What is your view on the market?
Most Indian industries have come out of recession after a prolonged period, and are now on a strong footing. They are able to cater to the domestic as well as the outsourcing opportunities that is coming India's way. We also have a fairly conducive environment for business; interest rates are low, domestic demand is strong and reforms are in place. The only thing you need is that these factors sustain over a long period of time. We have seen in the recent past that a change of government or a change of policy has not deterred the growth of corporate profits. That itself gives us a lot of comfort. We may see ups and downs in the market which could be of a short-term nature, but the secular trend of the market is bullish for a prolonged period.
What sectors do you like right now?
I like sectors that are out of favour in the market right now. These are oil and gas, automobiles and pharmaceuticals. In my career as a fund manager, I have learnt that it pays to be a contrarian. You do not need to do it in a reckless manner, but if you are intelligently accumulating when the best of the people are focused elsewhere, you unlock maximum value as and when the interest comes back.
Beyond that, I think there are two opportunities in the Indian capital market. One is the domestic demand story led by infrastructure growth and the other is the outsourcing opportunity.
Have you been able to implement your contrarian strategy?
I came here in 1998, and since then we have seen two major peaks and two major falls. And though no amount of education is enough in the market, these market cycles have provided a fair amount of learning on how to keep your head on your shoulders and not get carried away.
You are not worried that the markets will fall further?
I would be worried if the fall would keep the markets significantly lower than the present level and that too for a prolonged time. I do not think that either of these two situations will happen. Our markets have performed quite well in the last two years, and if there is a softening of equity markets worldwide, I don't think we can stand out like an island in that sort of an environment. We will also have to slide in sympathy. But once that situation clears, we will again be able to bounce back with the same vigour that we did after May 17, 2004.
So I will say that I am not worried, but I am certainly concerned.
We moved from stocks to cash in a couple of funds where we have consciously and explicitly adopted an aggressive strategy, and this move has paid off. In a matter of three months, the market turned quite volatile. But the strategy for the funds was not to generate returns from asset allocation between cash and stocks, but by superior stock selection. The upheavals that you saw time and again will not get repeated in future but attractive stock will keep appearing on your horizon continuously. The ability to identify those stocks and to take adequate and timely exposure in them will be the backbone of a sustainable performance. We used cash extensively in UTI Petro Fund in 2003 and 2004. But that was because there were some events that were clearly visible. But in case of a diversified fund, you need to pay more attention to the stock selection.
You manage the oldest mutual fund in the country-Mastershare. It has done well but are investors aware of the performance?
Mastershare has a very strong brand recall. The issue is that it gets compared to funds that are strictly not part of the peer set. Mastershare has an 18-year-track-record of performance as well as of uninterrupted dividends. We want to continue this performance. We are positioning it as a conservative and diversified fund with an objective to give an annual dividend, subject to favourable market conditions.
What about the other diversified funds?
I also manage UTI Growth and Value which we have acquired from ILFS. We are managing it as a moderately aggressive fund with 65 per cent in large-caps and 35 per cent in mid-caps. It has been performing well in recent times. UTI Dynamic Equity is an aggressively managed fund and we have used both asset allocation and stock selection here to generate superior returns.
And the other funds?
The PSU Fund is benchmarked against the PSU index but we feel that even without disinvestment, PSUs have a lot of promise. If you see the global scale of operations, the turnaround in the fortunes of many of these companies and the remarkable growth in profits can be captured even if the disinvestment theme does not play out. We are trying to invest in PSUs that are profitable on their own. Mastergrowth gives an option to the investor of either an automatic distribution between PSUs and non-PSU stocks, then Mastergrowth is the ideal vehicle. We will invest up to 50 per cent in PSUs and the rest of it into diversified equity. India Advantage Fund invests in companies that have an outsourcing opportunity. At this point in time, the opportunity is visible in pharma, IT, textiles and auto ancillaries. UTI Basic Industries complements India Advantage Fund as it invests in stocks with domestic demand.
The Petro Fund did well when disinvestment was a prominent theme. It is now passing through a lean period. Almost 20 per cent of the fund is now invested in gas related businesses.
How difficult is it to manage nine funds?
