"Management and business outlook is of utmost importance" - Sadanand Shetty

How did you come into the profession of fund management?

I started in the year 1993 when I joined a financial journal. In those times there were very few companies or organized institutions or research houses. In fact Dalal Street and Capital Market were the only magazines that came out with research ideas. Then having worked for many other places I found my passion to be in the equity markets and that is how I happened to come into this business.

What is the investment philosophy that you follow?

What I feel is that, one must be sure of what the mandate is. Since I am on the mutual fund platform my primary objective or mandate is – one, to beat the benchmark and two, to be ahead of others in the business.

But if you consider yourself as a retail investor for some time, then what will you consider most important while going into the market?

Look, for me one single objective would be that I want to make money. Now, this may happen over a two year time frame or even more.

What comes to your mind when you say you would hold a stock for say two years? What is the risk associated with that stock that you would look at?

Risk is associated with the momentum of the stock. Stocks move up and down. Within those two years there may be multiple corrections that can take place in the market as well as the stock. Risk is defined by the company and the management that you buy into. Management and business outlook is of utmost importance. Basically, I look at the business outlook and the management
in terms of whether they will be able to handle a downturn or not. Some companies are focused on market cap and they keep on raising money and they actually deploy recklessly across projects and their vision changes. But there are companies that are focused
like in the case of Bajaj Auto sitting on more that Rs 1 billion in cash and being a zero debt company. It could have gone and purchased an IPL team, but they know where their focus should be.

So, you mean to say that the focus of the management and the long term view of the management is what you would bet on?

Right! I would never bet on the ones who keep on coming to the markets and change their business plans again and again. That has a lot of risk.

So, where do you place your basic bet on: sector or the company management?

The sector is very important because if a sector is good then a company does well and if sector is at a secular decline then there is a problem.

But, would you still invest in a company where the sector is on a secular decline?

It depends. We would still be looking at the market share and size of the company. For example, if you look at the metal industry you know that it is cyclical in nature and we may add best companies when the cycle is down as because that company will outperform going forward. As a fund manager I would look for growth stocks in a good market.

What is the investment strategy you follow?

In a bull market, we focus on maximizing returns and in a bear market we look for capital protection. Our main objective is to protect capital and to look for absolute return companies. What we do in a downturn is that we look forward for multiple strategies. Clearly our strategy changes with the markets.

Is it really possible to gauge a bear market and is there any indication you get?

This is a very interesting question. What we do is that, we look at macro indicators like crude oil prices remaining high, interest rates remaining high and international troubles like the one that are still unfolding in Europe. You can look at the capex and the borrowing
programmes of companies and other lead macro indicators which will point towards the direction of the overall economy. The most important are the government policies. All these factors need to be looked and tracked properly so that you get a hold of where the
market is going. It is not a simple job. It takes a lot of effort and focus.

So should a lay investor go alone in the equity market? Or is it better to go with a mutual fund?

What you said is right, as a retail investor cannot be fully dedicated as far as his intellectual resources or financial resources are concerned, you have to depend on fund managers who earn their bread and butter by managing others funds.

Where do your stock ideas come from?

See we all here are in the market for a long time and I myself have been in the markets for more than 18 years. I have personally met thousands of companies and interacted with them. I have taken positions in a company and sold them off, so basically there is no need for fresh ideas, until and unless you are PE investor. If we look properly, we find that companies in BSE 100 or BSE 200 of Nifty 50 are well researched and what we need here are only incremental updates. Like in IT you know the basic DNA of the company, what you would like to know is whether unemployment rate is growing in the US and what is happening out there. These are the incremental updates, like the rupee-dollar rates and what is the churning ratio of the company, etc which help further. These companies are well researched and known investment ideas, what you need to do as a fund manager is that you need to judge whether this is the right time to invest in the stock looking or considering the incremental idea. In case of large caps you do not need fresh ideas as you need in case of mid cap companies. We do not look at small cap companies as we feel that it may introduce some risk in the portfolio.

On meeting the management, don’t you think that the company will share only the information they want to share. So how does meeting a management become really fruitful?

See, it is very difficult to gauge from the details what the company shares. But there are certain benchmarks set up and if someone says that we are going to grow at say 50 per cent without having pricing power then you can always make out that the person is lying.

As a fund manager there may have been instances where your investment idea may have gone wrong. What do you do in such cases?

It happens over a span of time. For instance, there is a media company which we were bullish on and took an aggressive position in the stock as there had been some structural changes. But very soon we realised that our optimism on the structural change is not correct as its willingness is dependent on the willingness of the government intervention. We decided to exit from the stock in a span of two months. Sometimes a stock gets hammered for no reasons and then we get back to the management to find that nothing wrong is happening and it is more of a sentimental issue. For example, there is a leading power transmission company and the stock has corrected 50-60 per cent, we again got back to the company sat on a one to one basis to find that there is nothing wrong fundamentally. So we came back and took more positions and since then the stock has given decent returns.

What is the most important advice that you will give to retail investors?

The retail investor may not be a happy lot today as per the return per se. But one has to remember that there is certain inherent strength in the Indian markets which is widely articulated is the demographic shifts and more people are earning that the persons retired which is unlike of US, Europe and China. With the increase in infrastructure, demographic advantage and consumption the Indian markets are going to deliver growth. 70 per cent of the Indian market is domestic. If you look at the indices they are trading at 2007 levels but their profits have doubled so the catching up of the prices with the level of earnings is still to happen. When this happens this will
deliver huge returns in a span of very short time. The message is do an SIP and do invest aggressively as this year there is a big window for investment. Historically we have traded at 15 times but at present we are trading at 11 times so this gap is certainly going to
be filled up.