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Vision for Growth

When Sunil Singhania joined Reliance Mutual Fund, it had less than Rs 100 crore in equity assets. Today, with Rs 17,700 crore, he is part of the largest equity fund player. Excerpts from an interview

A CA rank holder, with a few years of experience, Sunil Singhania began his investment career with Motisons Securities as president. He set up the business and later moved to Advani Share Brokers, handling institutional research and sales. Over there, he completed his CFA and moved to Reliance in 2003.

When he moved to the funds business, Reliance Mutual Fund was handling less than Rs 100 crore in equity assets. Today, with Rs 14,000 crore in equity assets, Singhania is part of one of the largest equity fund players in the business.

When did you decide that invesment management is the career for you?
Right from college, financial management used to excite me. Reading balance sheets and trying to analyse companies always interested me. Even during my CA practice, I would look into the practical aspects of accounting and balance sheets. That was the time when stock markets actually started to come into focus with liberalisation in the financial markets. Since 1992-93, the scope in the financial markets grew. When NSE started operations in 1994, I decided that to move to a career in capital markets.

What has been your biggest break as far as your career is concerned?
Frankly, I don't know. I have never thought about it. My career has been a smooth sail with no regrets. Traveling abroad has been a great learning experience. I was on one of the CFA global committees so would travel during those days. Since 2001, I began to travel extensively on work. The traveling and interacting with people across borders has helped me a lot and broadened my horizons and I think very few people have that kind of experience.

What has been the toughest phase in you career?
Over the last 16-17 years of my career and nearly 12 years of my experience in capital markets, I have seen it all - the boom times and the scams. There have been times when people used to tell me - 'koi doosra dhanda dekh lo'.

These times are challenging because I have to actually perform on a day-to-day basis. But I am not saying that it is the worst phase of my career. It is challenging but also a lot of fun. One is basically competing against their peer group who are extremely competent and equally passionate about the job. It is really challenging to give returns on absolute basis, outperform the benchmark, and compete against the best brains in the country.

With such a stressful job, what hobbies do you pursue?
(Wide grin). Hobbies ke liye time hi nahin hai. I read, I watch some TV and I like to spend time with my children. I have nine-year old son and a five-year old daughter. I would do them a grave injustice if the little time that I get, I don't spend with them.

What is your view on markets?
Given the long-term fundamentals, I think markets are quite okay and we are quite comfortable. Short-term money supply and geo-political events globally are likely to take precedence. At the same time our view is that the kind of volatility we saw a couple of months back, we are not going to see that at least in the near term. Though markets might swing up and down depending upon the news flow, it's not going to be as volatile as it was a couple of months back. Medium-term we remain positive. The maximum money in the markets comes during November-December and February-March period. We feel this year is going to be no different, unless some catastrophic event happens. The companies results have been quite good. I think all the negatives which the market was apprehending till June are more or less resolved. It was rising interest rates but now, in fact, interest rates have started falling. The monsoons were a factor. Corporate results have been quite good. The GDP at the macro level and economic factors are all in favour of companies doing well. So we are anticipating no reason why the earnings momentum will not be maintained.

Of course, people argue that India is the most expensive among all the emerging markets, but given the corporate earnings, I think India is also the fastest growing as far as the corporate earnings are concerned. Growth always comes at a price. A forward basis valuation of 14-15 times is not cheap but it is not expensive either, provided we are able to maintain this kind of momentum in the next two to three years.

So you are pretty sure about the India story?
Right now the trend doesn't show anything, against our hypothesis.

Despite the optimism, are there any pockets or sectors which you would like to avoid at the moment?
We would like to stay away from sectors where there is some kind of regulation, say oil and gas marketing and refining. The stocks are very cheap, but we don't know what kind of regulation is going to come in place take. So I think buying and selling oil and gas is a call on the oil prices and frankly we don't think that we are competent to take a call on that. It is a difficult topic. But by and large, I think most of the sectors have been doing well and without being too overweight on a particular sector, we are just trying to concentrate on companies, which are doing well within these sectors.

Tell us about the funds you manage and how you differentiate between each of them.
Reliance Vision is predominantly a large-cap fund. So our attempt in Reliance Vision is to have at least a 75 per cent exposure in large-caps, and the balance in very liquid and large mid-caps. Reliance Growth is the opposite. It will have only 20-25 per cent in large-caps to provide liquidity and the balance in mid-caps and a smaller percentage in small-caps or illiquid mid-caps.

Reliance Equity Opportunities is exactly in between and tries to provide the best of both these funds. Since it's a dynamic fund, it can have all mid-caps or it can have all large-caps. Its objective is to pick up the current trend. For example, when we were bullish on financial services, we bought Indiabulls and Reliance Capital. But on an average, the ratio of large- and mid-caps would be 50:50.

