George Heber Joseph, CEO & CIO, ITI Asset Management Limited,
has over 17 years of work experience in Fund Management, Equity Research and Capital Markets. He has been a Senior Fund Manager in ICICI Prudential Mutual Fund with an excellent track record of managing few flagship schemes with assets under management exceeding Rs10,000cr.
In an interview with Shweta Papriwal, Editor, IIFL, George Heber Joseph
said, “Economies will go through ups and downs but Indian economy is in a good shape and has good long-term growth prospects which many other developed countries do not have..”
Is this a good time for a new fund house to enter the market? The overall economic situation seems to be a little uncertain and the markets are so volatile.
Looking at the macro economic situation of India and the favorable demography the country has, we believe next 10 years would be the golden period for investing and also for asset management business. As Indian GDP keeps compounding at ~12% nominal growth rate (7-8% real GDP growth and 4-5% inflation) we could comfortably reach a USD 8 trillion economy in next 10 years. This will mean large pool of money will be chasing various asset classes, financialization of economy will keep happening at certain pace and therefore the quantum of money which could potentially chase financial asset classes like equity or debt would be significant. We believe it is always better to start a business in a downcycle than starting the business in an exuberant upcycle industry situation. This enables you to plan your business well, attract the right talent at reasonable cost as expectations would be low and overall costs could be kept under check and be efficient. Mutual fund is a very good business and it is not capital intensive at all. The fixed cost is low and operating leverage is very high as soon as it reaches an AUM scale of Rs10k crores and above. So, we believe macro is clearly in our favor and setting up the business when industry is going through tough situation is always good for a long-term player.
Economies will go through ups and downs but Indian economy is in a good shape and has good long-term growth prospects which many other developed countries do not have. Since we are present in India, the opportunity is immense and we are quite optimistic about the business prospects. We have zero legacy, have a fresh long-term thinking, have put tight processes for debt and equity based on the learning from Industry players - mistakes and also from good work. So, looking at the long-term macro prospects and the current industry situation, we believe there is a big opportunity to set up a mutual fund which could create a strong investment management platform and offer a differentiated investment experience for investors.
Several fund houses have taken a hit on account of the defaults in the marketplace. What is your take on that?
I see this as an issue of weak processes or processes getting compromised in an urge to generate higher returns. When a stock is bought or invested in a debt paper, before buying if the due diligence is not done and if the returns are not seen along with the commensurate risks associated with the instruments, big mistakes in stock buying or defaults in debt paper are bound to happen. Many a times the urge to collect more AUMs also overtakes processes. Our view is that bottom up research is very critical when it comes to pick the right stock and also to pick the right debt paper. In bottom up research we will be fundamentally analyzing the underlying business, promoters, leverage levels, cashflow situations and risks associated with the business. This gives a good understanding how much risk we are getting exposed to while buying a debt paper or a stock. If this process was strong in a mutual fund then this issue of defaults would not have happened, so at ITI Mutual Fund, our focus is mainly getting the bottom up research and credit research right and not forecasting the macro economic variables – which are much difficult to predict.
Do you foresee any gaps in the current AMC space? How do you plan to plug them?
We are seeing few gaps in the current AMC space and those are the opportunities for us as a new player. Gaps we see are 1) bottom up research or credit research is not strong enough with regard to few players; 2) Risk appetite of few industry players are above average – many are ready to take excessive risks in certain product categories which otherwise is a bank’s domain (a bank has a bigger balance sheet, better risk capital and robust risk pricing mechanisms); 3) Lot of focus on macro forecasting – which nobody has any hang on; 4) Compromising Risk management practices – risk and returns go hand in hand. Many have missed the risk-return framework which is clearly visible in the recent defaults; 5) Lot of industry players were found busy increasing equity AUM by paying upfront commission when markets were bit frothy in 2017.
We are cognizant of the gaps in the AMC space and have carved out our own investment philosophy, processes, risk management practices, sales and product strategies to circumvent all the gaps seen in the MF space. We have clear focus on bottom up research and identifying sound businesses is our main objective – Debt and equity funds will be truly based on research. We have below average risk appetite compared to many others in the industry and therefore many risky product categories within fixed income space we might not be present at all. A bird in hand is better than a bird in bush. We believe macro forecasting is like a bird in a bush and we’ve not seen anyone getting it right, and bottom up research is like a bird in hand – so our focus and analysis will be on what is in our hands i.e. the company history, financials, management track record, cashflows, leverage situation, promoter’s history, business acumen, capital allocation history, sectorial trends, etc. This approach will be useful for us to avoid or reduce mistakes in Debt and Equity funds. Our product and sales strategy will be dependent on risk- return framework, market cycles and business cycles, so our endeavor will be to sell certain products aggressively when markets are cheap and de-sell certain products aggressively when we see the markets are very expensive. Very few industry players do this at this point in time and I have high regards for them.
