Breaking the Barrier

Tushar Pradhan, CIO- Equities, AIG Global AMC (India), believes that equity investors should expect a realistic return of 15 per cent. Excerpts from the interview

AIG Global AMC (India), is known for its processes. After Tushar Pradhan, CIO- Equities, checked the interview transcript, so did his compliance department. And, they also sent a disclaimer, which we did not carry. Naturally, our first question pertained to that issue.

You just moved from a much smaller organisation. Is it not restraining moving to a larger, process-oriented set-up?
Processes are needed in a group that manages a trillion dollars in assets. And this is a positive in the long-run. Investors need to have the confidence that their money will be taken care of in the way it should be regardless of individual changes, to a certain extent. They need to know that their money is not being put into someone's hands but an organisation is managing it.

Give us an example.
We have a model for equity evaluation called EPIC - Equity Platform for Investment Communication. This is a web-based, real time equity platform. Once I enter the system, I can pick up any country and any stock being covered and see what AIG analysts have to say about it.

The moment I select a company to cover, the system automatically downloads 10 years of its historical data. Third party research gets incorporated into the system so I get to know other views about the stock. After the analyst researches the company, he inputs his observations and findings. He has to answer queries that are fixed according to category for every company and there is a slot for additional comments. So I can look at this and see the analysts reasoning on why he is giving a sell or buy on a stock and his target price. This eliminates the emotional bias.

So a new person coming in cannot reinvent the model. He cannot say I refuse to look at the company the way you are looking at it. Actually, this is what the company is all about. I am comfortable with this process because it lowers human error.

Is your team big enough to conduct in-house research?
Size of the team is no indication of the quality of research. We cover 200 companies in-house. Including me, there are two fund managers, two analysts and one dealer.

Do you invest in your own funds?
Yes. AIG as a group does so.

What is your take on the sub-prime crisis?
Sub-prime loans are given to people with suspect or sub-optimal credit quality. House prices were going up substantially. So even if someone could not service his loan, the lender would foreclose. The problem started when property prices began to fall and interest rates began to rise. These were all variable loans with reset clauses. The sub-prime loans were at a teaser rate for two years. Since most were done in 2005, it is time for a reset.

With interest rates going up and property prices falling, the rates of default are expected to go up.

Isn't it a challenge setting up a new business at a time when the markets are volatile?
Equity, as an asset class, offers a higher compounded rate of return compared to any other asset class. If I look back 15 years, I would have got the highest compounded return in equity than any other investment. Take rolling 15-year periods anywhere and you will find it true.

The second way is to look at equity as a market. The estimated real GDP growth rate in India is 8.5 per cent. Other economies may be larger but ours is growing faster. As an equity investor, I would rather invest in a growing economy. So in addition to equity offering better returns than any other asset class, we are talking of a growth story in India. Markets will be markets. One cannot expect it on a linear basis to always be worth more tomorrow than today.

What returns can an investor expect?
The Indian market over the last four years, from 2003 to 2007, has been a one-way street with just two
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