Neelesh Surana, Head-Equity, Mirae Asset Global Investments (India), spearheads the Equity investment and research team in terms of developing the investment strategy, designing policies and programs to enhance the portfolio performance. An MBA in finance from, Institute of Management Studies, Indore, Surana has a wealth of experience in portfolio management. He joined Mirae Asset after five years with ASK Investment Managers where he was Senior Portfolio Manager and was responsible for management of Indian and International portfolios. Prior to this, he worked with IL&FS Investmart Limited in the Institutional Equity team tracking Metals and FMCG sectors.
Mirae Asset Global Investments (India) Pvt. Ltd. is a wholly owned subsidiary of Mirae Asset Financial Group head quartered in Seoul, South Korea. Globally, the diversified businesses of Mirae Asset Financial Group offer a range of services including asset management, life insurance, securities and capital & venture investments.
Neelesh Surana tells Anil Mascarenhas of IIFL that “Macro worries call for applying stringent filters while selecting stocks with respect to cash flows, pricing power, leverage, ability to withstand oil, interest rate and currency.”
Brief us about your fund’s investment philosophy. To what extent has it changed over the years?
Our investment philosophy is a combination of top-down and bottom-up approach. Top-down approach enables us to select businesses based on key trends while bottom-up approach focuses on identifying stocks based on favorable price-to-value gap. Not much has changed in our approach, despite unprecedented changes in macro in the last few years as we continue to believe that returns will be driven by individual merit of businesses. Macro worries call for applying stringent filters while selecting stocks with respect to cash flows, pricing power, leverage, ability to withstand oil, interest rate and currency.
Do you expect the bottom-up strategy to prevail?
Certainly, if we dissect the returns over the last three-four years, we have seen that leadership has changed within many sectors, e.g., Information Technology, Banking, Autos (2-Wheelers), Retail and Pharma. The differentiated returns highlight the importance of stock picking even in large-caps, and obviously more within the midcaps.
What factors would increase appetite for investing in mutual funds?
Indian investors have historically been underweight on equities and their aversion to equities has unfortunately risen over the last few years due to two factors:
The current asset allocation is significantly skewed towards real-estate, fixed income and gold. The steep jump in both real-estate and gold prices in the last five-seven years has provided lot of comfort to individuals – however, I would be apprehensive in extrapolating the same particularly in case of real-estate where India is significantly expensive in many pockets. Muted returns in competing asset classes like real-estate and gold along-with lowering of interest rates and stability in equity returns could increase appetite for equity funds.
How do you compare Indian valuations with other emerging markets?
If we look at returns in CY2011, India is amongst the worst performing markets and so has been the Rupee. This underperformance is owing to domestic concerns rather than global issues. Central to all these issues is the vicious cycle of inability to absorb high crude prices and the resultant impact on the current-account deficit, inflation, currency and interest rates. At current levels, India’s valuations vis-à-vis other markets are inexpensive considering that it is at the lower end of its historical trading band based on price to book-value (P/BV), considering the sustainable return on equity (RoE) and also the sustainable growth drivers. In addition, investor expectations are currently low, fund flows are muted and the same is reflected in current valuations.
Which are the sectors are you bullish and bearish on?
At current levels, we would stay away from two set of businesses:
- Few stocks in defensive sectors like FMCG and Pharma which are relatively expensive; and
- Weaker businesses in investment related like construction, etc. despite the fall in valuation as free-cash flow could remain a challenge.
Barring these criteria, we see value across sectors. Also, there is no significant difference in valuation between large and mid-cap space. In a tough macro environment, differentiated returns would be driven by stock selection i.e. based on merit of businesses.
Brief us on your fund’s performance. What can MF investors expect from Mirae in the coming months?
We have two pure India-oriented schemes: Our flagship fund, Mirae Asset India Opportunities Fund (MAIOF) is a diversified flexi-cap scheme, with a bias towards large-caps and Mirae Asset Emerging Bluechip Fund (MAEBF) which is a midcap fund. On a relative basis, both the funds have been consistently placed in the Top Quartile with relative outperformance of about 10% (CAGR) in MAIOF and 17% (CAGR) in MAEBF.
Have corporate earnings been in line with your expectations?
Earnings (ex-forex adjustment) have been mixed with disappointments mainly from investment-related businesses, although not totally unanticipated. Generally, we are not focusing much on FY12 earnings as it has been impacted by a slew of factors, many of which would impair the earnings only in the short-term. In that context, we would focus more on businesses where margins are currently impacted by short-term headwinds, but would revert to mean in the long-term.
Every fund manager would give enough reasons to buy a mutual fund. For investors, when is an ideal time they should look at exiting a mutual fund?
Reducing exposure to equity funds could be considered in a scenario which is totally opposite of current scenario based on almost all factors i.e. earnings visibility, sentiments; fund flows; valuations etc. It is a function of risk-reward, which is currently favorable, and thus not advisable.
What is your outlook on the economy, currency, equity market over the next 12 month?
With regards to India’s economy, the current headwinds would have an impact more on the investment cycle. Despite the uncertainties, we believe that economy is structurally poised to deliver decent growth as long term drivers are not impaired, i.e. we would go by assumption of about 7.5% in the long-term. While near term visibility is low, reversion to growth should happen as monetary policy is eased roughly by about 150-200 bps over the next one year or so.
With regards to currency, we believe that the recent steep fall discounts most of the issues related to current account deficit, fund flows, etc. and would go with an assumption of some stability now.
It is difficult to forecast equity markets in near term. These are challenging times given the weak sentiments, uncertainty regarding earnings and fund flows. The factors related to sentiments and fund flows are unlike to get worse, except for some global shock. Given our assumptions related to fall in interest rates, and supported by current low valuation, we expect markets to bottom out. Going forward we see upside arising from a blend of earnings reverting to mean and some improvement in multiples.
What advice would you give retail MF investors in the present situation?
A well-crafted asset allocation is the most important in current challenging times. While allocation money to equity mutual funds one should have a time frame of at least two-three years. With respect to equity mutual funds, investors should keep two things in mind:
It is the best vehicle to invest in equities given the costing as well as stiff competition for returns in the industry, which ultimately benefits investors with superior returns
Across cycles, many of the well- managed schemes have significantly and consistently outperformed the respective benchmark
In your interactions with large investors, what are some of the key concerns they have?
The focus on macros in the last few years has been unprecedented, and thus most concerns are related to macros; earlier it was global factors and now increasingly domestic macros. It is very difficult to form a view and decipher each and every event. In this context a well-crafted asset allocation would help.
What kind of investment strategy, designing policies and programs do fund managers undertake to enhance the portfolio performance?
We continue to stick to the basics of investing and seek to focus on processes which help select/review quality businesses at reasonable valuation.
You also actively guide the equity research team. What are some of the challenges here?
While secondary research (input from brokerages) is important, we try to supplement the same with our own primary research. Our focus is on areas like annual report analysis, regular interaction with management, on the ground views from the industry experts, etc.