"Go deeper when the consensus is negative" - Neelesh Surana

What is the most significant part of your job as a fund manager?

The most significant part of our job is to identify good businesses, which over a period of time create superior value vis-a-vis its peers (as well as on an absolute basis). An important mandate of our product is to participate in the value creation process as businesses evolve. 

So, how do you go about picking stocks?

To begin with, out of the total listed companies we are track about 250 top companies, which are typically based on market cap (or size). We try to invest in a company with a minimum size-while the number is not cast in stone, but a size of about – Rs100 crore cash flow is an important filter to select the universe. Within the universe, we try to select businesses on a top down basis and once a sector is selected, we need to select companies which are best positioned in the respective sectors.

Please share the research methodology that you have adopted over the years while making a decision on whether to invest in a company or not?

It is a very basic fundamental research, which we have adopted. We try to generate ideas by following certain basic fundamental research like analyzing the annual reports, doing our own financial models, looking at the hygiene of the business in terms of ROI (return on investment),cash generation, meeting the management regularly etc. , When we buy a stock, we look at three things. One is we analyze the business, second is to evaluate the management and third is value the stock.At every step, there are various filters to be applied.

Most of the stocks are well researched now. So, what extra do you do to bring out the novelty in your portfolio?

I agree with you regarding top 50-100 stocks. However, it does not mean that something, which is well covered, is also appropriately priced. Otherwise, you won’t have multi baggers in large-cap companies.

Coming back to a stock, does it really serve any purpose to meet the company management before entering the business?

It depends on various factors, primarily on type of business. For example, in case of a Pharma company, it is extremely important to meet the management because the business is unique. However, the same do not hold true for a commodity sector as one can make a spread sheet and plug in the numbers and thus track the stock without meeting the management as lot of things are readily available.

How can you call it unbiased since the company would not like to share the negatives with you and will only talk about the good things?

I agree with you but that does not mean that management meeting is not useful. The job of an analyst is to filter the noises and get the useful information. Analyzing the past recordsis important to understand consistency of the business.

Being a fund manager, you might have gone wrong on certain decisions. So, what do you do in such situations?

Businesses are dynamic, so one can go wrong because of certain assumptions. What is important is whether you are going wrong temporarily, which would result in a quotational loss? Certain decisions might impair the stock for only short term and in the long term it wouldrevert to original assumptions. In those cases, we as investors do not get disturbed. The resultant quotational loss does not make a difference, and infact give an opportunity to buy more. However, if the assumptions goes wrong with respect to long term prospects, you have to review and if required sell. Typically selling is done under three conditions 

[a] if the stock has reached the price value estimates, 

[b] when assumptions go wrong; or 

[c] if there is better compelling idea. 

There are prolonged periods when the market does not behave as per your expectations.What do you do in such cases?

We have experienced these over the last four years. The global issues as well as domestic problems have led the markets to nowhere. Within the environment, our mandate is to buy better positioned businesses which would outperform. Times have been challenging since early 2008 as markets have not gone anywhere yet many funds including our have experienced decent relative/absolute upside. The same is possible owing to superior selection of businesses. There are large cap companies, which have more than doubled even in these times. 

Is there any way that one could see a bear market coming?

Markets are about excessive optimism and pessimism and the bouts of that coming in. Time periods are getting more shortened. I mean in five years, we have seen two such instances of a bear market that was probably not the case earlier. Right now with the earnings downgrades the PE is 14to 15X. There have been instances where the PE goes to 21-2x also. That is the time when you may not see the bear market coming but that is the time when the maximum damages happens as price-value equation is not favorable. One has been cautious when something is worth 100 and is trading at 120.

Buy and hold is being preached by a lot of investors. Does it really work for retail investors?

Retail investors must have information about businesses they are buying. As I mentioned above the three things, one should not sell unless price-value gap is bridged. If the investor sees growth, then even if the stock is momentarily expensive, he should hold on provided it is a good business.

Who helps me to select the correct fund manager?

It has to be a process driven fund house. There are advisors and various channels which advise on the fund houses. Typically people should follow their track records closely. So, the consistency of outperformance over the benchmark over various cycles and over a reasonable time frame should speak for itself.

What would be the most important advice you would like to give to retail investors?

Asset allocation should be a well thought out process. At this point of time, there is too much aversion to financial assets. The last few years might have been bad but that does not mean that the next few years will also be bad.

There has to be appropriate allocation to equity with a time frame, which is suited to equity as an asset class. People do not mind buying gold and real estate for a longer period of time (10-15 years), same thought process should be applied to equities as well.