The Hindu Business Line : Meet the Manager

A host of new fund houses are set to debut with their offerings over the next few months. Religare AEGON may be among the earliest to do so. Vetri Subramaniam, who joined the fund house as Head of Equity Funds in June 2008, shares his views on the fund house may approach stock selection in choppy market.

What would be the key aspects you would be looking at on stock selection in current market conditions?

I would not be bold enough to suggest that we will reinvent the stock selection wheel! But I am not a great fan of discounted cash flow analysis, in isolation. I believe that DCF can’t be practised across all kinds of stocks, given the many imponderables. We have to be more nimble when we look at stocks. We plan to have a categorisation framework to sift the investible universe of 300 stocks.

This will help us distinguish what are the reasons and financial parameters that make a company a good investment. Such a framework also keeps us away from value traps. Valuation is obviously important, but you shouldn’t get stuck with a stock just because it is cheap. The categorisation framework will help us distinguish between stocks based on business characteristics, so that we don’t rely purely on a single valuation metric to make our decision.

Do you see “value” style of investing outperforming “growth” now that the market is more choppy?

It is hard to predict cycles…but definitely value and growth tend to outperform in cycles, a bit like day and night. We are now in an environment where growth is facing a challenge. This requires us to go back to the drawing board and see where it is, that I’m able to buy companies at reasonable valuations, with growth projections that are fairly conservative, rather than aggressive.

Until 2007, diversified funds had no problem outperforming the Nifty or Sensex. But that’s changed now. Do you think that active funds will find it increasingly difficult to outperform the markets?

I would buy the argument that it would get tougher for active managers to outperform the index. As the market gets more institutionalised and more funds enter the market, it will become more difficult to outperform. Some of the issues related to out-performance in India are related to funds not having the right benchmarks.

If you look at the nature of the Indian market today, 50-55 per cent if held by promoters including government. About 20-22 per cent of the market cap is held by FIIs, with mutual funds owning 4-5 per cent and insurance companies- 8-9 per cent. Only 10-12 per cent of the stock is in retail hands.

The more the institutional holdings in stocks, the more research you have on each stock. Outperforming thus becomes more and more difficult. It is a challenge and we will have to learn to manage it. One of things I believe is that we will be able to add more value by researching the smaller company segment.

We, at Religare, would be looking to build our ability, processes and team towards identifying companies early in their life cycle, so we can get to them before they mature. We will ideally like to expand our coverage to 250-300 companies.

One of the key risks to Indian corporate earnings — input costs — has receded with the recent commodity meltdown. Will this call for an upward revision in earnings estimates?

Commodity prices may be lower than the peak they formed a few months ago, but the problem is that they are still much higher on a year-on-year basis. So this may not materially impact earnings, except on select sectors such as oil companies where there are pass-through issues.

The challenge when we get to the end of the year is not inflation, not interest rates, but the global growth challenge, with a significant portion of the world economy set to see a slowdown towards the end of this year.

There are also have a lot of headwinds that we are facing locally. The steady increase in interest rates from December 2006, suggests that we have been trying to lower our growth trajectory for 18 months now. We are only now beginning to see the impact of this.

The recent move in the market has been led mainly by rate-sensitive sectors such as realty and banking. So what is your view on these sectors now?

That is not surprising, as high beta stocks tend to stay so for a while. Any rise works in their favour. But you need to take a medium-term perspective. For the past 12 months, banking and realty stocks have suffered extensive damage when compared to defensive sectors such as FMCG or pharma.

These short-term bounces can be very misleading. To give you a stark example, after the 2000 crash, technology stocks were the best trading stocks in every bounce in the market, as they tended to outperform on every rally. But that doesn’t mean that they did well over the next three years.

AARATI KRISHNAN

More Stories on : Interview | Investments | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page