Interview With Sadanand Shetty, Vice President & Sr. Fund Manager, Taurus Asset Management Company

Sadanand Shetty
Vice President & Sr. Fund Manager
Taurus Asset Management Company

Regulatory authorities, the government, institutional investors and the judicial system will all have to act in a co-ordinated manner for investor protection.

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

There have been many, of course. The big investment ideas have come by being early in understanding the stock, sector and potential of the stocks in multiple scenarios. Most of these ideas generally do not have exhaustive research reports behind them and also have very little secondary information, and of course, most of these are to do with new and emerging sectors. You need to be on the ground doing your research, meeting not only with the companies but also vendors, peers and industry participants.

Further, most big investment ideas are about re-rating stories that come with the ability of the company to grow scale and sustain/expand its EBITDA margins and return ratios. You need to play them in cycles. A few of these that I can remember over the last one decade are Gati, TV 18, PVR, Jyothy Laboratories, M&M Financial Services, Rallis India, OnMobile Global, Mindtree, etc.

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

The most important point is the valuation of the company with reference to its history and its future potential.

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

There are cases when well-researched ideas turn bad due to reasons either within or outside the control of the companies. In case of external conditions, there is nothing much one can do but to limit the damage by booking profits and cutting losses. On the other hand, it is disappointing when a company under-delivers on the promise or guidance.

We raise red flags for any governance issues with a company. While we try to filter out such issues at the screening stage of our stock ideas, for any such surprises we take decisions holistically depending upon our exposure, stock correction/collapse and other factors. Hits and misses are a part of portfolio construction. As long as the risk framework is strong and robust, it will take care of such disappointments.

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

MF equity products are benchmarked versus respective benchmarks, and this is also a regulatory requirement. The benchmark composition is made of large numbers of sectors in the economy at a disproportionate level. You will find highest weight accorded to the Banking and Finance sector and FMCG, and lesser to many others.

Business cycles and economic cycles impact the sectors differently and thus their performance too. It becomes extremely important to choose the sectors and stocks to get better returns depending upon the underlying cycles.

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

Business and economic cycles have become very short due to multiple international and domestic factors. In the span of the past five years, we have seen how the large global economies have moved between the boom, bust and recovery phases. Similarly, regulatory and policy jams have ruined the fortunes of many sectors. Given this backdrop, buy-and-hold does not necessarily hold true for all sectors. One needs to be clear as to which companies’ managements pass the test of the buy-and-hold strategy.

There are great managements in India who have cruised through challenging times only to get stronger. We look at such companies for our buy-and-hold strategy.
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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?

We vote on the all resolutions of our investee companies, and have voted against the resolutions in many cases. You have rightly stated that the developed markets are considered to be at the forefront of investor protection, but instances of malpractices, defraudment and jailed CEOs abound in those markets too.

Investor protection in India requires co-ordinated and synchronised efforts at multiple levels. Regulatory authorities, the government, institutional investors and the judicial system will all have to act in a co-ordinated manner.

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

We have found that the degree of churn in a portfolio is also a function of the underlying market. It depends on where the cycle of the market is. Is it a bear market, a slow economic growth market, a consolidating market or a high growth market? Portfolio churn does help in creating an alpha for the portfolio.

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

This is certainly not easy to do so. Quite often, by the time you realise that you are in a full-blown recession or in a slowing economy, it might be too late. Many foreign brokerages have recently downgraded India’s numbers. Note that the downgrade of the Sensex target and GDP growth in the last month came just after a quarter of the slowest GDP growth of India.

Bear and bull markets are always a reflection of the state of the economy. It is not impossible to spot the trends either, as they don’t occur overnight. If you are tracking companies closely, it will throw up early warning trends in their operations, and the macro numbers eventually follow. It helps if you have experience of earlier cycles.

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

We think that India delivered the worst in terms of GDP numbers in the last quarter. Short-sightedness and lack of progressive polices has hit the economy badly. The growth engines of India remain intact, be it the demography, our outsourcing advantage or the need for massive infrastructure.

We have seen in the last few decades that the government of the day has acted when pushed to the corner. We are seeing the same trend now. The Indian economy will gradually recover to over six per cent economic growth.

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

The last leg of the market was singularly driven by weak currency, which in turn, has been impacted by the widening CAD, capital outflow from debt funds as well as low confidence. 

Now, the arrival of the new RBI governor has infused confidence with regard to the stability of the currency and his ability to manage volatility. Stability in the currency and reversal of negative trends in the macro indicators will provide good tailwinds for an incremental market rally.

What are the sectors that you are currently betting on, and in which areas should investors take caution?

The Banking and Financial sector, Oil & Gas and Capital Goods and Mid-Cap sector will outperform in the coming times. We also expect that the FMCG and Pharma sectors will relatively underperform, barring a few specific stocks.

What is your take on the maturity level of the Indian fund management industry?

There is still scope to adopt the advanced markets’ best practices in process and risk management and also at the governance level. Investors should also judge fund houses on this basis. We believe that the regulatory body has done great work in this direction, but even more is possible.

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

Follow a Systematic Investment Plan (SIP) and expect reasonable returns. Remember that it is difficult to time the market, even for the best of fund managers. Instead, take part in the market volatility through the SIP route. Have faith in Indian equities, for we are headed towards happy times.