Interview With Ramanathan K, Executive Director & CIO, ING Investment Management (I)

Ramanathan K
Executive Director & CIO
ING Investment Management (I)

How did you begin your journey in the capital market?

I started my career with a credit rating agency. This gave me a solid grounding on business analysis, especially from a credit perspective. A logical extension of using this knowledge was to move into the ‘investments’ area in a mutual fund. I joined Birla SunLife Mutual Fund as a credit analyst and progressed in my career to become a fund manager there. Later on, I went on to become the CIO at ING Mutual Fund with the current responsibility of overseeing Fixed Income, Equity and Multi-asset investments. 

Can you describe your investment philosophy for our readers? Buy-and-hold, as a concept, is widely preached and followed by fund houses. Is this concept completely foolproof in your opinion?

It is fashionable these days to say ‘I am a bottom-up investor with a buy-and-hold approach and cite several well known global luminaries in the investment field’. I beg to differ a bit here. It is important to define the ‘investment objective’ before you go into the investment philosophy. The investment objective, at least in most mutual funds is to add value to the portfolio by consistently beating the benchmark as given in the offer document of the scheme. Given this background, I feel portfolio construction in equities (in the mutual fund space) should be a blend of both top-down and bottom-up approach with equal importance being given to ‘risk control’. Risk arises by deviating from benchmark and can be measured in terms of tracking error or the percentage stocks outside the benchmark. Controlled risk taking and knowledge/confidence in the ‘risk’ or deviation being taken is important for consistent alpha generation.

What was your first big investment idea, and how did you develop it?

I would point out to a more recent idea (being a late entrant into active management of equities) – National Building Construction Company (NBCC). All of us know the plight of the plethora of construction companies which were once hyped, but which have significantly depleted shareholder values – key reasons being – poor growth in order book, moving from asset light to asset heavy model impacting return ratios, large receivable days, high leverage etc. NBCC, at the point of investment, was having similar valuations but with a significant visibility of order book growth (government projects), asset light model, negative working capital (the company gets advances for executing orders), zero debt and large cash balance (which is a significant portion of market cap), the company has significantly outperformed not only the other languishing construction companies but also the broader market indices since its IPO.

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

Business outlook and valuations are key factors that would determine the entry and exit points for stocks. This is from a pure bottom-up perspective. However, the stock’s position in a portfolio also depends on the sector call, macro call as well as its allocation in the benchmark.

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

Yes. This is a very important part of our investment process. We not only meet managements of companies that are a part of the portfolio but also other companies which are part of our universe which we continuously track and monitor for opportunities.

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

As much as it is important to book profits when valuations become irrational, it is important to cut losses if an investment idea has gone wrong. One certainly needs to take a decision after thoroughly reviewing the assumptions that went wrong.

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

Sector allocation is an important component of adding alpha. This in turn is driven by the macro call as well as sector valuations. During times of economic recovery, the sectors to benefit the most would be the financials and the capital goods sector. However, during uncertain times, uncorrelated defensive sectors like FMCG and Pharma tend to do well.

In developed markets, institutional investors are very active in protecting the interests of minority shareholders. What has the Indian experience been like, and how active are you on this front?

The Indian experience, I would say, has been a bit mixed. At least in the mutual fund space, fund houses do exercise their right to vote and publish details of voting for the benefit of the Unit holders. However, it is possible that other large institutional investors may not be very active unless in cases where there could be a large erosion in stock value. At ING Mutual Fund, we do have a ‘proxy voting’ system and process by which we exercise our right to vote regularly.

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

Too much or too frequent churning or trading could detract value. One needs to monitor and control the portfolio turnover on a regular basis. Annual portfolio turnover in excess of 100-150 per cent could be a cause of worry and should be looked into.

What is your view on the overall current macroeconomic scenario of India?

While there are silver linings in terms of bottoming out of growth and falling inflation, the short-term outlook is marred by the fear of portfolio outflows (that has an impact on the currency) and worries about decision making slowing down as we move into the election period. Weakness in the currency is inflationary and has a negative impact on the current account deficit (CAD). This would also deter the RBI from cutting rates further to spur economic growth. Hence, growth recovery will be slow and would happen only over the next two to three years.

What is your take on the financial performance of India Inc. for FY13 and how do you expect it to pan out in FY14?

Clearly, the investment led sectors (like capital goods and financials especially PSU banks and private utilities) have disappointed and the consumption/export led sectors (like FMCG, IT barring a few names, and pharma) have either met or exceeded expectations. At least in the short term, this trend is expected to continue, though there may be stock specific divergence.

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

Currency movement and the outcome of the elections (which would determine the stability of the government and the ability to push through reforms) would be the key triggers that would drive the markets going forward.

What are the sectors that you are currently betting on? Which areas should investors exercise caution in?

We are overweight on the oil and gas, technology as well as the financial sector. While there is value (based on historic mean valuations) in the PSU banking space and the capital goods space, investors should exercise some caution. From a three-year perspective, however, these sectors could outperform the broader market.

What would be your advice to retail investors?

Investors should take advice from certified financial planners to determine their asset allocation. Asset allocation (how much to invest in equities, fixed income and other asset classes) is a scientific process which depends on several factors like risk appetite, income levels, wealth, time horizon etc. Once an ideal asset allocation is determined, investors should stick to it and not be swayed by short-term market fluctuations.