'I don't invest without management interaction'

KNOW YOUR FUND MANAGER

Management credibility and stock liquidity are key investment parameters for Soumendra Lahiri of DSP Merrill Lynch.

He is a basketball fanatic and keeps track of the NBA on a daily basis. Well, that's when Soumendra Nath Lahiri, senior vice president and fund manager, DSP Merrill Lynch Fund Managers, is not busy researching companies.

"Time in the market is better than timing the market," says Lahiri suggesting that good returns are possible only if one stays in the market for the long haul.

Lahiri believes that investors should diversify their portfolio with a good mix of asset classes such as gold and real estate along with equities.

The DSP ML experience
Not just basketball, in fact, Lahiri loves sports and plays both cricket and table tennis as often as he can, at the CCI. But ever since he joined DSP Merrill Lynch Fund Managers in June 2004, he hasn't had much time to play.

Lahiri is now responsible for DSP Merrill Lynch India T.I.G.E.R Fund, which essentially bets on stocks which benefit from infrastructure growth and economic reforms, and DSP Merrill Lynch Opportunities Fund which takes concentrated bets on business segments that are likely to do well. He is also a part of the offshore portfolio advisory products team.

Always keen on getting into the stock markets, Lahiri got an opportunity to fulfill this desire when he joined Dolat Capital Market, an institutional stock broking firm, after his post graduation in 1994.

Despite his rich experience on the sell side, Lahiri went through rigorous learning in his initial days at DSP Merrill, to learn the nuances of fund management after which he was given independent charge for managing schemes.

"The first six months were spent learning and understanding fund management," he says. Surely, the 40-year old Lahiri seems to have picked up fund management pretty well. The DSP Merrill Lynch India T.I.G.E.R Fund has delivered returns of about 44.02 per cent over the past one year whereas its benchmark BSE 100 delivered only 32.96 per cent during the same period.

DSP Merrill Lynch Opportunities delivered 41.12 per cent returns over the past one year whereas its benchmark S&P CNX Nifty delivered 36.09 per cent during the same period. 
 

LAHIRI'S PERFORMANCE Scheme Performance (%) as on July 27,2006
Scheme	6 months	1 year
DSP ML Opportunities Fund	2.70	41.12
S&P CNX Nifty	5.80	36.09
DSP ML T.I.G.E.R. Fund	-0.90	44.02
BSE 100	3.90	32.96

The art of picking stocks
Unlike most fund managers, who would put business and management as their top priority while picking stocks, Lahiri has a different starting point.

"The most important criterion for picking stocks is liquidity" says the fund manager who likes to be confident of a decent exit even before he enters a stock.

Lahiri and his team use ten days' average volumes of the stock as one of the screens to shortlist some 350 stocks out of the 1,500 actively traded scrips. DSP has a liquidity screen which ensures that every stock falls in their liquidity criteria.

"If the stock is liquid it helps us liquidate our positions faster," explains Lahiri. The stocks that pass the liquidity criteria are then put through various stress tests, including one to assess the credibility of the management.

No matter what, Lahiri would not invest in a company if he is not comfortable with the management. "Meeting the company management is extremely important to get regular updates. I would not invest in a stock if I do not get to meet the company management," he says.

A case in point is Unitech where Lahiri did not invest because the management was unwilling to meet. The real estate company has delivered astonishing returns over the past one year with its stock price rising from Rs 9 to Rs 200 and today ranks as one of the top 100 companies by market-cap. But Lahiri does not regret his move a wee bit.

Before joining IIM, Bangalore, Lahiri, got a degree in mechanical engineering from Regional Engineering College, Surathkal, Mangalore and later worked for Crompton Greaves in the sales and marketing division. The experience, he says, helped him realise how important factors like the quality of management and corporate governance practices, are.

Lahiri says, "Infosys is the first mover in terms of transparency. They are always willing to share facts and information about the company and this has brought about a change in the entire industry."

Other parameters Lahiri considers while picking stocks are the business opportunities, the size of opportunity, the amount of money that is to be invested in the business and capacity of the company to scale up and seize the opportunity.

"A company should have the bandwidth to sustain higher levels of growth," he says. And in the ultimate analysis, earnings growth remains the key even for Lahiri as it is one of the key drivers of stock prices.

Lahiri enjoys reading books on investments and maybe that's why he is able to analyse companies in such depth. Hedge Hogging by Barton Biggs is a book which, according to Lahiri, is worth reading.

"The book throws light on how hedge funds operate and it also shares the experiences of a person who is operating a hedge fund," he says. Another book from which Lahiri learnt a lot about markets is Market Wizards by Jack D Schwager, which contains interviews of top market people.

Lahiri's favourites
According to Lahiri, IT and cement are the two sectors where there is an increase in activity and thus these sectors hold significant potential for outperformance in the short to medium term.

"The demand growth for IT services from regions such as the US and Europe is strong. The cement sector is witnessing increasing demand and thus higher prices," says Lahiri.

He is also bullish on the capital goods sector thanks to the infrastructure boom. On the other hand, he is bearish on the oil & gas sector due to a lack of free market product pricing.

Lahiri is betting on infrastructure, consumption and outsourcing as the three dominant investment themes for the next five to ten years.

On the direction of the markets, he says, "Over the next three to six months, markets will be range-bound between 9,500 to 11,000. I expect corporate earnings to grow at about 13 to 15 per cent over the next five years. Historically, it has been observed that the market tends to track corporate earnings growth, so we expect markets to give compounded returns of about 15 per cent."

Perhaps the lull in the markets will give him some time to catch up on his cricket. And also to spend time with his seven-year old daughter.