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Aarati Krishnan
Suresh Krishnamurthy

`There are a couple of issues about this rally. It is driven mainly by FII money, so the volatility is pronounced. Secondly, no fresh capacity is being built in the economy. We are trying to cash in on the rally by paying out dividends on all our equity funds.'

Mr P.G.R Prasad, Managing Director, SBI Mutual Fund

Mr N. Sethuram, Chief Investment Officer

SBI Mutual Fund has been out of the limelight in recent times, after a stellar performance by its equity funds in the 1999 rally and a sharp setback in the collapse of 2000. But the fund has put in considerable effort over the past couple of years, to avoid a repeat of the 2000 experience. Mr P.G.R Prasad, Managing Director SBI Mutual Fund and Mr N. Sethuram, its Chief Investment Officer, spoke to Business Line about the risk-control measures that the fund has put in place for its equity funds, and explain why they think SBI Mutual Fund is on a comeback trail.

Excerpts from the interview:

Your equity funds were among the top performers in the 1999 rally in equities. But they seem to have slipped in the rankings over the past three years. Why is this?

Mr N. Sethuram (N): In 1999-2000, we were among the top performing funds. When the markets fell, we fell substantially, owing to our heavy exposures in technology stocks. So, we carried certain baggage which it has taken time for us to shed. Until March 2003, we were in the process of cleaning up the portfolio. This is why, in any analysis of two- or three-year performance, our funds may not fare well. Restructuring moves do not usually reflect in performance until the markets pick up. This is what has happened. In the period up to March 2003, our performance was not too good. But it has picked up over the past six months. Since March 2003, if you look at our positions in the rankings, our equity funds have consistently figured among the top performers.

We have also adopted a clear focus for our two diversified equity funds. In Magnum Multiplier Plus, we are focussing on a higher return, by allocating a larger portion of the portfolio to mid-cap stocks. In Magnum Equity Fund, the focus in on high quality stocks — blue-chips. We have also rectified our sectoral exposures which were overweight in certain sectors. Today, you may not find the sectoral exposure of any of our funds over 20 per cent. Now if you look at any of our funds, you will see a very diversified profile.

When your Contra Fund was launched, you specified that you would be following a contrarian investing strategy. But now, its portfolio appears quite similar to that of your plain-vanilla equity funds...

N: Many of the stocks which now figure in the Contra Fund's portfolio were included about a year back, when they were not the flavour of the season. For instance, when we invested in BHEL, it was not a sought-after stock. But now, it figures in most portfolios. We have to take a call on whether there is further scope for appreciation in this stock or not. And we find that there is still good potential in the stock, so we have held on to it.

Secondly, we have found that it is not possible to consistently unearth stocks which are not yet discovered by the market. So we have moved to a situation where 50-60 per cent of the portfolio is invested as usual. For 30-40 per cent, we do try to look out for and invest in genuine "value" buys. Right now, the market is such that every reasonable-sized company with good prospects has already been discovered. If we want to go outside of this set, we may have to venture into really small-cap stocks, which may be quite risky.

Though you had the right kind of stocks in Contra Fund, the fund has under-performed comparable sector funds. Why is this?

N: In the Contra Fund, we specifically do not invest in IT, FMCG or pharma companies, as we have specific sector funds for these three sectors. This investment focus has handicapped the fund at times. For instance, pharma stocks have appreciated sharply in the recent months, but Contra Fund has no pharma stocks in it. Similarly, we missed out on the tech stock rally of August/September. But over a period of time, these will get evened out. Contra Fund has, in fact, been a consistently good performer, both over a one-year and three-year timeframe.

Diversified equity funds have appreciated by as much as 100 per cent over the past year. Should investors in equity funds be booking profits?

P.G.R. Prasad (PGRP): My advice would be based on the risk profile of the investor. If a retired investor asks me this question, I would tell him to quit if the Sensex is at the 4500-5000 level. To my mind, there are a couple of issues about this rally. Yes, it is broadbased, but it is driven mainly by FII money. Retail participation is not very high. So the volatility is pronounced. Secondly, no fresh capacity is being built in the economy. Corporate performance has come from better capacity utilisation. True, the FIIs are currently finding India an attractive destination. But if they find an alternative, they will switch. So, I would not like to bet on this rally. On our part, we are trying to cash in on the rally by paying out dividends on all our equity funds.

In 2000, your equity funds fell much more sharply than the market. If there is a market reversal now, what kind of risk-containment strategies do you have in place, to protect your funds' NAVs?

PGRP: We have several. In the 1990s, we invested in some of the companies through a private placement of shares. Many of these companies did not fare well. In such cases, exit became quite difficult. This time round, we have not invested in such offers and have specific guidelines forbidding this. Secondly, on the last occasion our sectoral weightages were skewed towards few sectors. Today, we have restrictions on how much exposure we can take to one sector. This is monitored by our investment committee.

You still have a significant investment in mid-caps stocks. Does not this add a higher risk element?

N: No. In fact, we have done statistical analyses of our equity funds to study their risk profile. The portfolio betas of our equity funds are all at 1 or less than 1.

This is the weighted average of the betas of the stocks which make up the portfolio of each fund at the end of the month. Mid-cap stocks usually have a higher beta than the market, so this shows that we are not taking undue risks.

Even Magnum Multiplier Plus scheme, our scheme which has a mid-cap focus, has a beta of 0.90.

Costs are now eating into a large proportion of returns in the case of income funds. Going forward, if portfolio yields fall to 5.5 - 6 per cent and expenses take away 1.5 per cent, would not investors turn away from debt funds?

PGRP: I agree that costs are likely to dent returns when there is no longer a steady decline in interest rates. As an industry, we have to bring down distribution costs which is a large chunk of the total cost in debt funds.

On our part, costs will come down given the steady expansion in asset size. We are also working on a few more initiatives to reduce costs and will be rolling out a detailed gameplan shortly.

How is your new scheme Magnum Income Plus different from your Monthly Income Scheme?

PGRP: The scheme is open only to retail, individual investors, unlike the Monthly Income Scheme which is also open to institutional investors. In terms of investment profile, the scheme can invest up to 20 per cent in equities.

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