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No Dearth of Ideas

A. Balasubramanian, CIO, Birla Sun Life Mutual Fund, says markets in the short-term are likely to be driven largely by the flow of funds and there's still scope to pick good stocks

Balasubramanian, one of the founder members of Birla Sunlife AMC, joined as Chief Dealer. He has moved up in the rank within the company right from being in-charge of trading in both debt and equity, heading the fixed income group and managing hybrid schemes. He started his career in Canbank Financial Services and moved to GIC Mutual Fund and joined BSLAMC in the year 1995.

What is your opinion on the current levels of the market?
Fundamentals are very strong, growing at a nominal GDP growth of over 11 per cent. Overseas companies are looking at investing in India. Valuation wise, markets may look stretched in relation to other markets. However, the space for companies to grow has increased due to visible spending in the next 10 years, thus leaving untapped opportunities. Therefore, the long-term outlook for market remains positive.

Where do you see these untapped opportunities in today's market?
I am referring to sectors like power that hold huge growth opportunity. The potential in terms of capacity increase is immense. With economy growing over 8 per cent, overall consumption will also go up. There is a positive change in the pace of project implementation. All these will help the economy grow further. However, markets in the short-term are likely to be driven by the flow of funds and sector wise and stock specific movements.

Tell us some of the sectors you like and dislike at these levels?
There has not been a major run in the media and petroleum & gas sectors, and some commodities. Although commodities have run a lot, yet there are a few on which we continue to remain under-weight. I think this trend will continue. We are over-weight on sectors like telecom and FMCG. We are also over-weight on auto, engineering and construction. We have built up position in cement and taken a contrarian call on steel. If you look at our broad portfolio, around 50-60 per cent of it will remain more or less constant. We limit our short-term calls to 20-30% of the portfolio. We may not buy a stock because it does not have say next 5 years visibility, but, we may buy certain stocks as there is a value for short-term trading purpose purely driven by valuation gaps.

Tell us about your research team and stock selection process.
We depend largely on in-house research. We also use external research in a limited way to look at certain stocks and sectors. We have a team of six analysts and three portfolio managers for equities. Also there is a Fixed Income team of six people.

We, as a fund house, focus largely on research-driven process. A research report is made internally on a company before it comes in the investment universe. And from the managers' perspective, the investment universe is the bible, he has to go by the investment universe of 200-300 stocks. These stocks are regularly monitored.

Our analysts strictly go by the internal financial models. We have divided the companies in the investment universe into two groups - companies that are adequately covered in the market. There is no point wasting time doing thorough research on those companies and we look at only broad numbers and macro outlook. The other group consists companies not extensively researched by leading broking houses. We maintain a detailed financial module for such companies and focus on extensive research.

At any given point of time, our reaction to stock price movement would be based on the financial module maintained internally. For each portfolio, we maintain separate valuation sheets based on the earning projections of the portfolio stocks.

From the point of view of identification of companies, it's about taking a macro call on certain sectors. Once we are bullish on a sector, we start picking companies which have good management, enjoy acceptability of products among customers and quality earnings. Research analysts, as well as the fund managers and myself, get involved at different levels when the initial report is made. After that, it's more of maintenance, which comes in the form of tracking that company on a quarterly basis. The moment a research analyst identifies a stock, it is discussed by the investment team members. We look at the contribution of the companies in terms of portfolio performance on a regular basis.

What is the idea behind the new concept of having a primary and a secondary fund manager?
It is not a new concept. We had this concept in 2000. Till 1997-98, the industry, as a whole, did not have the concept of portfolio manager. If you see the old offer documents, it was the CIO who used to manage all the funds and all of us used to perform the support functions in the form of research, dealing, trading and other activities.

We introduced the concept of backup fund manager in 2000. It works like this: When I was managing the Birla Balanced Fund, Nishid Shah was the backup fund manager; when Paras was managing the Birla Advantage Fund I was the backup fund manager. I used to be the head of Fixed Income, but I was the backup fund manager for some of the income schemes. The concept got discontinued in between as the team became small, but it has been re-introduced.

The idea is that when a fund manager goes on leave, the backup fund manager knows what all has gone in the portfolio. So it brings in continuity. In the system of a single fund manager, if that person leaves, there is the risk of discontinuity.

As far as responsibilities are concerned, the primary fund manager is the one who is completely responsible for the performance of the fund but the secondary manager brings in inputs.

