"We are seeing a lot of capital flowing into India. This kind of liquidity ensures that the impact or the pain of consolidation is subdued" Brahmaprakash Singh, Executive Director & CIO – Equity Pramerica Asset Managers

Constructing a portfolio that will provide positive returns requires you to be in constant touch with the markets and the economy. Brahmaprakash Singh, ED & CIO – Equity, Pramerica Asset Managers, speaks to Saikat Mitra about his investment philosphy, advising investors to make the equity market as a part of the asset allocation in their investment portfolio.

“Currently, the Indian economy is going through a phase of consolidation… However, the global factors are such that availability of capital from the global markets is much easier at this juncture. So, we are seeing a lot of capital flowing into India. This kind of liquidity ensures that the impact or the pain of consolidation is subdued.”

Says-

Brahmaprakash Singh

Executive Director & CIO – Equity

How did you begin your journey in the capital market?

In the initial parts of my career, I was engaged with a ratings agency. I was also working with the sell side. I worked with CRISIL, UBS and SSKI, and subsequently moved to the buy side. In the buy side, I started my career with Deutsche AMC and then I started two funds in India. The first one was in 2005 till 2007, when I was with a company called Atlantis Investment. I set up and used to advise an offshore fund. In 2008, I joined Baer Capital, and was there till 2012. For the last three and half months, I am with Pramerica.

Can you describe your investment philosophy for us?

My investment philosophy is very simple. It is hard work, basically research-driven concept, and the idea is to generate returns which are better than the markets. Basically, it is good stock picking backed by top-down macro views. This is what I do.

Generally, I tend to pick up stocks which help me to construct a portfolio, which will not only outperform the benchmark but also provide positive returns for investors. That is what I focus on. For that, you need to be in constant touch with the markets and the economy, and based on that, combine both the top-down and bottom-up approach to reach a decision.

What difference do you find while working for the sell side and the buy side?

Actually, not much. On the buy side, the responsibility increases. On the sell side, you are researching and recommending stock ideas to a fund manager, who is supposed to be a very knowledgeable person. Therefore, the processing of the recommendations takes place at these levels. On the buy side, as you are managing and handling money for retail investors, the responsibility of the fund manager increases. Here you have to be more careful.
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What was your first big investment idea, and how did you develop it?

Well, the first investment idea as such will be very difficult to recall. When you construct a portfolio, you are continuously researching. What I can say is that I used to manage Deutsche India Alpha Equity Fund, and that particular fund performed really well in the period of 2003-2005 – performance-wise, it had beaten the benchmark. In 2003, the markets were not performing well, and at that time, picking stocks and creating a portfolio that really outperformed the market for a longer period was my first such experience.

What are the most crucial signals, according to you, which would determine the entry and exit points for stocks?

I continuously analyse the stocks that I know, as well as the markets. I look at the potential of a company in terms of its ability to earn and generate future growth. But the chance of generating higher returns is when the perception about a particular company is weaker than the reality. This actually presents you with an opportunity, as the stock is undervalued at that point of time, and that presents an opportunity to pick it up.

Of course, there is also a flipside to this. A stock may be extra excited as the investors may not get a chance to do due diligence on that company and hope to generate returns higher than their expectations. However, at that point, the company may not be able to deliver those kinds of returns. So, as an investor, what I see is that when the excitement or the euphoria is higher in a particular stock, it is the ideal time to exit the stock.

Do you meet company managements, and do you constantly remain in touch with them till the idea is a part of your portfolio?

This is an ongoing process. We not only meet the managements of the companies where I invest, but we may also meet the companies where we have never invested before. We keep meeting the competitors also. The thing here is that you need to form an opinion and look at a company from a 360-degree angle. It should not be that one meets the management only when investing in a company. You should keep on meeting the management all the time. You keep a watch on all the stocks and keep analysing them. Whenever you feel that it is the time to make it a part of your portfolio, go ahead and buy, and vice versa.

How important is the selection of a correct sector for a stock’s performance?

Quite important. See, what happens is that when a particular sector is not doing well and is going through a bad phase, even the leader may not get the kind of valuation it deserves. Investors do not only make returns on the earnings growth but also on the PE re-rating. Please appreciate that PE plays a very important role in the returns generated. Therefore, it is very important to pick up companies in sectors that are doing well. So, while constructing a portfolio, as I initially explained, any research will pick up the companies based on bottom-up research and also top-down analysis that you do, and then, obviously you choose the sector and the competitive companies in that sector.
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Technical analysis is considered to be a very important and integral part of market success. What is your take on it?

