"The markets are always in motion like a pendulum. They can go from extreme exuberance to complete panic. Your success or failure will depend more on identifying those points." - Navneet Munot
8/9/2012 9:00 PM Thursday
Navneet Munot, CIO, SBI Mutual Fund, brings with him over 14 years of diverse experience in the financial markets. Prior to joining SBI Mutual Fund, he was the Executive Director with Morgan Stanley Investment Management, where he was also the Head of Multi-Strategy Funds. He has also worked as CIO, Fixed Income and Hybrid Funds with Birla Sun Life AMC. Here, he shares his investment ideas with Saikat Mitra and provides valuable guidance to investors.
Can you describe your investment philosophy for us?
Talking about investment philosophy, the first thing that comes to my mind is to deliver superior returns. We lay a lot of emphasis on the fundamental research approach with a long-term orientation. So, I want to mention here the risk-adjusted returns; every bit of risk that we take has to deliver an alpha for the investors. Also, we have a long-term orientation and do not get into momentum-based trading.
We are a fundamental research driven organisation having a large research team in place and laying a lot more emphasis on in-house research. We have templates for each of our funds, which clearly define the investment strategy for that fund. We have a universe which is tracked by the analysts, from which a fund manager selects stocks. Our investment committee looks after the investment activity on a periodic basis. Otherwise, the fund managers have the flexibility to select stocks from the universe by following the templates.
How did you enter the fund management industry?
I joined Birla Global Finance in the year 1994 and stayed with the financial services business of the Aditya Birla Group for 14 odd years. After that, I moved to Morgan Stanley Investment Management, and in December 2008, I joined SBI Mutual Fund. Throughout my stint at SBI Mutual Fund, I have been involved in equity, fixed income and foreign exchange.
What was your first big investment idea, and how did you develop it?
In Birla Global Finance, we were doing something which is called as market-making in the OTC listed companies. Then, some of them (like a company called Renewable Energy) turned out to be multi baggers. Of course, that exchange did not survive very long, but some of the stocks have definitely given superior returns.
What, according to you, are the most crucial signals which would determine the entry and exit points in stocks?
For entry, we look at a couple of things, like the business should have a competitive advantage. The other important things are the quality of management and of course, the valuation. While buying into a stock, you have to maintain a margin of safety. That is a very critical factor. We are relative value investors, so we look at the benchmark. Our views are based on both absolute as well as relative valuations. So, if one idea is more attractive in terms of relative valuations, then it finds its place in the portfolio.
The exit depends more on the alternative opportunity. As I have mentioned earlier, we are relative value investors, and we remain invested. The exit will come only if we see a good alternative investment opportunity.
Do you meet company managements, and are you constantly in touch with them till the idea is a part of your portfolio?
We very much follow this practice of meeting the company managements. Our analysts not only meet the management but also do channel checks. They also keep a fair amount of watch on the industry as a whole. Many a time, we see that a lot of emphasis is given on the financial numbers, but as a fund house, we believe that understanding the business model and assessing the management is a very important part of the overall investment process.
Do you think that the management will share the correct picture with you? If not, then how does meeting the management really help?
See, the trick is that you do not take everything at face value and do your own analysis. Very thorough due diligence is done. As I have mentioned earlier, we have a large research team that is constantly engaged in all these activities.
Technical analysis is considered to be a very important and integral part of market success. What is your take on it?
Technical analysis is important for those who are more engaged with momentum-based trading. We are more dependent on fundamental trading calls. We follow a bottom-up approach.
Have you gone wrong on your investment ideas at times after having generated and followed them?
We constantly re-assess our investment universe, and where we think that our investment thesis and our assumptions are not going right, we switch to another stock. There is no shame in accepting mistakes, and one needs to move ahead. You cannot get 100 per cent of your calls right. The correct idea is to see at what point you should accept your mistakes and move ahead.
How important is the selection of a correct sector in a stock’s performance?
There are phases of markets where sectoral allocation determines the performance of one’s portfolio. But there are phases when stock selection delivers better returns. In India though, bottom-up stock picking has always played a larger part in generating an alpha. Even within specific sectors like IT and banking, we will find some stocks trading at their yearly highs and others at their yearly lows. That is why we lay more emphasis on fundamental research.
Is it possible to recognise a bear market before it is too late?
The markets are always in motion like a pendulum. They can go from extreme exuberance to complete panic. Your success or failure will depend more on identifying those points. From my experience, I can say that the way money chases momentum and the way the valuations quote the markets clearly give out signs of overheating. To be precise, if you look at the money flow, primary market activities give out a clear signal of whether there is a bull or a bear on its way.
Buy-and-hold, as a concept, is widely followed and preached by mutual funds. Is this concept completely foolproof, according to you?
Over the last few years, we are realising that the economic and market cycles are turning shorter. Therefore, the need for higher sectoral allocation, and the lifecycle of the businesses and companies are reflecting this new trend. Thus, as an investor, you have to be very nimble.
Also, as I mentioned, we are relative value investors and have to constantly look for relative value. Our objective is to read the market on a constant basis, so obviously, we have to look for relative value, and whenever we find that, we pick it up. Having said that, our investment horizon will be a little longer as compared to that of the rest of the industry.
The corporate results for FY12 as well as for Q1FY13 are not showing encouraging signs. How do you think the performance for FY13 will pan out for India Inc.?
We are very close to the trough of the earnings cycle. I think that for Q4FY12, we have seen more positive surprises than negative ones. So, the downtrend is nearing an end, but the uptrend will take some more time due to the macro challenges.
What are the triggers that you are looking for in the current markets?
The policy initiatives by the government will be the most important trigger and determine the future course of the markets.
What is your take on essential commodities like crude oil?
We have been bearish on crude oil for some time now, and our portfolios have benefitted from this stance that we have taken. The bearish stance is based on China, where the slowdown is going to be deeper than expected. This will augur well for India once the rupee starts stabilising.
What sectors would you say are currently offering attractive investment opportunities, and in which areas should investors take caution?
Since we were bearish, we have laid our bets on defensive sectors like domestic consumption and healthcare. Of late, we have been shifting to cyclical and rate-sensitive stocks as we think that the overall economic environment is bottoming out in India. We expect policy action to take place. Low interest rates in the developed economies will see more money being routed towards India.
Do you think that the interest rate scenario in India has peaked out?
Yes, we think that the interest rates have peaked out in India.
What would be the most important advice that you would give to a lay investor?
I think that in last few years, the bulk of investments has gone into physical assets like real estate and gold and the allocation towards equity and long bonds has gone down. Investors must learn the importance of asset allocation. I would reckon that investors should work on asset allocation and increase their allocation towards equity and long bonds.
Chief Investment Officer
SBI Mutual Fund
Charter Holder, CFA Institute, USA and CAIA Institute, USA
FRM Charter Holder, Global Association of Risk Professionals (GARP)
Chief Investment Officer, SBI Mutual Fund
Executive Director, Morgan Stanley Investment Management
Head, Multi-Strategy Boutique, Morgan Stanley Investment Management
Chief Investment Officer, Fixed Income and Hybrid Funds, Birla Sun Life AMC
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