The Hindu Business Line : For us everything is top-down, we leave the bottom-up approach to fund managers

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For us everything is top-down, we leave the bottom-up approach to fund managers

Shanthi Venkataraman
Vidya Bala

Going forward, sector choices of funds are going to be ones that can identify stocks that are able to outperform their peer group. MR MUGUNTHAN SIVA, CHIEF INVESTMENT OFFICER, OPTIMIX

OptiMix, like other mutual funds, manages your money. Only, it does not manage stocks; but a portfolio of mutual funds. A unique fund house, which specialises in Fund of Funds products, OptiMix is a standalone division of ING Investment Management (India). In a chat with Business Line, Mr Mugunthan Siva, Chief Investment Officer, OptiMix, discusses the strategies and investment style of the fund house.

Excerpts from the interview:

What factors do you consider when choosing a fund for your portfolio? How much weightage do you give to a fund manager and the fund house, to start with?

We give two-thirds weightage to qualitative factors and one-third to quantitative factors. For us, qualitative factors revolve around the experience of the investment team, not just the CIO and the individual members. We look at the funds' investment processes and how they are able to rigorously apply such processes.

A fund like Franklin Templeton, you would say, is process-driven and does not have so many heroes. They have a group of analysts doing research and providing their own portfolio, and then the fund managers looking at the analyst's portfolio decide which stocks to buy.

If you go to some other fund houses, it may be the CIO sitting in front of you and saying, "my decision was this so I did this". Fidelity again is very research and team driven. How often do you see the name of the CIO of Fidelity? So you get to understand what an AMC is about and that's part of the decision-making process.

Second, we have our views on the AMCs and then the funds at the next level. We have done an attribution analysis, for example, which tells us which managers are good in adding value through holding cash positions; which managers are good at selecting sectors to be overweight and underweight; which managers are good in certain sectors, picking the right stocks and how, therefore, all of these factors influence the portfolio.

What is your investment style?

We have a core and satellite approach. For the core portion, we pick certain funds which we feel can outperform any market and we anchor the portfolio in terms of their risk scorecard.

In the satellite portion, we take positions if we feel in the next three to six months the position will play out. But if you get the call wrong, you could suffer as well. That's where we need to rotate and turn over the portfolio. Somewhere between 60-65 per cent will be in the core; reminder in satellite.

How many funds would you hold in a portfolio?

Five to seven. If our scheme becomes very big then I understand that we will have to go up to about 10. We do not want to take too much exposure in one AMC and we do not want to hold 20 per cent in a scheme. That is because the fund house will suffer when we have to redeem 20 per cent of their fund.

But once you cross 10 funds you'll be compromising on what you are doing, because you are just picking an average of all the funds and not adding value.

Do you look at a fund's current portfolio while making a choice?

Yes we do. Every month we line up all portfolios and look at which is overweight and in what sectors. Do we look at the quality of stocks? Probably not, because in the end we leave that job to the fund managers and we have constant interactions with them. With OptiMix, everything is top-down. We leave the bottom-up approach to the fund managers. But we try and work out who is best at applying bottom-up.

Going forward, sector choices of funds are not going to be different. It's going to be funds that can identify stocks that are able to outperform against their peer group. Therefore, you need to be a very good stock picker in today's market.

Do you balance your portfolio between aggressively managed and conservative funds?

Yes. We do look at factors such as who performs well in an up market and who performs well in a down market. In today's environment we wouldn't put all our money in our core space in funds that only do well in a bull market. You might bias your portfolio that way. You might say out of my 60 per cent in core funds, 40 per cent can go towards funds that do well in a bull market.

We look at aggression and defensive qualities. That's how value funds also come into the game. If you have a 100-per cent equity portfolio, you don't have to necessarily sell to create defensiveness. You might say, let me get out of all my aggressive managers and move to some more defensive managers. Let me get out of mid-caps and go towards large-cap or let me get out of India and go to an emerging market situation. So there are other ways you can defend a portfolio from a market fall.