I agree with you that it is quite important. See, the markets are composed of different participants, and no two investors think alike. Therefore, factors like technical analysis do matter. As a fund manager or a portfolio advisor, it is important to keep that in account. However, technical analysis is just an additional tool that helps a portfolio manager to control the cost of the acquisition and ensure that the stock which is picked up or sold ends up generating returns. So, it is a tool, and cannot become the main driving factor, but one certainly needs to take it into account.

Buy-and-hold, as a concept, is widely preached and followed by fund houses. Is this concept completely foolproof, according to you?

Well, the concept has to be backed by thorough research. Buy-and-hold may not be the only concept. For that, you need to continue to evaluate situations. The concept has somewhat developed a bad name as it has not yielded the kind of returns it should have.

Do you believe that portfolio churning is required to create an alpha?

Is it possible to recognise a bear market before it is too late?

Well, I do not think that the correct term is portfolio churning. Just churning will not help, but the valuations of the stock will. If the stock is overvalued, to continue to exit from the stocks that are overvalued provides an alpha. So, only churning will not provide an alpha.

How do you cope with any investment idea that has gone wrong?

As a portfolio manager, if I go ahead with 10 ideas, and if seven and eight of them turn out to be good ideas, then I am very happy and excited. One or two will go wrong. If it is not going wrong, then there is something wrong in me, because if that were the case, then I would have been the richest man on earth. So, mistakes are bound to happen. People have to understand that the ideas that are going wrong will be followed by some success stories. As a portfolio manager, the idea is to prepare for the next opportunity.
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What is your take on the overall current macroeconomic scenario of India?

Currently, the Indian economy is going through a phase of consolidation. We had a reasonably long period of high growth, and whenever you go through a period of high growth, inefficient utilisation of capital takes place. Those economies that are going through a phase of high growth attract a lot of capital, and in that year, the capital gets invested in non-productive assets. Every economy goes through this cycle, and therefore, in India, you will find that a large amount of investments have taken place in areas that may not be economically attractive. 

However, during the phase of consolidation that follows, you will find that you have slower growth. But at the same time, inefficient players emerge during periods of high growth, and they tend to give way in favour of efficient and competitive players. That is where the consolidation of the business or economies takes place.

A consolidation is always very good news for investors, as this is where the pricing power and market share shifts to the corporates. That is where the corporate profitability tends to expand. So, post this consolidation, we will get into a phase where the corporate profitability and margins will expand, and the PE will also expand post that. Before that, consolidation is bound to take place in the economy, and that is what we are going through.

However, the global factors are such that availability of capital from the global markets is much easier at this juncture. So, we are seeing a lot of capital flowing into India. That means that when you are likely to go through this consolidation phase, this kind of liquidity ensures that the impact or the pain of consolidation is subdued. Therefore, the global factors are allowing us to consolidate our economy in a less painful way as compared to what it might have been.

What is your take on the financial performance of the India Inc. for the third quarter, and how do you expect it to pan out in FY13?

As mentioned earlier, what happens during a phase of consolidation is that the margins at that point of time are subdued. In the last two to three quarters, you will find that the economic numbers are not very healthy. This means that the corporate profitability, particularly for the third quarter, may not be very exciting. It will be a bit subdued, and this particular trend will carry forward for a few more quarters before we get into a very healthy performance from the corporates. This is a phase where the markets are driven more by liquidity and less by corporate performance.

What are the triggers that you are looking forward to with regard to the markets?

The developments on the global front will be the key trigger for the markets going forward. The recent occurence in Japan, whereby they are trying to buy back some assets to push in liquidity in the markets and bring in some inflation into the economy, is actually good news for India. We believe that some amount of carry trade will take place on account of that. Similarly, the US Fiscal Cliff being averted will play some role for the markets. Back home, the budget will be the key trigger.

What are the sectors that you are currently betting on?

We are currently betting upon banking and capital goods. We have also picked up pharma and FMCG sectors in our portfolio. In the last one month, we have gone overweight on commodities.

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

I would like to give two pieces of advice to the retail investors. The first is to take a look at the markets, which is a continuous process and should not be an on-and-off kind of view. Make the equity market as a part of the asset allocation in your investment portfolio, and continue to maintain that.

Secondly, the investment in stock market is a full-time work and any investment needs good amount of due diligence. That is what we do as fund managers. It may not be possible for many of the retail investors to put in sufficient time and efforts towards that. Therefore, mutual funds may be an ideal route to enter the markets.