Go for a lucky fund manager than an intelligent one: Anoop Bhaskar

Being in the hot seat is not easy. Ask Anoop Bhaskar, head of equity at UTI Asset Management Company, the fund house with probably the largest number of investors in India.

“Ours is the only job where you are tested everyday. That’s the only part that is a strain,” says Bhaskar, whose UTI Mid Cap Fund and UTI Master Value Fund have delivered 42.88% and 49.23% one-year returns as on September 18, 2010.

“If a sales person achieves his target in the first 10 days, he can rest for the month, but I can’t do that,” he says. In an interview immediately after the Reserve Bank of India hiked rates last Thursday, he tells DNA of the impact the move will have on the markets in the mid-term and about mid-cap stock selection.

Are there new leaders for the rally’s next leg?
They are here already. We did an exercise last week. If you were to analyse the BSE 100 during the peak of January 2008, the winners were in the capital goods, power utilities and infrastructure space. Today, when the market is still below the peak, we find domestic consumption —  that is. staples, two-wheelers, auto — have moved up 2-3 times, while the previous winners are down 20% from the peak.

Nobody said IT would be the best performing sector because of a strong stable government, but it has given 180% returns. When a stock gets overly expensive — 35-36 times two-year forward earnings, you know that the analyst has tried very hard to convince you to buy it. So the earnings themselves must be suspect. This is not in India alone, but a phenom across emerging markets.    

Sectors that were totally avoValuations don’t give much comfort. You have to see whether the earnings growth will deliver and sustain these valuations. If a mid-tier pharma company trades at 14 times next year earnings you are worried as these have usually traded at 10 times one-year forward. Valuations per se can be stretched.

I would not take very large holdings but restrict myself to smaller stakes in more companies.ided in the last part of the rally of 2007-2008 have done well, and the ones that have done the best in those two years are lagging.

What about valuations in these segments?
Valuations don’t give much comfort. You have to see whether the earnings growth will deliver and sustain these valuations. If a mid-tier pharma company trades at 14 times next year earnings you are worried as these have usually traded at 10 times one-year forward.

Valuations per se can be stretched. I would not take very large holdings but restrict myself to smaller stakes in more companies.

Do you see market rally continuing?
The short-term looks worrsiome as we have had a very high flow of money into India despite premium valuations to some emerging markets with better macro economic fundamentals. But then, as the saying goes, success begets success, which is leading to sustained flows, which may reverse once global macro situation worsens.

Will you still stick with consumption-related sectors despite the fifth rate hike this year?
Generally the assumption is that these are safer companies though valuations are excessive. So, what if they correct by 5-10%? It’s better to stick to these companies rather than shift to unknown infrastructure stocks. What you would need is a global mindset change where fund managers globally figure it out that these valuations are expensive.

Its not just an India phenomenon, even in China we have some consumer staples companies trading at 40 times, and some media companies trading at 30-35 times and they have much lower return on equity of 15-25%, whereas in India, companies still have RoEs above 25%. So if happens, it will be a trend decided by foreign flows rather then Indian fund managers deciding to take a call that these stocks are expensive.

The BSE Consumer index never used to top 13 times and today it is at 21 times. I can’t figure it out and my fingers twitch pushing me to sell it, but then I say I will sell 5% at a time rather than dump the entire holding. These are fairly well-managed companies.

You will see 15 companies coming and setting up power plants, but you will not see 15 companies coming and selling a Horlicks-equivalent. The barrier for entry is very high, so you will have to give them some premium for that.

How big a role does an institution play in stock selection?
Luck is a big part. You can’t say it’s only because of my skills to analyse balance sheets and meet managements that my fund is doing good. If somebody is saying that, he’s fooling himself — rather than lying. Take the case of the results of the general elections in May last year. Did anyone say that domestic consumption stories would do well over next 12 months? Everyone was upbeat on infrastructure and capital goods due likely increased spending by the government. You can’t say that I was so visionary that I saw the domestic consumption demand. It’s luck. If someone says that I bought cheaper stocks which were these consumption-related stocks rather than highly priced infrastructure or capital goods, fine, but to claim foresight would be wrong. If you have to choose a fund manger, choose one who’s lucky rather than one who’s intelligent. In the end that matters more, because you can be most intelligent guy making most deep analysis but if something goes wrong, then that’s it. Tell me, you think balance sheets aren’t doctored in India? So to claim that I am fundamental analyst and will look at balance sheets and dig out information works only so much…

Business and economic cycles have become shorter in the last few years. So how do you provide for the downside?
If you are lucky and you are very smart and able to identify companies that can consistently grow at a fast pace, and you have them in top 5-6 schemes, your fund would keep on doing well. But that is difficult. So you take a wider portfolio of say 60-70 stocks so that you are not over emphasising on 1-2 stocks to deliver the performance and as when their target prices are achieved you sell a part of these. Another way is to have a core portfolio concept in midcaps where there are certain stocks you will always hold whatever be the situation. These are very growth-stage companies and they move up in a lumpy fashion.

