The trick is in getting the management rather than the numbers right, believes K N Sivasubramanian
K N Sivasubramanian, vice president and portfolio manager at Franklin Templeton AMC has been riding the growth wave along with the rise in the markets over the last one year. Over this period, the three funds he manages--- the High Growth Companies, Flexi Cap and Prima funds---have given returns of 102 per cent, 90 per cent and 101 per cent respectively, in the process comfortably beating their category and benchmark index returns. For Sivasubramanian who manages Rs 4,500 crore in equity assets and has an experience of 11 years in the equity investment field, a bottom-up approach to hunt for diamonds in the rough works better than taking a sectoral call.
Choosing scrips
Unlike some who ride the sector boom, Sivasubramanian relies on stock picks based on individual merits. Says he, “The way we build our portfolio is bottom-up. We look at individual companies, their valuations and business prospects and buy them if we like them.” Once the company is identified, the single most important criteria then is the quality of management. “From our experience what we have gathered is more than the numbers, we have to take a bet on the person running the business and wherever we have managed to identify the right kind of person running a business, we have been successful.”
This strategy has helped him net some winners over the years.
What clicked
The entry of private players in the banking sector about 15 years back was a good opportunity for investors. However, while there was a rush of private players, a couple of them disappeared or were acquired.
While all of them started on the same footing, only some were able to capitalise on the opportunities in the sector. He says that while players such as Global Trust Bank did not last, the company bet on players such as HDFC Bank which has consistently been delivering and has helped the fund reap the gains. “The credibility and the track record of the promoters made our job easier,” he says.
The company which reaped huge gains from this investment continues to keep the faith in this private bank. While some bets such as HDFC Bank worked for him, some others did not deliver on the returns front.
| FLEXICAP | HIGH GROWTH | PRIMA | |||
| (% of net assets ) | % | (% of net assets ) | % | (% of net assets ) | % |
| Bharti Airtel | 7.38 | Bharti Airtel | 7.17 | Aban Offshore | 4.84 |
| Infosys Tech | 4.76 | India Infoline | 4.70 | Crompton Greaves | 3.61 |
| Guj State Petronet | 4.26 | Guj State Petronet | 4.36 | Yes Bank | 3.59 |
| India Infoline | 4.19 | Deccan Chronicle | 4.26 | Guj State Petronet | 3.53 |
| HDFC Bank | 3.80 | HDFC Bank | 3.83 | Jagaran Prakashan | 3.49 |
What failed
Sivasubramanian says in sectors that have done well such as software the fund has gone wrong as it bet on the wrong horses. “Instead of putting our money in the best stocks we diversified and they didn’t deliver,” he says. Another area he has not had too much success is commodities. Says he, “We got the cycle totally wrong many times. We have not been good at commodity investing.” The fund is looking at correcting its strategy towards commodities going ahead.
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The company also lost out during the equity bull run due to its exposure to MNC pharmaceutical companies and auto ancillary stocks such as Fag Bearings. “While the stocks were cheap, they did not appreciate as much as the market, so we lost out on opportunity cost.” One of the things that has helped minimise the losses especially in the midcap space has been the control of biases.
| MARKET GAINS | |||
| Scheme | Corpus * (Rs crore) | One year returns (%) | |
Says Sivasubramanian, “While we cannot eliminate biases towards a particular stock, the aim is to minimise that.” For midcap-oriented funds, instead of one person looking at the portfolio, another fund manager is roped in so that biases can be reduced. Among the key sectors that he has an exposure to are pharmaceutical, software, capital goods and the financial services space.
Sectoral calls
The three funds that Sivasubramanian runs are heavy on banking space with each fund having a minimum of 15 per cent exposure to the sector. The reason is that the fund house has the strengths in assessing the sector better.
“The aim is to capitalise on our strengths rather than on our weakness,” he says.In addition to this the fund also has exposure to the pharmaceutical space.
Though the sector is defensive some companies especially in the midcap space have grown faster than the market. This coupled with a huge valuation differential to the frontline pharmaceutical companies clinched it in favour of midcap names such as Ipca and Lupin, says Sivasubramanian.
While the fund house is positive on capital goods stocks, it thinks that valuations, especially in the large cap space with P/E multiples at 25 plus, are expensive.
The fund house zeroed in on companies such as Crompton Greaves which were growing faster than the top tier companies, but were at a discount in terms of valuations. While his picks indicate a growth bias, Sivasubramanian believes that both value and growth style of investing have worked for him.