"The genesis of a bull market is in a bear market and vice versa. So the starting of the bear market may be attributed to very high expectations which mean high valuations." - Bhupinder Sethi

Bhupinder Sethi, Head of Equities, Tata Asset Management Company has an overall experience of 17 years in equity research and fund management in the Indian capital market. In a freewheeling interview with Saikat Mitra he shared many important insights on smart fund management in the Indian context.

What brought you to fund management?

After pursuing my MBA, I got a job with UTI Mutual Fund and there I got into the equity research. So, in a way you can say that equity research was my first job and capital markets the field in which I directly got into.

Please share with us your investment philosophy?

In a sense the field of investment is simple but it is not easy. Simple in the sense that what really makes for a great investment is to look for companies run by good management and companies which are superior in terms of business efficiency. Also we look out for companies that are generating superior cash flows. Apart from the earnings growth what one has to follow is the valuations. At the core of the portfolio you have to have companies with superior business qualities. Apart from these one should also look forward for decent business models coupled with better earnings growth. That is the sort of basic construct of mind that I have for managing money.

Can you share with us your first investment idea?

I joined this business in the year 1994 and at that time it was the FMCG companies that did well in a scenario of an industrial slowdown along with MNC pharma companies. The big call came across only in the year 1996-97 when software companies started doing well. These companies were quoting at single digit valuation with an earnings growth of 30 to 40 per cent. I remember one of our analysts did some DCF for software companies and he came out with fair values of two to three time the current price. At that time it was a big change for us. Normally the fair values do not come that higher. So as a team those were the really big baggers that came along which were fascinating too.

According to you what are the key signals that you look forward for entry and exit in a particular stock or sector?

The entry level would basically come from the fact like the valuations. Clearly, lower the valuations better the entry opportunity along with facts like what really lies ahead for the sector and for the company. We have to look forward to any regulatory changes that may happen and whether a movement in the sector is in the offing. Also, factors like ageing of the business model or a new management take over are some other points that one has to look for.

Don’t you think that the information that comes from the management side during a visit to any particular company is somewhat directed to generate better views on the company?

I think people like Benjamin Graham who are so data driven will never meet the management of a company. But what I feel is that whenever we meet a management we should be ready with our homework on the sector as well as on the company. We should be aware of the past performances of the company and clearly the body work has to be done. If you do your homework on a company even before meeting the management you really know a lot. What we focus on, is that when we go to meet a company we will not ask basic questions like what is your business. The emphasis will be on what you do and how you do. The focus will be on the crux. So when you want to see how passionate they are on the business and what really drives them is to look forward for. So meeting managements really helps you to increase your conviction level on the stock or put you on guard.

Do you think that the buy and hold strategy followed is full proof?

I think in investments nothing is full proof. As I said you have to buy and hold companies which are run by good managements and have good business models which have compounding characteristics. There are companies where the buy and hold strategy will really work. But there are cyclical industries where the buy and hold approach will not work. You have to look forward for businesses with secular growth prospects and managements that can take the company forward given the tailwinds in the economy, this strategy will work wonders. But in a cyclical industry where the management has limited scope of scaling up the business, this strategy will certainly not work.

Is it really possible to recognise a bear market before it hits?

The genesis of a bull market is in a bear market and vice versa. So the starting of the bear market may be attributed to very high expectations which mean high valuations. Then we will see some structural decline in the business models. So can one see high valuations? Yes. Can one see structural decline? There can be telltale signs that one can gauge. To answer your question one should avoid high valuations and business models where we are seeing a structural decline or the conditions have deteriorated for them. If you follow these two even on a stock specific level you can actually avoid major draw downs. But, foreseeing a bull market or a bear market is really challenging. So essentially even if I am not a good forecaster and I stick to the discipline by not buying at high valuations I can certainly avoid some mistakes.

Where do you think the Indian markets are headed?

If you look at the current scenario the sentiments are really sombre. Markets are down twenty per cent from their highs. If you look at the current markets and if you look at sectors like pharmaceuticals, consumer driven sectors and private sector banks they are at all time highs. So it shows that where the fundamentals are strong they are doing well even if there is bad news around. Basically, India has many structural drivers in terms of a demographic advantage. This can be seen by low per capita income which can scale up and in terms of consumer aspirations. So if I take a five to ten year view of India then there are sectors whose prospects look bright. At the current juncture where the investment cycle is not doing well and role of government policy making is also not encouraging the market is getting effected to that extent. We all know that between 1994 and 2004 the Sensex has not gone anywhere. Yet there are investors who were able to latch on to some opportunities and able to compound their money. Therefore focussing too much on where the markets are headed in the next six months may not serve you well. The one that will serve you well will be how the economy is shaping up and what companies are well placed to capture that.

What according to you are the factors that can act as triggers for the Indian market going forward?

The big triggers will be fiscal consolidation. Any step forward in respect to fiscal consolidation is certainly a trigger like the fuel price rationalisation. If the GST gets implemented from the next fiscal it will be a big boost for the markets. Basically the government has to look into two things; one, they have to get their books in order with respect to fiscal consolidation and second is clearly they should be taking any step that shows clarity that the government is acting, like say infrastructure roll out. They have to come out of the political inertia and that is the need of the hour.

What is your advice to the retail investors?

My first emphasis will be that you understand what power of compounding really means. There are many investors who will opt for fixed income in these volatile times but if you get the things right then the few percentage points extra that you get from investing in equities will create enough wealth for you. Retail investors must also understand that higher returns from equities will come with higher volatility. They also have to be long term oriented.