Do you look at the business model or the management of the company while picking a stock in your portfolio?
This is  a very MBA-type question. Aap bolo, in a 2-hour meeting what business model can you understand of the company? What I look at is the business cycle stage in which they are. If the business cycle for them is at a stage which will give them an upturn, they will do well. How would you differentiate a construction company? There’s no company which is specialist in particular skill as 95% of the work which they do in India is often sub-contracted to other smaller teams or sub-contractors. You take a call — either you buy the cheapest stock, or the one that you believe is the most honest or the one where Ebidta margins have consistently been the highest or one that’s generating free cash.

How do you go about stock selection in midcaps?
You need to go and meet more companies in midcaps than in largecaps and you should have a slightly longer view on them because many of these companies tend to have drivers for growth that are mainly internal rather than driven by the environment. If you were to pick up a blue-chip steel stock, the same brokerage might have changed its recommendation three times a year based on external factors like prices of steel in China and total production going up or down. But in the case of a midcap steel company, you need to look at the company’s capacity or its coal mines getting operational.

So the price performance of a midcap company doesn’t vary much with change in global prices. These are more slightly insulated companies and you can take a slightly longer-term view. If you meet management, you are aware of trigger that can happen over period of time that would boost the earnings. Some of these companies tend to have a more stable view on them compared with the large caps, which are now very global on account of the environment in which they operate.

What are the characteristics that you look for when buying midcaps?
They’re no different from large caps. You look at companies that have done well consistently in the past and are available at cheaper relative valuations which fell due to some event like some 2-3 large sellers unloading. There are also some companies that were doing good, say 3-4 years back, but had raised a lot of capital and then the global situation led to their businesses suffering. In the case of midcaps, the expectations of investors tend to move ahead of what companies can deliver. This leads to investor selling or disinterest despite their performance stabilising and cheap valuations. Such opportunities are there in the market where you can now meet the management and find out about earnings growth in the next 3-4 quarters and take a call.

How do you manage the risk in midcaps?
It is more on the small-caps side. You have to be cautious. They have a new plant and they will say they will stabilise in a year. In India, plants don’t get commissioned on time, they never stabilise on time and then the products won’t get sold on time.

So, if a company tells you it has ‘x’ capacity and targets 3x capacity, the point to assess is, is there a market for that? The plants can be expanded. But it might take two years to actually go and fill the market and get to the capacity utilisation levels that generate the margins the company is talking about. So, you have to take new projects with a pinch of salt. Whatever deadline a company gives, you need to take it with a delay of 12 months. Good promoters may get it executed with a delay of 6 months.

Also, all these companies have gone through a cycle - they have acquired another company, have lost money, raised capital, sold stake to private equity. There is a fair amount of due diligence done by outside investors. To find a total virgin in the Rs5,000 crore market cap bracket is rare, if at all.

How big is the liquidity problem in small and mid-caps?
I believe what the late Harshad Mehta said that in stocks only if the price goes up does the demand go up. If you are the only buyer of stock it might be the best time to buy it if you have the guts. But I don’t. I need to have other people to buy it to give me some comfort. There is no stock that has gone from Rs500 crore to Rs5,000 crore and still trades 100 shares a day. It’s a fallacy to say it is illiquid. It is illiquid because nobody wants it. To assume that at your exit price it will be as illiquid as it is today then either the stock will not go up or if it goes up then it will not be as illiquid as at the time of buying. Illiquidity is an issue only when buying, not selling.

How do you juggle between the different objectives of Master Value and Mid Cap fund?
We try to focus on companies that are more value-oriented for the Master Value Fund. It is not a pure value fund. If we have two companies in the same sector, the one which is more expensive and has got high growth will go into mid cap and the one which is cheaper but might have slower growth will be in the Master Value.

We are going to reposition the fund to have a 30% large cap and 30% small cap composition so that you get both sides of the curves in it. The 30% large cap will give it the stability and the small cap will give it volatility and sharp-rise movements, so that the fund is not cyclically volatile. It also gives you liquidity. It is a good combination for investors.

Any sectors that you find attractive in mid caps?
I think across the sectors, infrastructure looks good. A lot of investors have recently taken a liking to cement stocks that you can call cheap. Last year, investors were negative and promoters were positive, and THE stocks just went up. This year all the promoters are negative and investors are positive and the stocks are still going up. I can’t figure out why.

Cement could be the next one working in your favour. Construction is a safe bet. The next big thing would be capital goods. The perpetual dark horse is real estate. I think the problem there is that the business model is not suited for the stock market because it cannot have linear growth.