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Stock decisions must align with portfolio needs - Vetri Subramaniam

| 12/16/2011 4:04 PM Friday

What is the investment philosophy that is followed by the fund house and you in particular?

We have developed a process-driven strategy which also includes people. The idea is to create good portfolios and our huge team of people helps us cover a large number of companies.

Does a process-driven strategy work in the market?

A process-driven philosophy does not necessarily mean that there is no flexibility. It means that you are very clear about how you operate and you know the boundaries within which you have to function. We put into implementation certain parameters that work for particular types of companies and the analyst has to know which of these parameters are important. We, for example, focus on the unique proposition that a company has to offer. To be able to create alpha, it is important to understand the four levers that work here.

Which are these four levers?

They are asset allocation, sector allocation, market cap bias and stock selection.

What, according to you, are the crucial signs for entry or exit in the market?

The entry boils down to the fundamentals of a given company. The business of that company must meet some typical parameters and when these criteria are no longer met, it is time to make an exit. Also, it depends on the alternatives available. You may want to exit from one stock when there is a better alternative available. At times the decisions are not just related to the stock but also to the needs of portfolio management and this can be related to the investment approach of the fund.

It is often said that fund managers do not stick the mandate that is given to them. Is this true?

If this concerns the offer document, our approach is to convert it into a set of guidelines. This is true of all our funds. We then use this as a lever for our asset allocation and ensure that this is in line with our mandate. Of course there always are grey areas. For example, can a banking stock belong to the infrastructure sector? Therefore, some level of detailing is always necessary and what is also required is pure commonsense.

Do you track a definite number of stocks?

We track about 304-305 companies of which 165 are categorized with our technologies and can be bought by any of our funds.

Compared to 5000 stocks available, isn’t this number small?

It sounds good to say that there are 5000 stocks available but a huge majority of them are not of any practical use.

How often do you meet the companies’ management and how critical do you think it is to do so?

At the end of June 2011 we had done about 900 corporate interactions for this year through our team members. This includes group meets, conference calls, etc. However, a lot of such meetings happen with the small and mid-cap companies. This kind of interaction is important to get a sense of what a company is doing. At the same time, you cannot totally rely on what a company’s management tells you. The facts must be verified through a study of the balance-sheets and other data. It is important to maintain a clear balance and bring to the table an impartial view.

How much of information available in the open domain should an investor rely on?

When I started in 1994, there was an information edge from which you could profit. For example, if Madras Cement declared its results, they would be available here only by midday but you could get it earlier if you made a trunk call to Chennai. Now the challenge has changed. There is too much of information and a lot of it is pure noise. So you must learn to distinguish between the two and it is important to understand what to disregard.

How important is technical analysis?

No one can provide a clear-cut answer for that. However, it does have some value in terms of tracking the market extremities. It can be used to pick up messages and maybe fine-tune your buying and selling. It is another adjunct to the overall investment process but certainly not to be used as the primary source of decision making.

Is it possible to time the market?

It is very difficult to consistently time the market. The important question here is to know why you are in the market. It should more be about optimising the portfolio than trying to time the market.

How do you handle things when ideas go wrong?

Going wrong is not much of an issue because what you can do in such a case is to take corrective action. For us it is more important to take a look at the companies that did not do well over a period of six months or so. Obviously you want to make as few errors as possible but the idea is not to minimise the errors but to learn from the mistakes. Focusing on minimising the errors will mean that you are shrinking your opportunities.

What is the temperament needed for booking losses?

You must always ask if you are doing your best in that particular market position. The concept of stopping the losses is more relevant in trading.

Do you think the strategy of buy and hold works well in real life?

In a buy and hold strategy there is a lot that is left unsaid. Valuations matter and it makes more sense to invest when the valuations are cheap. Asset allocation is important too. Therefore the buy and hold strategy may be better than timing the market but it is not the eternal truth.

Is it possible to recognise a bear market?

There is no sure-shot method. Even if history repeats itself, it does differently each time. You must always think with a certain perspective.

Any investment idea that stands out in your career?

There is not one but many. However, the simplest and the best has been that of a company in which an investment was made on the basis of its balance-sheet and the management’s description of how they would do data processing. Another idea that stands out in my mind is that of an MNC consumer healthcare company.

Any advice for retail investors?

It is important to look at equity as a long-term asset class. The harsh reality is that cheap valuations are accompanied by a terrible mess. The typical reaction is to be fearful when the headlines are adverse and confident when the headlines are bullish though it should be the other way around. In fact it is better to hold yourself back in a rising market.

Is independent investing better than using a mutual fund?
If you have the time and the DNA to do it alone, go ahead. Or else give it to someone who knows best.


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