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"Fund managers no longer have the luxury of investing for the long term" - Views on News from Equitymaster
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  • Jan 29, 2001

    "Fund managers no longer have the luxury of investing for the long term"

    Sunil Joseph is the President and Director of Dundee Investment Management and Research and a Director of other Dundee group companies including Dundee Bancorp Private Limited. Dundee Capital Markets Private Limited and Dundee Precious Metals Private Limited.

    He has worked in private corporate and merchant banking for 14 years and has been with Dundee for 5 years. He is an MBA from the Australian Graduate School of Management and a BA (Honours) from St. Stephens, University of Delhi.

    In an interview to personalfn.com, he aired his views on the economy, the state of the equity and fixed income markets and Dundee Mutual Fundís investment strategy.

    PFN: What is your view on the economic scenario?

    Mr. Joseph: Lets begin with what happened way back in 1998. Then, with the foreign institutional investors (FIIs) and foreign direct investment (FDI) we had thought the country would be able to take care of its current account deficit. But that did not happen, which is why we had the Resurgent India Bond (RIB). When that still did not happen we had the India Millennium Deposit (IMD). All these events have had an impact on country allocation. Perception of risk has increased, which is why foreign investment inflows have not been up to the mark.

    With interest rates coming down we have to see where the risk-return allocation has been globally. While our current account deficit is under control with the IMD inflows and the exports going up and petrol prices coming down, industrially however, we are witnessing a slowdown. Even our exports are IT-centric at the moment. IT (information technology) again is going through a transition period. In April and May 2000 we had valuation concerns and now we have worries that the revenue model overseas is not working anymore. There is still a strong link between the Indian and US markets, where we are still service oriented. Hopefully, export of gems, jewellery and invisibles may take a better shape next year.

    Now the second problem is if there is actually an economic slowdown, you canít predict it until the second quarter. Right now, we have an interest rate scenario, which is fairly relaxed. The government has been able to issue 15-year paper at lower rates. However if the budget has a large borrowing program this year, I do not see interest rates coming down.

    If the government wants to control fiscal deficit, it will have undertake some fiscal measures. Tinkering with the monetary policy will work in phases and is not a long-term measure.

    PFN: How do you find the markets now? And going forwardÖ

    Mr. Joseph: The markets have changed and no one looks for value anymore. Its a quarter-to-quarter momentum. So going forward if the quarter-to-quarter sentiment continues, and I think it will, you will find that youíll have to be more of a trader than a value investor. Accordingly your strategy will have to be shorter youíll have to be very aware, much more aware than people have been in the past. In December we may find software companies reporting lower billings because markets like the US donít work too much in December. So there is nothing wrong with the company fundamentally, but the sentiment could turn negative since its a quarter to quarter market. Going forward on the equity side, youíll have to be very vigilant and youíll have to focus on the companies and not on the stock market or the BSE Sensex and thatís been our philosophy because probably the Sensex has remained the same and people have made money. On the debt side, if the budget deficit is significantly large, we may see a rate hike and that means that portfolio managers will have to shorten their duration.

    PFN: What is your investment philosophy?

    Mr. Joseph: We look at sectors and then we look at companies within the sector. We look out for good defensive stocks, growth momentum stocks, value stocks and we narrow down to 2-3 stocks within the sector. We track 20 stocks maximum.

    PFN: Do you normally have a long-term view on stocks?

    Mr. Joseph: Because of the quarterly momentum trend in the markets currently, there have been times when we have exited a stock completely and re-entered it at lower levels. While the business (of the company) maybe very sound, but for that quarter or for that period the performance doesnít match the market sentiments. So we have rethink where we have to exit and where we have to re-enter.

    PFN: Do you believe these quarterly earnings and tracking is a good thing? Shouldnít a fund be taking at least a 2-3 year investment horizon?