Reliance Equity is a new fund and has a simple philosophy: To focus only on the top 100 companies by market cap or the companies which are traded on the derivatives side. So all are liquid stocks. The second feature, which we have incorporated, is compulsory hedging. In other funds we might or might not hedge depending on the fund managers' perspective. To ensure that discipline is followed, we have this feature that on the basis of the PE, we have a certain percentage of equity allocation hedged or shorted. So at the current trailing market PE of about 18-18.5 times, we have to have a 30-50 per cent hedge on our equity exposure. What it tends to do is that in an extremely bull market, it might underperform because some part is always hedged, but in an extreme bear market, this fund would be a saving grace because it will protect your capital. And in a flat market, by using derivatives and by writing calls, we are trying to make that additional 1-2 per cent. So the objective of the big fund is to provide steady returns to the investors on a risk-adjusted basis. So we tell the investor that it must be a part of your equity corpus, because this will be one fund which will save you from heart breaks or big volatility and it has shown that in the current market fall.

Were you expecting to raise so much money in this fund?
We were expecting a good response for a number of reasons. Our track record is very good, we don't come out with new funds very often, and I think the concept was really good. We were really convinced about it.

There are a lot of questions as to how we will manage Rs 5,000 crore. But what happens is that because there is no Rs 5,000 crore-fund in India, it appears to be very large. If you see the present market cap of the country, it is just about Rs 30 lakh crore and Rs 5,000 crore is just 0.15 per cent of the total market cap. In that perspective, I don't think it is a big fund. In fact, the total mutual fund industry is managing only Rs 1 lakh crore which is 3 per cent of the total market cap. I think this will be among the lowest in the world. So in absolute terms, because no one has raised Rs 5,000 crore, it looks to be a huge number.

But because it will hedge or go short, can we expect it to be significantly in cash to support those positions?
It depends upon how much you have to hedge. Suppose the hedge position is frozen to say 15 per cent, then obviously we will have to retain 15-20 per cent in cash. But again to make things clear, we are paying margins by way of FD. So even that cash is earning us FD interest. Coming back to your question, now suppose the hedged position goes to 90 per cent or more, then we will have to keep larger amounts for margin calls. So it will depend upon the PE of the markets, which again goes in our favour because the higher the PE, we anyways would like to have higher cash. So it's an automatic risk management mechanism for the investor. How much is to be hedged depends upon the PE of the markets. The stocks to short or hedge is the fund management's decision, but on a macro level how much to short or hedge is based upon the market PE.

Reliance Growth has delivered excellent returns year after year. Do you feel its size is a concern?
The success of the fund has largely been a team effort and passion. An important thing has been our ability to take decisions and buy stocks which have been unheard of, largely because of our strengths to analyse those stocks in-house. If you track the history of the fund over the last 3-4 years, most of the stocks, which have delivered superb returns have been the ones which were not covered by anyone when we bought them.

Another is that since we have done work ourselves, we were not too early to sell them. A stock can be a multi-bagger only if you hold it. And then, the most important thing is discipline. Wherever we found that life is becoming tough, we have shut the scheme, dissuaded the investors from investing, gone in cash to the extent of 10-15 per cent. Even this flexibility of moving a certain percentage to large-caps has helped.

Obviously managing a Rs 2,000-2,500 crore mid-cap fund is very different from managing a Rs 50 crore or a Rs 100 crore mid-cap fund. But at the same time, the size of the mid-caps which we were buying then and now has changed dramatically. The companies are the same but they have also grown in conjunction with the size of our fund. So it is not that we are buying larger companies, we are buying the same companies but they themselves have become large.

But earlier you could have identified small companies and invested in them with no problem. But now, even investing amounts which could be huge for such stocks individually may be a miniscule part of the fund's portfolio and hence may not impact returns significantly. What's your take on this?
If you talk about absolute returns, you are probably right to a certain extent. But if you talk about risk-adjusted returns, I think now the fund will give you higher returns than earlier because the risk has also reduced. Earlier we were buying micro-caps but now we are not going to take that risk. We are buying quality mid-caps which can become large-caps. Whether you manage a Rs 1,500 crore fund or a Rs 2,500 crore will not make much difference. The difference would be whether you want to manage a Rs 100 crore fund or a Rs 2,500 crore fund. And the difference will be purely in momentum terms. When markets are in huge momentum, then obviously a Rs 100 crore fund will have more flexibility of getting in and getting out. But I think those times are already behind us. The reason why we shut the fund down was basically to prevent churning within the fund. We saw that a lot of large investors were coming in and getting out, trying to time their entry and exit and it was very easy for them to do it. In a mid-cap fund it becomes very difficult for a fund manager when Rs 30-40 crore comes in and then goes off because we are not able to deploy that money fruitfully. Last year in August we shut down the fund for the first time and the second time it was in April this year. It saved a lot of investors from investing at that time. It's our business to gather assets, so it's a tough call to shut a fund. But, I think by doing it, we have gained a lot friends.

What is the advice you would give investors?
If a person is a short-term investor, then I would say that this market has given them an opportunity to exit. If he is a medium-term to long-term investor, I am very sure that the equity market in India, given the strong corporate earnings, can deliver higher returns than any other asset class for at least the next 5-6 years.