Where will your focus lie on - debt funds, equity funds or balanced funds
Our focus will be on Equity funds, short to medium duration debt funds and asset allocation products like balanced advantage funds or any other thematic/solution-oriented funds. Our other aim would be to innovate some unique products which would meet investors needs and long-term goals.
What is your investment philosophy? How do you select stocks?
We have framed a strong investment philosophy for ourselves to efficiently manage funds. We strongly believe in bottom up research and that helps in identifying sound businesses and buying them at appropriate price points.
Our investment philosophy:
Our philosophy is highly influenced by Mr. Howard Marks and Charlie Munger
Think of long-term investing and use short term volatility to accumulate
Aim at risk adjusted returns than simply focusing on returns
Understanding the business thoroughly before buying, this gives conviction in periods when the stock keeps going down
Always spend time and energy on good quality businesses and not on low quality mediocre businesses (minimum 13% cut-off on ROEs on all core holdings)
Buy good quality stocks at reasonable valuation and not at any valuation
Select companies with good track record of management and promoters
Buy businesses with low leverage,
Always understanding the company and its business environment. This is important than focusing on broad macro trends.
Catching winners are important but our other motto is “if we avoid the losers, the winners will take care of themselves”, this also can be practiced only if we analyze the companies thoroughly on bottom up basis. Avoiding mistakes is more important than catching the winners because if we lose capital then making money becomes a difficult proposition.
The macroeconomic situations are good to know and help you to understand what is happening around the world but I haven’t come across anyone who has got the forecasting on GDP, interest rates, inflation, sectorial trends, etc. consistently right over my 27 years of personal investing experience. So, my faith in macro forecasting has been coming down year after year and my belief in bottom up investing kept on increasing and as of now, we believe in it fully. Macro understanding may help to prepare and not predict.
What investment strategies have you adopted to invest in equity market?
Buy good quality businesses at reasonable valuation and buy good businesses in temporary problems are my favorite strategies. Understanding market valuation cycles, business cycles and earnings growth are important in framing the investment. This helps in riding the bull and bear market cycles, bubbles and booms with limited negative impacts.
Where do you see Indian equity market in FY20? Which sectors according to you would outperform in FY20? And, which sectors you are avoiding?
It is difficult to predict where the markets are going to be in FY20. At current juncture, markets are not cheap and potential positive election outcomes can take the market up and I see a possibility of valuations getting stretched. In the year 2013, the markets were cheap just before elections but the construct of the market before the elections this time is not the same as 2013. If we look at all sectors what is very clear to me is that the FMCG sector is clearly expensive and Pharmaceutical sector is very cheap.
After seeing new highs last year, most fund houses are witnessing a slowdown in inflows. How do you propose to garner funds at such a time?
We have a long-term mindset when it comes to our mutual fund business and therefore, we don’t worry on the short-term trends. From a long-term perspective, we are quite bullish on the business and next 10 years is going to be a dream period for asset management companies. We are confident that our investment philosophy is quite unique and definitely our partners and investors will take note of our actions. We have created a robust investment management platform focused on ethical practices, transparent communication and investor centric investment strategies, which will eventually attract long term money from investors.
Some people say that this is a good time to invest in small and medium caps; whereas quite a few have another opinion. What are your views?
Markets are fairly expensive at this point in time and therefore mid and small caps are not my preferred bets. Mid and small caps have to be bought when broad markets are cheap and that is not the current market construct, so my preference is for safe large caps. If markets get a thumbs up from election outcome, then there is a possibility of retail money flowing into equity and therefore mid & small caps could outperform for some time.
What are the targets that you have set for yourself as far as AUM is concerned? What are your growth plans?
Our long-term target is to be in top 10 mutual funds by profits in next decade. Next 5 years we would be targeting Rs60k crores AUM for our mutual fund, it is quite possible to be achieved as the industry growth expected by us in next 5 years is also quite huge.