    Mr. Joseph: You must understand that the Indian investor will never allow us a 2-3 year horizon. The investor and the mutual fund looks at it daily. If you are a portfolio manager you donít have that luxury anymore of investing for the long term. Its because you seen such a lot of wealth created in such a short period of time, and you have also seen a lot of wealth eroded in a short period of time. If you give a growth fund a 2-3 year investment horizon, you may get a 16-17% compounded return. If you take a period lower than that, than you would be disappointed with the fundís performance. That is one reason why balanced funds have done so very well and have picked up.

    PFN: Is tracking the NAVs daily a good development for the industry? It puts a lot of pressure on the fund manager to deliver.

    Mr. Joseph: The manager should be under pressure to perform. I am not saying that you do should not do value investing. An individual investor doing value investing is justifiable. But I donít think the fund manager can afford, he just does not have that luxury in a mutual fund. Donít forget that stocks have fallen 70% (over the year) so you really have to be nimble if you want to cut losses.

    PFN: Do you advocate both investment styles, growth as well as value investing?

    Mr. Joseph: Yes. We follow both investment styles.

    PFN: What is your investment strategy for the fixed income market?

    Mr. Joseph: In January we have decided to go for long-dated paper. In the Sovereign Fund we have bought paper till even 2008. You have to understand it is different in a Sovereign Fund as compared to a gilt fund. In a gilt fund you have to go by liquidity in addition to the duration, because liquidity is a driving factor rather than the duration. In the liquidity fund we have 1-1.5 year paper except for 1 or 2 boosters.

    One thing I can say on liquidity during the year. Although I believe that interest rates could rise in the year, disinvestments will play a crucial role. I believe that disinvestments could well happen by July-August this year as the disinvestments department seems to be working overtime.

    PFN: Do you believe the US slowdown could have an adverse impact on the domestic IT sector?

    Mr. Joseph: You have to understand the slowdown in the US. Its more of a political problem (than an economic one). You raise interest rates, let a new government come to power. If you track historical data thatís what it implies. In any case, our IT expertise does not include making software products, rather, we are service providers and are placed at the lower end of the ladder. So I do not see us getting affected by a US slowdown for at least 2-3 years, and I feel that way very strongly.

    PFN: When you look at Dundee Mutual Fund, you find that it is a predominantly debt fund house. The only equity investments are in the tax saving fund and the balanced fund.

    Mr. Joseph: We have just got our growth fund approval. We started off with debt funds The truth is we thought convertibility would take place when Manmohan Singh was the finance minister (but it didnít really happen). We wanted the government to do then what its doing right now i.e. allowing ADRs investments. We started with proprietary money in equity. We were the first FII to invest in debt in this country. That was as far as proprietary cash was concerned. On the fund side, we decided to start with the low risk liquid, money market funds. To move up on the chain we started sovereign fund because the pension fund sector was getting deregulated and gilts were becoming the flavour of the day. We then moved on to corporate bond and PSU bonds to give it a retail flavour. After we decided to move into equity, which is why we launched the tax fund and balanced fund and now we will launch the growth fund.

    PFN: How big is Dundee Mutual Fund in terms of net assets?

    Mr. Joseph: Today we are Rs 2.3 bn (in net assets). Of this the liquidity fund is Rs 1 bn, corporate bond fund is about Rs 160-170 m, and the bond fund is about Rs 800 m, balanced fund is about Rs 200 m, gilt fund is about Rs 150 m and tax fund is about Rs 20 m.

    PFN: How positive are you about distribution of mutual funds through the NSE?

    Mr. Joseph: You see itís a t+5 and t+0 situation. So long as its t+5 I am a little pessimistic. Once thatís sorted out, it will be very good. You just canít beat an organized distribution network (like the NSE) in the long run. Moreover its unbiased.

    PFN: Do you believe that buying stocks/mutual funds over the Internet has a great future in our country?

    Mr. Joseph: It all depends on how comfortable people are doing all this on the Internet. Till now its been mostly brick and mortar, so we donít know if that mindset is going to change soon.

    PFN: Who are the persons who have influenced you the most?

    Mr. Joseph: My dad for setting the ethical standards for me. My immediate boss in Dundee, not just because he is my boss, but because I have learnt a lot from him.



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