There’s no dearth of investment professionals with relevant skill sets in the Indian financial ecosystem. In the asset management space, there are a fair number of adept and experienced portfolio managers too. And, then there are veterans. With those very words, Vicky Mehta introduced the audience at the Morningstar Investment Conference to Prashant Jain and Sankaren Naren.
The two stand a cut above the rest when it comes to portfolio managers who have successfully navigated various investment cycles. In this interaction, Vicky delved into their individual investment psyche to understand how each of them stick to their convictions and adhere to their investing principles in the face of dynamic market conditions.
Excerpts from the dialogue:
Prashant, you are known to have a quality bias and prefer to acquire an understanding of the business you invest in. Naren, you have a definite reading of the macro environment, are a stickler for valuations and display a penchant for contrarian investing. Tell us how your investment philosophy evolved.
I came into investments more by accident than design. Eventually, all of us are shaped by our experiences. At the start of my career in the early nineties, we made a lot of mistakes. We lost significant amounts of money investing in businesses which we subsequently realized were not of good quality, did not possess decent competitive advantages and, therefore, the earnings estimates kept going wrong. This mistake led me and my colleagues to focus on quality and competitive advantages eventually shaping my investment philosophy.
- Prashant Jain
It was post 2007 that I began to see the importance in top-down investing. In the nineties, I was running a broking firm in Chennai where a few of us created a value investing group from which the idea of contrarian investing germinated. In 1999-2000, I avoided technology stocks and saw the benefit of it after the dot-com bubble burst. But during the boom I was questioned repeatedly about my stance. Again I saw that contrarian investing worked in 2007-2008. But there is no denying that the money manager has to withstand the pain when standing against the crowd. Being a contrarian investor is no easy task.
- Sankaren Naren
Did you have mentors when you started off?
All of us started by reading Warren Buffett. It is simply a matter of time when you realize that you are not Warren Buffett. By reading the thoughts, works and the papers put out by those unrelated to the Indian market, such as James Montier, Howard Marks and Mark Mobius, I have learnt a lot. Locally, we all have our biases against a promoter or sector. An outside perspective unattached to India helps because the theory is then very relevant.
- Sankaren Naren
There has been no single individual who has mentored me, it was more of an organization. When I joined SBI Mutual Fund in the early nineties, I was fresh out of college. The industry itself was very new. So it would not be out of place to say that I got a good pitch to practice on. Like Naren, I too have benefitted from reading the works of Warren Buffett. John Bogle’s book Common Sense on Mutual Funds also helped me tremendously.
- Prashant Jain
Both of you have cited Warren Buffett. I would like your views on something Buffett has spoken about. Buffett talks about a circle of competence. He says that technology is outside his circle of competence, hence he avoids investing in it because he does not quite understand it. What’s your take on the issue – does it make sense to identify and stick to one’s circle of competence?
It is no doubt relevant but at the same time one must attempt to increase their circle of competence. I may be clueless about certain things today but nothing stops me from attempting to increase my knowledge and understanding of it. It may still not make sense, but I should at least attempt to move out of my comfort zone. For instance, I do not think it is necessary to understand the intricacies of technology when investing in technology. Yet, one can be a reasonable investor by understanding how rapidly technology changes and if the company is dynamically responding to such variables.
- Prashant Jain
I do believe that it works. But one cannot tell their boss during their first year of fund management that they have a circle of competence and plan to stick only to it. My strength in contrarian and value investing has been cultivated and honed over the years. Having said that, don’t forget that in 2006 and 2007 most individuals believed that value investing will not work. The phase after that proved that value investing does indeed work. I now have the courage to state that this is my area of competence and I stay away from concept stocks and high PE stocks. Everyone has a circle of competence; I see it in my own team. If an individual can stay in his zone of competence it will help him.
- Sankaren Naren
Taking this thought one step further, is investing a team-driven or individual-driven reality? The reason I am asking is because we have seen different managers from the same fund house pitch in disparate performances on similar strategies.
I am not trying to evade the issue but I do believe that the truth is somewhere between. Within the same mutual fund, the performance of different individuals can be different. To have all individuals perform the same way is neither practical nor desirable. Process does shape the kind of people you work with and the thought process of the team. So at a point of time, portfolios may differ because individuals think differently, but there will be some commonality in the individual thought process.
- Prashant Jain
In a team, different individuals will have a different circle of competence. So I have to map the person to his/her area of competence. As the chief investment officer, I cannot let any stock enter the portfolio. But the actual weightage to each should can be decided by the fund manager. If I am strong in contrarian value techniques and I try to reduce the performance of a person who believes much more in quality than I do, it will not work. So it’s better to leave that quality person function within his level of competence. Let’s say you create an investment process which is built on growth and reasonable price. But some individuals will have a value orientation, others a quality orientation and still others a growth orientation. End of the day, it is an art.
- Sankaren Naren
The importance of skill is widely acknowledged. Should temperament be given equal weightage as skill while investing?
In my opinion, the first 10 years are a lot of learning and a lot of hard work where the focus is on developing your skill. You learn to understand businesses and companies. This is mandatory. Then comes the second phase, where temperament comes into play. This is all the more relevant in a globalized world where events come out of nowhere.
- Sankaren Naren
I agree with Naren and don’t have much to add to what he said. In a mutual fund format temperament is extremely important. A mutual fund is benchmarked to an index and to the peer group over short time frames, not just 5-10 years. How you keep a balance in what you genuinely believe in and how you mitigate the short-term risks is also reflective of your temperament.
- Prashant Jain
Let’s turn back the clock. Prashant, in the momentum driven market of 2006 and 2007, you stayed away from real estate and infrastructure names, and instead stuck your signature investment style. As a result, you underperformed significantly. Naren, you took over the AMC’s flagship fund ICICI Prudential Dynamic in September 2006 and in 2007 you underperformed significantly.
My question to both of you is the same: How difficult was it to endure the underperformance and how confident were you that the investment philosophy would eventually pay off.
It is always challenging when you are underperforming. Those are the times when your thought process and understanding of equity is challenged. When your convictions are tried and tested. I do believe that the market can get it wrong in the short to medium term but over the long term it is fairly efficient. That belief enabled us to bear the pain.
In 2007, the conviction was very high. Whatever model you worked on, particularly on real estate companies, it just did not add up. So it was simply a matter of time when one realized that this state of affairs would not be sustained. But it is challenging specially when you are running open-ended funds and there are business implications.
- Prashant Jain
The year 2007 was difficult, but that is where experience helps. I had seen 1999 – 2001, not in fund management but retail broking. But my past experience helped me keep my composure because I was constantly questioned as to why I am underweight on Capital Goods and because I believed that Technology and Pharma was cheap. But we will keep having such years.
- Sankaren Naren