What is your strategy for the recently acquired Alliance funds?
The obvious is to try and grow their asset size. Some of the schemes have unique investment objectives which we want to continue. Some of the Alliance schemes have been the best performing ones and we plan to take them forward.

There are around 13 diversified equity schemes in the Birla fold. Are there mergers on the cards?
We have the Birla Advantage Fund, Birla Top 100 and Birla Sun Life Equity Fund. These three are the diversified equity funds which focus on all caps, there is no theme attached to them. Then we have Birla Midcap - though it's a diversified equity fund, yet - there is restriction on market cap. Then there are funds like Birla MNC, Birla Dividend Yield Plus, Birla Sun Life Buy India, Birla India Gennext, all thematic funds with different investment approach, but they are diversified equity funds in their own category. Within the equity category, if you put them on a risk spectrum, then we have funds to cater to all investors with different risk appetite.

Tell us more about your equity funds and their suitability to a particular type of investor.
We have identified around eight schemes which are among the best performing schemes. As I mentioned, there are three diversified equity funds. Among them, Birla Advantage is one of the oldest. There is the perception that Birla Advantage Fund's performance is poor. If you go by the facts, Birla Advantage Fund's return over the past 10 years has been as good as Franklin India Bluechip. I am comparing Birla Advantage Fund with Franklin Bluechip because both are in existence for many years now.

Then we have the midcap fund which is at the highest rung of the risk spectrum and is performing well. Its performance has been as good as Franklin India Prima, which is the top of the mind recall. Though Birla Midcap also has a comparable performance record, the fund size has not gone up because of some of the gaps.

Then there are the thematic funds - Birla MNC, Birla Basic Industries and Birla Sun Life Buy India. Then we have Birla Dividend Yield at the lower end of the risk spectrum. Birla Dividend Yield Plus is one of the best performing funds in its own category and is known for its dividend distribution consistency.

What are the gaps you mentioned?
One thing upon which we are focussing is communication. See, either the market has to recognise your work or you have to keep communicating whatever you have done. We are stressing on quality communication. We try to communicate how the portfolios have performed. In my opinion, unless you communicate clearly, you always feel there is a gap. Another thing which I am stressing on is the synergy between fixed income research and equity research so that we can avoid duplication.

How challenging has it become to scout for more and more promising stocks at these levels?
The opportunities are large. I remember that some years ago, the investment universe was only 30-odd stocks and all of us used to say that we can't invest in more than 30 stocks. Today we have vibrant capital markets. And a number of companies which used to be privately held are now realising the importance of going public. So, opportunities are coming and the space is only widening.

What would be your strategy should the market tanks? How do you plan to protect returns?
Defensive strategy will be more focussed on portfolio allocation in different sectors. We continue to hold reasonably good amount of pharma stocks where the sector has not been growing pretty fast and at the same time offers a very limited downside risk.

We have an internal template for each scheme, which lays down the extent of exposure to certain sectors and stocks. Moreover, there are internal limits, which is an automatic risk-mitigating parameter. At times we also use derivatives to hedge the portfolio in a limited way. We generally do not take a cash call. We may take a quiet cash call of not more than 4-5 per cent, but we focus more on sectoral allocations to mitigate such risks.

What is your view on the debt funds? Is it all over for them?
One could have argued to have the highest exposure in equities two years ago. But today we are in a scenario where the market has gone up significantly and because of that, the earning yield is relatively less. On the other hand, bond yields have gone up by 100-200 basis points.

Asset allocations will play an important role and this would mean money coming into the debt funds. Today, the bond market looks flat - one-year yield is the same as the 10-year yield. This kind of scenario cannot continue for long. The liquidity conditions will eventually help the bond market to stabilise. We might see debt funds getting revived this year and that will be largely driven by the asset allocation play.

As far as asset allocation is concerned, one way to look at it is that 100 minus your age should be the amount of equity and the rest should be debt, but that is simply a thumb rule. Another way of looking at it is in terms of the expected returns from each segment and asset allocation can be done on that basis.

My expected returns from debt are around 8 per cent on a simple buy-and- hold basis in the next one year. Suppose my expected returns on equity is 15 per cent and debt is 8 per cent, as against last year's 20-30 per cent and 7 per cent, respectively, the ratio of equity to debt will be hugely different, obviously more debt will come in.

What have been the good and bad things in the budget from the market's point of view?
I think the budget is positive because things have been kept more or less the same and whatever measures have been taken will further growth. Moreover, things likes focus on infrastructure spending and growth in consumption will boost growth.