Continuous evaluation of investment decisions and an eye for opportunity has helped in delivering consistent returns.
Despite running the largest mutual fund scheme with a corpus of Rs 5,000 crore and attendant problems of liquidity and investment in select companies, Sunil Singhania has managed handsome returns of 41 per cent and 46 per cent over the last three and five years, comfortably beating its benchmark.
While some perceive a bigger size to be an issue, he believes that there is enough choice due to a basket of growing companies which ensures liquidity and good returns.
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Consistent returns, he says, is a function of betting on the long term rather than getting swayed with the need to give investors quick returns over shorter periods. The fund’s investing style is flexible based on the opportunities and the situation prevailing in the market.
Investment philosophy
Singhania, who manages assets worth about Rs 15,000 crore spread over 4-5 funds says, “At Reliance Mutual Fund, we are opportunistic investors. We don’t say that we are value-based or growth based but revolve our investing decisions around new avenues and opportunities.”
Citing technology stocks as an example, he says that till the early 90’s, the sector wasn’t on investors’ radar but now constitutes 10 per cent of the major indices. Ditto for telecom and real estate. He believes that retail could probably emerge as a major sector going ahead.
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“In an emerging economy you will get a lot of opportunities and your investing style has to change according to the times and you have to embrace all kinds of strategies.”
It doesn’t come as a surprise that the Singhania who completed his CA when he was just 21 is a numbers person, poring over the balance sheet whose analysis he considers is an important tool. While the investing style has helped ensure good returns what role has the fund played in ensuring this?
The team approach
Experience, teamwork and low turnover are reasons for the success of the fund. “We have a steady and consistent team over the last 5-6 years and despite the contrasting styles and approaches of fund managers, being together for a long time helps in understanding the strengths and weaknesses of the team and gel better.”
The fund manager who joined the company in 2003 after stints with two broking outfits believes that the autonomy and the freedom to take initiative has helped the fund managers and the funds to grow.
The teamwork and the investing style has worked for the company (fund house) which had a corpus of just Rs 50 crore when Singhania joined six years ago but has over Rs 30,000 crore (equity corpus) in its kitty now. While teamwork has helped grow the corpus and leave competition behind, Singhania believes that there has to be a passion for stocks or the individual will burn out in the high pressure and volatile world of equity markets.
The challenges, making mistakes and learning from it are things that he loves about his job. “Equity markets unlike other jobs are not monotonous, and if you love your job and are successful at the same time, it is the icing on the cake,” he believes.
The art of stock picking
The advantage, believes Singhania, at Reliance Mutual Fund is that most senior managers have an experience of tracking stocks for the last 15-20 years. This helps as they have observed 4-5 cycles of market booms and busts.
“When a stock starts becoming interesting, you know at what point in time you have to be careful about the management because of what they have done in the past,” he says.
The fund house’s large research team of 16 people and tracking over 400 companies is another positive. The important thing that separates the fund house from others, says Singhania is that in the past it has not been apprehensive of being the only institutional investor in a number of stocks.
He believes that targets may not work. “It is not always the case that you buy a stock at Rs 100 and have a target at Rs 150 and sell it off when you reach the same. The fundamentals can deteriorate when the stock hits Rs 80 or can improve even if it touches Rs 300. Every day you have to analyse whether there is a better opportunity or not.”
The fund he believes has been successful in not only getting in a stock early but holding on to the stock to benefit from complete appreciation rather than selling too early. But, what about the stocks to avoid?
“Every stock is an investment opportunity at a price,” says Singhania. He believes that if you stick to AAA-rated management companies you might not get the returns that you expect and instead could bet on less appreciated managements where you feel there can be an improvement.
The fund, he says believes in betting on buying good stocks not just good companies. That could be one reason why the country’s largest power utility is not among the top holdings in the fund.
Managing bad times
Singhania believes that the fund erred in its decision to take an exposure to textiles 2-3 years ago. The belief was that textile stocks would do well after the removal of the quota system but other factors ensured that things did not happen according to plan. Though the exposure was small considering the size of the fund and did not impact the NAV much but value wise the company lost quite a bit due to the exposure.
For the fund as a whole, the company has been able to derisk by ensuring that the holding in any one stock does not exceed 6-7 per cent, with a maximum of 16-20 per cent in a sector. But, what’s important is to learn from mistakes and not repeat it.
He says that the best way to handle volatility is to be in cash (about 15-20 per cent) and shift from volatile stocks to more stable ones and manage the rest as best as you can. “We were in cash since December 2007 and did not invest. This has helped us a lot. The fund fell significantly less than the power index.”
The company tackles sectoral headwinds by changing the composition of the fund. It was initially overweight on power equipment companies but shifted to generation companies when valuations for equipment companies were looking stretched.
The road ahead
Despite the volatility experienced in the past few months, Singhania believes that the markets offer good opportunity over the medium to long term time frame. High GDP growth, according to him will depend on inflow both in terms of FIIs and FDI.
“If we see visibility of $40-50 billion of foreign inflows every year, GDP numbers can start to inch back to 8 per cent. That can be the big trigger,” he says. With GDP at those levels, he expects private sector earnings growth at 15-18 per cent.
“Valuations at current levels are not expensive,” he says adding that earnings estimated which currently hover around Rs 875-900 for the Sensex will be upgraded with every quarter.
He is bullish on domestic-oriented sectors as he feels that the government will take steps to ensure that the economy is back on the track of fast growth.
Infrastructure, capital goods, steel, cement, agri-based industries such as agro chemicals and banks are sectors he thinks offer an opportunity. He is also bullish on domestic pharma as he feels it has potential for growth and stocks are not expensive.