Prior to joining Morgan Stanley Investment Management, he worked as the Chief Investment Officer - Fixed Income and Hybrid Funds at Birla Sun Life Asset Management Company Ltd. Several funds managed by Navneet got recognition for their consistent superior risk-adjusted performance and won several awards from independent agencies such as CRISIL-CNBC TV 18, ICRA, Reuters Lipper and got top ranking in Value Research. Navneet is a postgraduate in accountancy and business statistics and a qualified Chartered Accountant. He is also a charter holder of the CFA Institute USA and CAIA Institute USA. He is also an FRM charter holder of Global Association of Risk professionals (GARP).
Brief us about SBI MF’s investment philosophy. To what extent has it changed over the years?
Our investment objective is to provide superior risk adjusted returns on a consistent basis with a long term orientation through a fundamental research approach.
Superior risk adjusted returns means delivering returns higher than the relevant benchmark and the average peer set adjusted for the risk.
We focus on consistency of returns and have a long term orientation. Our focus is always on better “risk adjusted returns”. For us, risk management is not an “after the fact” activity but fully ingrained into the whole investment process. Even though bulk of our investments are in high grade issuers, importance of credit research cannot be undermined as business cycles are becoming shorter and fixed income markets are illiquid.
Most important is to maintain sanctity of the product. To put it simply, our large cap fund (Magnum Equity) can’t have even 1% exposure to midcaps. Similarly, we have limits like 3-year average maturity in our short term fund and Gilt short term fund. The fund manager can’t exceed that even for a day.
There are internal templates for each scheme that clearly sets the risk-return framework (benchmark, tracking error, index coverage ratio, deviation on sector and stock level, market cap restrictions etc and duration, liquidity, credit parameters for fixed income funds).
There are three ways of making money in equity funds, market timing, sector allocation and stock selection. We avoid market timing. Sector calls are top down but more of a risk overlay and a reflection of what we like on a bottom up basis. We are bottom up stock pickers and the source of alpha is mainly through superior stock selection. To achieve that we have put in place a robust research process. We are building a “quantamental” fund house, i.e. focus on fundamental research with a quant overlay.
We follow two distinct philosophies in equity funds, one, a relative return philosophy that’s primarily applicable to large caps where the idea is to beat the benchmark over a 1-2 year basis. The other is absolute return philosophy that’s mostly applicable to mid and small caps. Here, based on our assessment of competitive advantage, return on equity, growth, management and valuation, we look for ideas that have potential to generate absolute returns over a 3 year plus horizon.
What is your outlook on the economy over the next 12 months?
The macro situation had bottomed last year with challenges as twin deficit, subdued growth, high inflation and weakness in external account are clearly behind us. India has been agile as well as fortunate to counter each of these issues with proactive policy regime and concurrent softening of the global commodities.
Capex by central and state governments will kick-start the investment cycle followed by private capex at a later stage. This should start the virtuous economic cycle. While we maintain our long term positive outlook given the structural and cyclical improvement in the macro, softer interest rates and better business climate, we expect markets to consolidate its gains in the near term. Major move in the market over the last year has been driven by valuation re-rating and further gains will track earnings growth, in our view. We also expect equity issuances to absorb good part of the incremental flows helping the market to take a breather in the near term.
How do you view the currency movement?
RBI started its monetary easing cycle in the current quarter. Given the fiscal consolidation, global deflationary environment with soft commodity prices and government’s focus on addressing the supply side, we expect RBI to continue with a softening bias on interest rates. We were pencilling in 100 bps rate cut in CY 2015, so we expect another 50 bps rate cut in next quarter.
In terms of currency, RBI has demonstrated exceptional agility and vigilance to absorb any shocks after the 2013 experience. INR today is among the least volatile currencies in its peer set. Although, the on-going sharp USD rally will have a profound impact on policy and markets around the world and India is going to be no exception. We expect Rupee to witness marginal weakness as RBI would continue to beef up reserve and prevent undue appreciation of rupee.
Should interest rates rise in US, what impact would it have on FII flows into India?
The US dollar has appreciated against most of the currencies, having a disinflationary impact on the US while negatively impacting profits of its companies deriving revenues from the rest of the world. Bond yields have touched ultra-low levels (near-term yields in most of the developed world are in negative zone) and the liquidity glut has benefited most of the other asset classes.
Though the tentative agreement of Troika with Greece has provided a relief for the next 4 months, a lasting resolution to the problems in the Eurozone periphery would not be easy given the political polarization. Though, we must add, sharp weakness in Euro is likely to help improving the competitiveness of the Eurozone. The global environment has been positive for India in two major ways; soft commodity prices have helped in improvement of macro indicators across the board and foreign investors continue to pour money given the relative attractiveness of India.
