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Still Bullish On Equities

Soumendra Nath Lahiri, Fund Manager, DSPML Fund Managers, remains bullish on Indian equities and anticipates a 15 per cent compounded annual return over 3 to 5 years

After completing a bachelor's degree in Mechanical Engineering from the Regional Engineering College, Surathkal, and a Post Graduate Diploma in Management (PGDM) from the Indian Institute of Management (IIM), Bangalore, in 1994, Soumendra Nath Lahiri joined Crompton Greaves. Pursuing his interest in equities, Lahiri moved to Dolat Capital Market in 1995, a domestic institutional stock broking firm, as part of their equity research team and then moved to DSPML Fund Mangers in June 2004 as part of the equities fund management team. Excerpts from an interview:

Markets have been in the thick of action over the past month. What is your view on whatever has happened during this time period and the way forward?
Indian equities have declined by nearly 13.3 per cent since the BSE-30 Sensitive Index hit an all-time high of 12,612 on May 10, 2006. This decline can largely be attributed to a number of reasons. First, there was a sharp correction in commodities, particularly metals and the consequent impact on metal stocks. Weakness in US equities as well as Asian markets impacted the sentiments further. While these two factors played their part, I believe it's the unwinding of leveraged equity positions by domestic retail investors that has perhaps been the most significant contributor to the recent market decline.

Between February and now, there has been a substantial increase in retail investor participation in the equity markets. However, the recent market decline triggered stop losses and resulted in unwinding of positions in order to meet margin requirements. We think that most of these leveraged positions have largely been unwound and now expect the market to consolidate next week before the uptrend resumes, assuming of course, that equity markets around the world also do not display further weakness.

Fundamentals in India continue to remain strong. Growth drivers for the economy continue to remain intact. For FY 2007 GDP growth should come at 7.50 per cent while corporate earnings should grow at 20 per cent. Against this backdrop, the BSE-30 Sensitive Index is currently trading at a PE ratio of approximately 17. We do not anticipate any slowdown in economic growth since all investment themes that are contributory to growth viz. domestic consumption, infrastructure development and outsourcing continue to play out strongly. We remain bullish on Indian equities and anticipate a 15 per cent compounded annual return over a 3 to 5 year investment horizon.

Which pockets or sectors of the market look good buys at the current levels?
The three big investment themes over the next few years will be domestic consumption, infrastructure development and outsourcing. There will be many sectors that benefit from these themes playing out; for example, infrastructure-related sectors - such as construction, engineering, capital goods and banking - are likely to do well going forward.

Tell us about your research team. What's your stock selection process? What are the variables you look at while selecting stocks?
We have three fund managers and three analysts. The investment objective of a particular scheme shapes the portfolio that is most appropriate for that given scheme.

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 has been your defensive strategy for the market falls, like the one we witnessed in May?
In the current market scenario we have shifted focus on sectors where we see strong earnings visibility, reasonable valuations and return of pricing power. We have also increased our weightage in large cap stocks.

Tell us about the two funds you manage and their positioning. To what kind of investor would you recommend each of these funds?
The DSPML Opportunities Fund, which was launched in March-April 2000, has a more dynamic streak to it and the idea here is to take bold sectoral bets. Most diversified equity funds today are in the same multi-sectoral bucket. Since this fund takes more aggressive bets on sectors and stocks, you will find that the portfolio turnover will be higher than say the DSPML Equity Fund. The portfolio's positioning here, is therefore more tactical in nature.

This fund has grown from about Rs 50 crore in May-June 2002 to over Rs 1,000 crore today. So, the fund flows in this fund and the brand recall are pretty good, along with the impressive fund performance.

DSPML India TIGER Fund's investment objective is to generate capital appreciation by investing in sectors which could benefit from structural changes brought about by the liberalisation of economic policies of the government and/or from continuing investments in infrastructure, both by the public and private sector. Economic reforms and infrastructure development are likely to be among the key catalysts for economic growth in the medium term, with the growing service sector and higher infrastructure investment likely to sustain higher growth.

You have taken over the charge of DSPML Opportunities recently. It started off in an aggressive way, but is now managed very conservatively which is unlike many other opportunities funds. What can the investors expect from you vis-à-vis this fund? What sort of opportunities will you be looking at to add to this fund?
The DSPML Opportunities Fund is managed with an objective to adapt to the changing market trends. The fund is therefore easily able to switch between stocks and sectors in order to take advantage of appropriate market themes, and seeks to capitalise on up-trends in certain sectors at varying points in time.

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. Our efforts will be to consistently outperform the benchmark index and the peer group of funds. The fund will focus on companies and businesses that are expected to deliver superior return over the longer term while taking advantage of mispriced opportunities in the near term.

Both of your funds have seen a sharp rise in their assets in the recent past. Is it a challenge to manage such big funds, particularly when the markets are going through such an uncertain phase?
Fund management in any market condition is always a challenge. We have an experienced fund management team and are comfortable managing these funds despite a sharp increase in assets.

We have taken a defensive approach in this volatile phase of the market and have moved towards companies with strong earnings visibility and reasonable valuations. We have also increased our large cap weightage over the past few quarters.

The recent market behaviour has been a source of confusion for the investors. What would you like to advice the investors?
Deciding how, when and where to invest one's hard-earned money involves much more than watching the market movements on a daily basis.

An individual should carefully draw out a systematic financial plan based on one's unique circumstances, ability to invest, risk appetite, financial goals and investment horizon. Once you have a clear idea of your financial position, you can determine an appropriate asset allocation mix that will help you achieve your financial goals.

Although historically, equities are likely to outperform other asset classes in the medium to long-term, individuals sometimes shy away from equity investing because of concerns on timing and the reliability of returns.

The key is to choose your investments wisely, chart out an investment plan, and adhere to it over the pre-defined investment horizon.

An easy solution is to invest into mutual fund schemes through a systematic investment plan.

Mutual funds offer you a well-diversified, professionally managed portfolio at a low cost. Systematic investment is perhaps the simplest and yet most sophisticated way to avoid market timing, while ensuring reasonably good returns through rupee cost averaging and the power of compounding.

By investing for the long term, such investors are also able to extract the full benefit of the power of compounding, since their investment will likely increase on a compounded basis, the longer they stay invested.