When you talk about funds with different styles is it different concepts such as contra, value?

The core tends to be diversified. The satellite funds can be anything. We have had PruICICI Discovery Fund, which is a mid-cap value fund. We have had large-cap, value, sector-based funds. At one point we invested in Benchmark ETFs in our satellite space. We considered that Benchmark almost like a fund, because no one else can hold 10 per cent in Reliance or big chunky stocks. If Reliance is going to do 100 per cent like it did in the last 12-20 months, then it is going to be difficult for any fund manager to outperform. People keep saying fund managers cannot beat the index at all. It's just that five stocks form 50 per cent of the index and if those stocks run, you can't beat the index. We're not hamstrung by saying we must invest in only certain types of funds in our satellite space.

Are you quick to weed out under-performers or do you give them a chance to pick up?

One of the things that AMCs appreciate about us is when we do our monthly call we don't say, "why was your performance not good?" That's our decision. We want to know what is their process, how they think and what strategy they are likely to implement.

When we invest in five funds we know that one won't do well. You can't have five great funds. But if you are consistently picking three or more that are doing well, then you have done the job because you get the consistent performance in the long term.

In fact if you pick five funds that are doing well, you are doing something wrong. Because in multi-manager if you say complementary investment styles, then all five styles can't be running the same.

How long do you think an investor should hold to a Fund of Funds, especially considering the relatively high costs involved?

It is like any other mutual fund. If it is an equity product, then, perhaps, a longer term is required. OptiMix's objective is to be in the first quartile (in performance ranking) over 12 months. To give that benefit of complementary management styles, you need to be invested for at least 12 months. It's not really a three-month product where you get into an NFO and when you have an increase in NAV you get out.

Is there a tendency on your part to invest in a fund that will ride the wave, play the momentum and get out at the right time?

Yes, we feel we have identified those and at certain times you will see our portfolio increase our weight to those funds when we are bullish on the market. When we are bearish we start to reduce the allocations there. There are a lot of tricks of the trade in the mutual fund industry. If you study the behavioural patterns you get to know who is going to do well. Sometimes they will surprise you and do something out of the ordinary. That happens because fund managers and AUMs change. You can't sit there and say this fund will always be the same.

Is the lack of a capital gains benefit (which is available for equity-oriented funds) for an investor the reason why a Fund of Funds is yet to catch on?

You could be right. We do not see ourselves as a Fund of Funds. We see Fund of Funds as a way for us to implement multi-manager. We see these asset allocation products are best suited to that environment. Because of the tax factor, an equity fund is forced to hold so much in equity. We saw in May, investors wanted funds to hold cash. Their expectations are, "protect me when I am falling".

Unfortunately our asset allocator product has not had the opportunity to go through a fall, when the core value would have emerged. Had asset allocator been launched in May, we would have returned something like 16 per cent while the average equity fund would have done 6-7 per cent. The model shows that we would have locked out of equity at 11,400. But this is all with the benefit of hindsight. We need reality to happen to prove it.

How do you prevent having too many similar funds in your portfolio?

We look at many factors, one being the correlation of excess returns. Most equity funds have a correlation of between 0.85 and 1 because it's the same asset class. If you take a median, an average, and correlate the excess returns then you get a feeling as to who did well in what type of markets. What we are looking for is someone who outperformed in certain markets and someone who perhaps doesn't do as well in such a market. You create a situation where you get consistent performance.

Another way we look at it is to take every portfolio and look at the overlap of stocks. Let's say we have HDFC A and Reliance B. We look at the overlap between the two. If 80 per cent of the stocks overlap, then there is no point staying invested in two of them.

But what we have generally seen in the mutual fund industry is that the overlap is not more than 20 per cent in terms of portfolio. So that gives us comfort that there is diversification benefit in holding three or five funds.

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