Though I manage nine funds, they are of three types-sector funds, thematic funds and diversified funds. These categories fit in three different mental compartments, so that makes it fairly easy. The second thing is to look at the addressable universe of stocks from which you select the portfolio and then decide whether you will be aggressive or conservative in partitioning the stocks. How much of a particular stock you will take and for which fund will determine whether you are being aggressive or conservative. Basically, it is a matrix of two dimensions - the category of fund and the level of aggression. I am not saying that the job is easy. It is difficult to look at these nine variables together but if you try to simplify it, the job becomes less complicated. Let me elaborate with examples. I manage three diversified funds. UTI Mastershare is a fund we consciously manage in a conservative manner. It has a positioning of being a fund which pays annual dividend. So we try to keep that at the back of our mind whenever we are taking a decision for Mastershare. On the other extreme of the style is UTI Dynamic Equity Fund, which is aggressively managed both in terms of asset allocation (stock and cash) as well as stock selection. The Growth and Value Fund is between those two. So when I look at the universe of stocks that I have to include, many of the stocks get excluded from Mastershare, purely because they will not fit into that particular fund. Then we look at Growth and Value and Dynamic Equity Fund, and then decide how aggressive you will be. In a sector fund, you will be more aggressive in terms of the amount of exposure you will take in a particular fund as compared to a diversified fund. The thematic funds are in between diversified and sector funds in terms of taking aggressive positions.
How do you select stocks for your portfolios?
We have an in-house research team that tracks 15 sectors and 184 companies. That gives us a fairly large universe to pick stocks. However, a fund manager is not confined to these stocks and can look beyond that universe. What we do is use various screening processes to pick stocks out of a database. We evaluate them on a few criteria. If there are some stocks that are outside this universe but if we feel that we need to take a closer look, then we study them ourselves and include them in the portfolio.
While it is fashionable to classify yourself as a growth investor or a value investor, I would say that I am a combination of both. Very few markets in the world would give you a universe of 9,000 listed companies, out of which 2,500 stocks get traded everyday. In a country where the business climate is changing, there would be many such emerging stocks which you will need to look at. I identify stocks that look good to me-it could be because of the growth story unfolding in them or they are at extremely attractive valuations. As we go forward and our markets become more mature, I will have to define whether I am a growth investor or a value investor.
How do you divide time between the nine schemes you manage? Do you focus more on Mastershare, which is the largest fund?
The corpus size does not take so much management time, but managing the nine portfolios is more demanding in terms of time. Sometimes, I do spend more time on the smaller funds than the larger funds. For example, when I started managing the Petro Fund in 2001, it was a Rs 17 crore fund; it grew to a Rs 350 crore fund and after payouts and redemption, it is still a Rs 250 crore fund. So the amount of attention you pay to a fund is related to the future inflows in that fund. Market cycles also have an impact. If the market cycle is favourable to a fund's portfolio, you may not need to pay attention to that portfolio. But if a fund is passing through a hostile market cycle, then you will need to devote more time. Three months back, I would have spent more time on the auto fund than for any other fund.
You must be the only fund manager to have started your career in the marketing department. How did you transition so smoothly from marketing to fund management?
When I was in Bhubaneswar, it was the only UTI branch in Orissa. We were servicing 5.5 lakh unit holding accounts. There were over 15 lakh accounts in other UTI funds, which were being serviced out of other UTI offices, but all service requests used to be routed through the Orissa office. We had 13 chief representatives, 10 collection centres, 3 franchise offices and about 1,500 agents. I learnt to deal with a large number of things together. I learnt to cope with volumes; there were 11 employees in that office servicing the lakhs of accounts. Some of the systems that we had applied were appreciated by the headquarters and implemented in other centres.
Even earlier in Kolkata, we had an annual system of reviewing our chief representatives. So, I suppose all these things helped my career progression in UTI. There are three core areas in a mutual fund: mobilisation of funds, investment of funds and after-sales service. By the time I came to Mumbai, I had experience in two of the three areas. I joined the dealing room for the offshore fund in 1998. After that I started managing four funds. What helped me was a combination of an academic background to have the skills required for this job and an exposure to a wider area of the functioning of the entire organisation.
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