The Hindu Business Line : `We've narrowed in on a high growth universe'

Mr Sandeep Neema, Fund Manager for JM Mutual Fund, says that it is the real estate component that will distinguish the new JM HI FI (Housing, Infrastructure and Financial Services) Fund, from the slew of infrastructure funds already in the market. He feels the sector is still in a nascent stage of development, with the potential to add stability to the "growth" stocks in the HI FI Fund's portfolio. Mr Neema took some questions on the fund.

New funds that have mopped up a lot of money are waiting for the market to correct before they invest. Under the circumstances, will you adopt phased deployment for the JM HI FI Fund?

I don't see that problem arising if we collect a reasonable amount of money. Some of the new fund offers you mention have raised more than they expected, over Rs 1,000 crore.

When you collect funds of that size, you would be uncomfortable investing them all at once. I feel there are still a lot of opportunities in the space we are looking at.

There are already several mutual funds in the market that play the infrastructure theme. How is the JM HI FI Fund different?

To differentiate ourselves and have more flexibility in the portfolio, we have added a housing and real estate component to this theme fund. We firmly believe that there is a good story in real estate. The financial services sector will participate in this growth because it provides the funding to these sectors.

Typically, infrastructure stocks are "growth" plays that may offer volatile returns. Housing and financial services stocks are low Beta stocks that may add stability to returns. We saw this as a good combination for a theme fund.

You have said the sectors covered by this fund account for about two-thirds of the BSE market capitalisation. How, then, is this fund different from a diversified equity fund?

I would actually cite this as an advantage. We have narrowed in on a high-growth universe, yet offering the benefits of diversification. We expect that the universe we have identified for this fund will grow at roughly thrice India's GDP, at about 24-25 per cent a year.

I don't think any other set of stocks or combination will offer you this kind of a growth rate. What I'm not going to invest in is FMCG, pharma, IT, textiles or sugar stocks.

Isn't there a very limited universe of stocks in the real estate space?

We can play the real estate theme in three different areas. First, real estate developers such as Mahindra Gesco and Unitech, to name a couple. We will invest in these stocks if the valuations are reasonable. This pie will expand as more companies tap the markets to raise funds.

Second, we will look at quasi-real estate plays such as retail and hotels, where there is plenty of choice. Then, we will look at direct asset plays. For instance, companies such as Bombay Dyeing, that hold large tracts of real estate and may unlock value by selling or developing it. In these cases, we will look at disconnect between market capitalisation and the value of assets in the balance sheet.

Fourth, there are the banks and housing finance companies that will fund real estate and infrastructure.

Aren't there governance and disclosure issues relating to real estate stocks?

That aspect is already improving. Several large global real estate funds are already taking stakes in the real estate developers. Once these funds invest, they tend to whip the operations into shape and introduce a greater degree of transparency.

The disclosure aspect will also improve as more companies tap public funds. There were similar concerns about construction companies four years ago and nobody would invest in them. But look at their valuations today. As they have scaled up, the disclosures and governance have improved as well.

In the last six months, we have seen frontline stocks rising and mid-caps staying behind. Do you see mid caps catching up?

If you are bullish on the Indian markets and on the economy, you have to believe that mid-cap companies will participate in that growth. We are seeing mid cap companies scaling up.

In the preceding six months, when mid cap stocks outperformed, many of the stocks had run ahead of fundamentals. That is why we saw the long flat phase. Now with frontline companies running up, you may see mid-caps again participating. But in an emerging economy, mid-caps will outperform over the long term.

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