Vetri Subramaniam, CIO at Religare Invesco AMC, is a stock market veteran and a very respected fund manager. Here he talks about how he is positioning his funds currently.
Religare Invesco Growth and Religare Invesco Business Leaders both delivered positive returns last year when the large-cap category average was negative. What worked?
Different aspects.
First of all, it is the kind of businesses we backed. We looked at companies that were reasonably well placed in terms of their growth prospects and we picked them up when we thought valuations were reasonable. We stuck with them. It’s not that we shuffled the portfolio dramatically over the past year.
Also, we steered clear of stocks around which there was a lot of excitement. Post election, in the second half of 2014, investors were chasing a lot of stocks indiscriminately. The belief was that the economy would improve dramatically post elections so people were overpaying for those stocks in terms of high valuations. Avoiding such mistakes also helped contribute to outperformance.
We had exposure to a few companies on the premise that a cyclical improvement would help their prospects. That contributed marginally because the cyclical lift is still to be fully visible.
Largely, it is the stock picking that worked well for us.
What went wrong with your mid-cap fund?
On the mid-cap front, our stock picking was not as strong as it had been in the previous years. That said we still outperformed the benchmark index. We did some portfolio reshuffling by taking out stocks that we perceived to be expensive and investing into stocks which we thought were more reasonably valued. This did not work to our advantage.
Also, we have not gone down the market cap curve aggressively. A lot of the outperformance in this category has come from the lower mid- and small-cap stocks.
During the Morningstar Investment Conference, in response to a query on which sectors you are looking at, you stated that you are focusing more at bottom-up stocks than sectors at the current stage. Why?
Our strength over the past seven years has always been in getting the stock selection right. Our source of alpha has been in stock pickings, be it the large- or mid-cap funds.
Does a top-down approach never come into play?
There are times when the top-down selection can play a more significant role in the fund’s strategy. But right now we are also witnessing very divergent outcomes even within a specific sector.
Further given where valuations stand and due to poor visibility of growth – we are emphasizing backing the right companies rather than the sector allocation.
Can you give an example?
Financial Services. Some banks are growing credit in the 20%+ range, yet there are others struggling to get a positive single digit growth. So within one single sector, the outcome is so divergent that it is more important to be in the right stocks rather than get the sector right.
Automobiles. Within this sector, four wheelers are doing better than two wheelers. Within the two wheelers, scooters are doing better than bikes. Companies with global exposure are suffering compared to those with a pure domestic exposure. Naturally, the divergence in stock performance is tremendous.
Look at last year’s performance of banking stocks. Some stocks have delivered -20%, but others have delivered +20% for the year. There is an auto stock which has delivered 25% in 2015, but another has dropped by more than 25%.
The macros are not fully aligned so we will not get the benefit of getting the sector selection right. Also, we have no idea where the upturn in the economy will come through. The levers are in place, but will it be two quarters or four?
Our premise is that whenever the upturn does come, the companies we back will be better placed to benefit from the upturn.
If we find an acute case in terms of valuations, we will look at it on a sector basis. We did see this in Consumer Staples and Industrials.
Do you not find such a situation in Commodities?
Global commodities are under tremendous stress. In recent years, China has been the key driver but that economy has slowed down too. But top down we are starting to see value.
I have no view if and when China will turn the corner. But what I can see is that many stocks are trading at very reasonable valuations - slight premium to book and in some, slight premium to cash. In some cases, we see that the spot price of that commodity is at a level where 50% of global producers will be out of money. So we are not as concerned when demand will come back, because we see supply itself responding by shutting down.
So we have been buying global commodities where the balance sheet is strong so they can absorb weak commodity prices.
That is why in some of our funds we have been net buyers of metal stocks.
What is the common investing rationale across your funds?
The market treats companies differently. So valuation ratios could look different across companies at any given point of time.
The common factor is return on capital (ROC) or return on equity (ROE) depending on which is more relevant for that company. We would like to invest in companies where ROC and ROE is above a healthy threshold.
Some companies tend to be in non-cyclical businesses so the fluctuation in their ROC or ROE may be low. But in cyclical businesses you cannot assess it based on just one year, you have to view the ROE over the cycle.
So across the investing spectrum we look at how the stock is placed in terms of ROC and ROE. Why would I want to buy a company whose return on capital is not above the threshold? I might as well then put my money in a fixed return instrument which will give me 9%.
Having said that, for a set of ROEs and ROCs, the market can value companies differently. Then for every category we tend to look at valuation parameters differently. For instance, Commodities are trading closer to book value today, so we will look at the P/B metric. If we look at non-cyclical, steady growth businesses, we will look more at P/E ratios.
To use industry jargon, are you benchmark aware, benchmark agnostic or benchmark driven?
Benchmark aware. We do not run absolute return funds. Investors evaluate us against our performance vis-à-vis the benchmark and then amongst the peer group.
But we do invest in stocks that are outside the benchmark and actively discourage benchmark hugging.
How?
Every month when we conduct our MIS, we closely evaluate the number of stocks we own in a given portfolio which are underweight their own benchmark weight. Because if they are, then we are tilting towards benchmark hugging.
The way we look at it is if there is a stock in the benchmark and in our portfolio, we should be overweight. There is no point running an underweight portfolio. The only reason to be underweight is when I am building up my position in that stock or exiting it gradually.
In all our portfolios, we do not have more than three names at any given point of time which would be underweight their own benchmark weight. And it’s typically for the scaling reason I mentioned before.
We also track the active weight. The stock in question may have a 5% weight in the benchmark, but in the portfolio it may be 8%. So the active weight is 3%. So that is the source of risk in the portfolio. So we look to run positive active weight positions.
This is visible in the kind of alpha we have managed to generate.
The proof of the pudding is in the eating. We have seven years of performance to show that we have delivered. The investment process has been key. We have shown consistency over a range of strategies – contra, mid cap, large cap.
This interview appeared in the online publication of India Markets Observer. The outlook for various asset classes, perspectives on the industry, investing insights, interviews of fund managers, and the entire list of contributors, can be accessed here.
