroeconomic conditions are potential positives for the Indian equity market. Cost-push pressures on corporate earnings are possible areas of concern. While we remain positive on markets over the course of this year, investors must be prepared for more volatility and sharp stock specific movements.

At the current index level of 6750, the market is priced at 12.5 times 2005-06 estimated EPS. From this level, investors should expect a normalised rate of return, in line with underlying corporate earnings growth.

Which sectors will do well?
Before giving you an overview on some of these sectors it would be useful here to give a perspective on how sectors should broadly be viewed across market cycles. When we look at sectors across the spectrum of the market, we tend to classify them into cyclical (economy linked, companies with volatile return on equity), growth (high growth phase companies with high return on equity and very high earnings growth) and defensive sectors (companies with moderate to high return on equity and stable earnings growth). This classification is based on the nature of their business and the present stage of evolution of the sector.

Each of these broad sector classifications requires a different investment strategy. For instance, cyclical Sectors, as the name suggests, show volatility over periods of time and hence require an active investment style. Defensive sectors, on the other hand, such as pharmaceuticals and FMCG sectors have more stable performance characteristics and are better invested into with a buy and hold approach. Growth sectors, as we saw in the IT sector, also require a buy and hold approach, as long as the earnings momentum is visible.

In terms of specific sector views, we typically favour sectors that demonstrate some element of pricing power. In the present environment, the engineering, technology, pharmaceuticals (through exports) and banking (higher credit growth) sectors look well placed.

Enhanced infrastructure investment, increased consumption and outsourcing constitute the main growth triggers for Indian markets. The continued emphasis on infrastructure growth and capital expenditure will spur the engineering and construction sectors. Increased levels of domestic consumption as well as the growing easy availability of credit is likely to further promote economic expansion. The consumption side is a phenomenon particularly observed in the past few years and I believe we are at the tip of the iceberg. Retail loans have grown fourfold in the last five years to about Rs 1 lakh crore, but that pales in comparison to the potential that lies ahead. Retail loans to GDP is still only 5 per cent of GDP for India, as opposed to 74 per cent for Korea, about 47 per cent for Taiwan, and a much higher percentage in the developed markets. The base is low and growth should rapidly escalate in the future.

In the banking sector there has been a consistent improvement in balance sheets as well as loss ratios, and the net result has been a secular re-rating of the price to book ratio. Therefore it comes as no surprise that these stocks have done extremely well in the last few years, and we believe they will continue to do so in the medium to long term as well. The banking sector in our country should grow significantly in the next 5 to 10 years, in terms of its reach, profitability, productivity, and market capitalisation.

The outsourcing theme is also giving significant traction. The Indian technology and pharmaceutical sectors are gaining more intrinsic credibility and the momentum is likely to increase. These sectors are highly scalable and there are good quality companies in which investors can participate. The auto ancillary sector is an emerging growth sector.

What's your investment style?
We follow a fairly flexible investment style, which is neither growth nor value biased. Our investment style is a combination of top-down sector selection and bottom-up stock picking. From a top-down perspective, we analyse the broad macro trends that contribute to the momentum and direction of economic growth. From a bottom-up perspective, we focus on various qualitative and quantitative variables that influence corporate performance. We tend to focus on financial parameters such as return on capital and earnings growth and look at valuations in this context. We also tend to be fairly diversified in our portfolios.

What's your stock selection process?
A lot of science goes into our investment portfolio. The investment objective of a particular scheme shapes the portfolio that is most appropriate for that given scheme. The specific stock selection process involves a series of steps. We would typically start with analysing the past performance of a company, understand its business dynamics and then make an educated forecast of future earnings. We would then pass the company through a valuation screen. If the company looks undervalued, the next step would be to analyse the business dynamics in more detail. Once we are comfortable with our understanding of the company, its financial forecasts and the stock valuation, we would look for its proper positioning in terms of weightage and investment objective of the portfolio.

Tell us about the funds you manage.
DSPML Balanced Fund
The DSPML Balanced Fund seeks to minimise risk while optimising return, by maintaining a dynamic asset allocation between debt and equity. It combines the low-risk benefits of the fixed income asset class with the high-return potential of the equity asset class. Approximately 60 per cent of the portfolio is invested in equity securities, while the balance is invested in fixed income instruments. The fund has a dynamic asset allocation between debt and equity, with an actively managed, well-diversified equity component.

DSPML Equity Fund
The DSPML Equity Fund holds a diversified portfolio comprising both large and mid-cap stocks.

There is very little churning of the portfolio, since the fund largely employs a buy and hold strategy, until stocks attain their respective target prices. We employ a 'bottom-up' individual stock picking investment style from a value and growth perspective, with strategic investing to target undervalued stocks or stocks priced at attractive levels.

DSPML Top 100 Equity Fund
With the DSPML Top 100 Equity Fund, investors can seek to lower portfolio volatility by limiting the investment domain to the top 100 stocks by market capitalisation, which are relatively more liquid. Among these, we aim to select liquid, large-cap, superior-quality stocks for an actively managed portfolio.

DSPML Opportunities Fund
The DSPML Opportunities Fund is managed with an objective to adapt to changing market trends. It is therefore easily able to switch between stocks and sectors in order to take advantage of appropriate market themes, and seeks to capitalise on the uptrend in certain sectors at varying points in time. Since the fund's launch in May 2000, its asset base has grown significantly, a testament to the fact that it is a favoured choice of the aggressive equity investor. In managing the fund, we use an opportunistic investment approach, and seek to take aggressive sectoral and stock positions to maximise performance. The portfolio is actively managed with a tactical investment strategy.

DSPML India T.I.G.E.R. Fund's investment objective is to seek to generate capital appreciation by investing in sectors which could benefit from structural changes brought about by continuing liberalisation in economic policies by the government and/or from continuing investments in infrastructure, both by the public and private sector. Economic reforms and infrastructure development are likely to remain among the key catalysts for economic growth in the medium term, with the growing service sector and higher infrastructure investment likely to sustain high growth.

DSPML Technology.com Fund
As its name suggests, the DSPML Technology.com Fund is an aggressive, sector-specific fund, focusing on investing in technology and technology dependant companies. Despite volatility around its launch, the fund has had a reasonably good performance, particularly in the last one-two years.

Your oldest equity fund (DSPML Equity) remains a Rs 150-crore fund, though its performance has been good. Why?
The DSPML Equity Fund is positioned as a diversified portfolio meant for investors with a long-term investment horizon. We believe that the size of this fund will grow as investors increase their appreciation of the value of long term investing. The fund has a good long term track record to back up its positioning. Lately, it has witnessed inflows that have resulted in the assets under management increasing to over Rs 175 crore as of May 31, 2005.

Your product basket does not have a tax-planning fund. In view of Budget 2005-06, do you think it's time to launch one?
We are considering a tax planning option in addition to our existing range of products. Besides offering a tax advantage to investors, such a product would also impose a discipline of long term investing, which should eventually favour the investor further. The fund manager also has more flexibility in terms of managing investments and taking longer term views without the undue influence of volatility in fund flows.

Many new funds have collected whopping sums in the last few months. Is it a worrying sign? Are you planning to join the party?
Huge collections by new funds is positive as it increases the exposure of individual investors to equities, which is presently under-represented as an asset class in the average Indian household. However, investors would be well served to appreciate that there is no particular difference between a new fund and an existing fund. It is also important that any fund should have a clear investment objective and a long term investment case.