As we expect volatility in global markets to inch up, could it affect India? Yes. We hasten to add, given the improved macro situation, a stronger external sector balance sheet (forex reserves at record high) and better policy climate (with a decisive leadership), impact on India is likely to be relatively muted. Increased faith in financial assets among domestic investors would also act as a cushion in case of any external vulnerability.
Do you think valuations are high especially with the possibility of earning downgrades?
We are in an environment where one third of the world is operating at near zero interest rates. The persistent carry is seeking shores of investment opportunities that provide good risk adjusted returns. This has amplified the valuations for opportunities where incremental fundamental change is positive. We expect India to remain a beneficiary of this situation where both global and local money seeks equity as a favourable asset class.
Sensex is currently trading at a 1-year forward P/E of around 17.3 which is at a premium compared to the 10-year historical average. The consensus estimates are for an average earnings growth of around 17% for the next couple of years.
While it is true that India is trading at a premium to emerging markets, India also has better earnings growth potential among peers. Hence, while we do not expect further valuation re-rating in the near term, we feel the market can sustain current valuations which are considerably below ’07 peak levels. Going forward, we expect earnings growth to be the primary driver and companies that show superior growth prospects are likely to do better.
What are your views on the midcap space?
We believe that India is at the beginning of an investment super cycle on the back of bottoming out macro, lower factor costs and benefits of global liquidity seeking growth in a growth-less world. Institutional investing has been concentrated in the larger liquid opportunities thus far.
Historically, mid-caps have demonstrated superior performance to the broad market indices during each of the positive economic cycle in last two decades. In the last cycle, they were at the receiving end of weak macro, higher input costs, high interest rates and low operating leverage. The equation is reversing on each of these variables. This positive reflexivity has further gained momentum with favorable eco-system (Government’s focus on “ease of doing business”, access to capital, advances in supply-chain, technological enablers etc.). Midcaps stand benefit the most here.
With the recent run up, mid cap valuations too have improved and are now trading above the10-year average. The recent catch up in this segment has brought the mid cap valuations at premium to large caps. In the last two cycles of the economic growth mid-caps have traded at ~35% premium to market over a long period.
Going forward, we expect mid cap multiples to remain firm as earnings growth tracks sales on the back of better operating and financial leverage space keeps attracting incremental equity flows seeking growth higher risk appetite discount time risks on uncertainty of cash flow progression in valuations multiples start reflecting delivery of persistent earnings upgrades
Which sectors are you bullish and bearish on?
The opportunity of growth in India offers a concoction of multiple themes that revolve around changing governance, changing consumer preferences, changing technology and changing ownership patterns. Each of these variables over the medium to long term possesses disruptive traits that can challenge the current market structure.
Therefore, the new winners of this story will also be different. The government is clearly making efforts on improving the ‘ease of doing business’ with a genuine effort on simplification of not only the tax regime but overall regulatory regime for all stakeholders in business. As the rules of the game change, businesses with operating mindset of ‘yesterday’ may face the heat while extra ordinary opportunities will arise for those who have the vision, integrity and execution capability to win in this new environment.
We remain positive on themes of tomorrow like –
Consumption enablers – like internet, logistics, technology
Cyclical Recovery – revival of investment cycle
Manufacturing exports – light engineering, chemicals, etc.
New-gen aspirational opportunities at the bottom of the pyramid
Premiumization in the consumer segment
In terms of caution, we need to watch financial services very carefully as technology sweeps through the way we operate and transact. Business models not programmed to navigate this trend would cease to exist over long term.
Kindly comment on the performance of your schemes.
We have a wide buffet of products that suit varied preferences and risk return profiles. Most of our funds have delivered superior performances across time horizons. We are proud of our team and culture and with robust processes in place, we are confident of delivering alpha on a consistent basis.
What books have you been recently reading? Any key takeaways?
I have varied interest when it comes to reading. I believe in Charlie Munger’s concept of ‘mental models’ so it’s important to read a variety of subjects. I like reading ancient scriptures and strongly believe that they contain profound wisdom, I have developed a deep interest in meditation from reading them.
Apart from philosophy, history, biographies, psychology, economics, I love reading a lot about technology and its profound impact on mankind. There are some structural disruptive changes happening globally in terms of Artificial Intelligence, Virtual reality, Virtual Money, 3D printing etc. Two books I am currently reading are “Bold” by Peter Diamandis and “Zero to one” by Peter Thiel.
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