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| Patience pays |
| Ram Prasad Sahu / Mumbai Aug 03, 2009, 00:39 IST |
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Discipline and a focus on the long term have helped Mahesh Patil stay ahead in the game
The best way to tackle irrationality of the markets is to adopt a disciplined approach to investing, believes Mahesh Patil, co-head, Equity Investments at Birla Sun Life Asset Management Company. The fund manager who manages four funds with a current corpus of about Rs 3,000 crore has been credited with turning around the Birla Sun Life Frontline Equity Fund by diversifying the portfolio and thus reducing risk.
A strong research background and the ability to take calculated risks have helped this money manager outperform the respective benchmarks across different time periods: Birla Sun Life Equity Fund, Frontline Fund, Infrastructure Fund and the International Equity Fund. While investment discipline has helped the fund manager deliver on the returns charts, how does he keep his wits when the markets go ballistic?
The investment process
While the investing style of each fund manager evolves over a period of time as learnings are incorporated and processes refined, Patil credits a part of his success to his seven-year stint as a research analyst. Trying to pick stocks based on research, meeting managements, carrying out due diligence and taking a medium to long term view will help identify the next big trends, believes Patil. However, in an industry where returns are quite often put through the scanner, this can be tough ask.
| THE OUTPERFORMERS |
| Birla Sun Life Funds |
Size Rs cr |
Returns (%)
|
| 3 mths |
1 yr |
3 yr |
5 yr |
| Equity |
1,112 |
44 |
13 |
17 |
30 |
| Frontline Equity |
788 |
42 |
21 |
21 |
30 |
| Infrastructure |
470 |
51 |
15 |
16 |
- |
| International Equity |
700* |
- |
13.4** |
- |
- |
Source: valueresearchonline.com and Birla Sun Life
*Total for Plan A and B, **For Plan A |
The long term focus
To tide over the market gyrations, Patil segregates his portfolio into two parts, the first is his core holdings, the long-term bets which account for about three quarters of his portfolio. He continues to stick with the scrips as long as the story is intact. The rest of the portfolio is a tactical play where the fund manager believes that the stocks are undervalued be it in the midcap space or otherwise and would like to ride the momentum. This allows him to enhance returns in the short term while his marathoners generate wealth over the long term.
Tackling risk
Patil emphases the importance of management quality when it comes to tackling risk. The fund house tries to mitigate the risk component by periodically meeting the management and trying to get a sense of the promoter’s outlook and vision for the company. His second weapon is to diversify and not have a large concentrated exposure to a particular stock or sector. Explaining this diversification strategy, he says that if the benchmark weight for the IT sector is 10 per cent, he would exceed this marginally if bullish on the sector but will not throw caution to the winds by increasing his exposure to 20 per cent.
Stock picking
The process the fund house follows is to scan the overall universe based on valuation filters such as price to book (P/BV), price to earnings and cash flows which differ based on various sectors. Post this, the fund house tries to look at earnings prospects and the growth estimates. Getting the sectoral call right is also important, opines this computer science engineer and a finance MBA as he believes that when a sector does well, most of the companies with it do well. “Once you identify the sector you check whether the company has any intrinsic or competitive advantage as it will help it stand out against the peers and generate superior returns. The management quality is also important as this will decide how effectively are shareholders’ funds being deployed.”
Star performers
This fund manager took a long term call on the telecom sector because of the under penetration, limited competition and the growth potential. Expecting leading players to perform well he bet on Bharti Airtel, when few were willing to stick their neck out for this novice. He says, “When Bharti came out with an IPO three years ago, it was a kind of a failure. It listed at Rs 45 levels and came down to Rs 25 as it was loss-making. At that time a lot of people were sceptical believing that the valuation was expensive and that Reliance Telecom was a big threat.” His belief that the market would expand rapidly and well managed companies such as Bharti would gain, paid off. The stock went down from Rs 45 levels to Rs 25, but over the last three years moved up to Rs 1,000 creating wealth for his fund.
More recently the fund house bet big on the commodity stocks such as Tata Steel. “Our call was that the stock at 0.6 times book value was available much below its intrinsic worth and that we were buying at the bottom of the commodity down cycle and we had nothing much to lose,” he says. The fund house got in lower levels and helped itself to high returns. REC was another example. “The markets were punishing financial stocks in January this year due to the global meltdown. The company has no NPAs, ROE is at 20 per cent, and was available at 0.6 BV. This was being treated as a PSU Bank. The stock has hence more than doubled,” he says. While these were multi-baggers, there were some investments decisions on his watch that did not deliver.
Learning from mistakes
Trying to be part of momentum and justify a decision even though the market is fairly valued were costly learnings for Patil. He held on to some stocks in the infra space and paid the price when the markets collapsed in the 2008 crash. Lesson learnt? The fund manager now reduces exposure or rebalances its portfolio so that it can cushion the fall when a correction takes place. Looking too deep into the future is another thing which could land one in a tight spot. Says he, “If you are paying 90 per cent for the future potential and only 10 per cent for current earnings then there is a huge risk element there.” Patil believes that the exit strategy is also important. In cyclicals, he thinks that you have to get the decision right twice viz. during upturns and cyclical downturns, otherwise you lose heavily.
Sectors to bet on
Patil believes that future growth will come from the consumption story and will benefit those sectors such as auto which depend on discretionary spending. Another bright hope is the infrastructure space due to the investments lined up. Says Patil, “Be it power utilities or power equipment or construction, this space should generate good growth and returns for investors.”
The way forward
The fund manager believes that there are signs of recovery. Markets, he says are fairly priced or slightly expensive from a 2009-10 earnings perspective. He believes that earnings growth will start catching up in the next fiscal and once the upgrades come in, like in 2003-2008 when results were better than estimates, the markets will get into a consolidation mode. Patil says that if at all there is a correction it will be limited to about 15 per cent from these levels.
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