Nikhil N Khattau, chief executive officer, Sun F&C Asset Management Company believes that the current slump in the market provides an excellent buying opportunity. He is of the opinion that the economy is picking up with sectors like automobiles, housing and cement poised for sharp upturn and expects a GDP growth of 6-7 per cent. In concurrence with the AMC's outlook, the flagship equity fund, Sun F&C Value had around 23 per cent of its assets in sectors like auto, cement, engineering, metals and diversified companies as on March 31, 2000. The exposure to economy stocks is, however, down from 39 per cent in December 1999.
The AMC is currently in the market with Resurgent India Fund, which will tap the opportunities arising out of acquisitions, restructuring, privatisation and turnaround of Indian companies. The minimum investment in the fund has been pegged at Rs 5 lakh.
Q. Why is Resurgent India Fund targeted at big-ticket investors?
NK: This fund will test the patience of both the investor and the fund manager since one will have to wait to reap the reward of a turnaround or restructuring. It will be some time before retail investors understand this kind of a product. The fund will have a very low portfolio turnover with little volatility.
Q. Have you already zeroed on some scrips for the Resurgent Fund?
NK: We are looking at around 60-70 companies and some of them include Crompton Greaves, Raymond and Siemens. For instance, Crompton is being split into three different corporate entities with each company operating in a niche area. The company also sold Skycell, which was running cellular services in Chennai. On the other hand, Siemens has a software subsidiary but its valuation is not reflected in the company's share price.
Q. The bourses have been extremely volatile for some time now even though results have been encouraging and economy is growing.Your comments
NK: The markets have partly slipped in the hands of investors. The introduction of rolling settlement has also affected the sentiment as it has squeezed liquidity from a number of scrips. You cannot have rolling settlement without introduction of derivatives. Still, we are bullish on the markets and believe it is a good time to buy quality stocks. There has been no significant change between when the markets were at 6000 levels and now. We expect an earnings growth of 25-30 per cent for the broad market. Though the earnings growth for software will be higher, we will not see PE levels of 200-300. I also see markets looking beyond technology and pick up pharma, FMCG and cyclical stocks. However, I advice investors to enter equities with a long-term perspective (at least two years) and not as momentum players.
Q. But, do you see Federal Reserve adding to the global meltdown?
NK: It depends. A sizeable portion of FII money in India is that of India-dedicated funds. Hence, these funds cannot sell off here and put money in US treasury. It is only if investors in these funds press the redemption button, we could see a sell off. On the contrary, we could see some fresh investments coming into India if our markets remain relatively stable.
Q. You have maintained a significant exposure to cyclical stocks in the last one-year and even took it to 61 per cent in September, 1999 while pruning exposure to IT to 10 pert cent as you expected a sustained recovery in the economy. It has not happened so far…
NK: We continue to be bullish on the economy and have been waiting for a turnaround in sentiment with investments in cement and other cyclicals for almost a year now.
Q. So, when dos that wait end?
NK: I do not know but the growth is there.
Q. What has been Sun F&C's experience with investors in the recent fall?
NK: There is a very positive development that retail investors are showing maturity amidst the steep fall. I have been visiting different parts of India regarding Resurgent India Fund. Investors ask me whether it is a good time to buy to average out their cost of acquisition. They also know they have taken a high degree of risk by investing in technology stocks and technology funds and hence, there is no panic. Even at Sun F&C, we have seen our net assets move up every day as we get fresh investments. There has hardly been any redemption though some investors have opted for a lateral shift from equity to debt. Only high networth individuals have burnt their fingers with momentum play or those investors, who had borrowed money to invest in equities or funds.
Q. What is Sun F&C's outlook on interest rates?
NK: We are of the opinion that interest rates could harden in the medium turn as demand from economy picks up coupled with the government's huge borrowing programme. Consequently, we have reduced the average maturity profile of our portfolio from 2.8 to 2 years.
Q. Your bond fund, unlike some of its aggressive peers, has restricted its exposure to gilts even as interest rates declined?
NK: Our fund has given a one-year return of 13.12 per cent as on April 28, 2000, which is a good return. We go by the principle of safety, returns and liquidity, in that order. A lot of debt funds, even us, were hurt when prices fell in the debt markets in March. But, we were not as badly hurt as some of the other players.
Q. Your equity fund has a size of Rs 55 crore but has more than 60 stocks. Is it not too diversified for comfort?
NK: We keep altering our investment strategy in line with the market. When the market is in a bullish mode, we pick up some small and mid cap stocks since these stocks rise very fast in a rising market. Even though they do not form a significant part of the portfolio, they provide a kick to the NAV. We come back to our core holdings once the market turns bearish - the fall in these stocks has a marginal impact on the NAV. Second, we disclose our full portfolio and some of these stocks would have appeared as we are in the process of exiting those counters.
Q. Are you looking forward to any sops from the government?
NK: We only want the government to allow pension funds. However, this will involve lot of hard selling since it would take away the assured return of 12 per cent from an employee in a firm. On the other hand, the government will also lose a steady and big source of investment in government securities since pension funds will be investing in different asset classes.