Mahesh Patil, Co-Chief Investment Officer, Birla Sun Life Mutual Fund says that the markets can deliver 17% CAGR over the next three years. He expects the markets to be primarily driven by earnings growth in 2015.
Can
you take us through the investment philosophy of Birla Sun Life AMC?
We aim to generate consistent returns over and above the benchmark with a measured risk. We focus on mainly bottom up stock selection. We also look at the macro environment while picking up stocks. We have a rigorous process and various filters which we apply while buying any stock. We buy stocks which can offer growth at a reasonable price.
Do you think the markets have the potential to deliver the kind of performance we saw in 2014?
We saw a big re-rating last year because the markets were undervalued. We believe there is still potential in the market for a re-rating this year. We expect a growth of 17% CAGR over the next three years. The markets will be driven by earnings growth in 2015. There should be some consolidation this year. We can expect 20% returns from markets this year. Because markets can react to quarterly earnings results, we could see some volatility. It won’t be a smooth journey that we saw last year.
What is the rationale behind launching BSL Manufacturing Fund?
India is at a point where a lot of factors which are essential for manufacturing growth are falling in place. We have a large pool of skilled labor, adding one million young force to the job market every year, which is equal to 25% of the world’s incremental addition to the labor force. We have access to abundant raw materials which we have not exploited so far. Also, a lot of sectors have been opened up for FDI by our government. Our Prime Minister has got commitments from various countries for investments in India. The competitiveness of India has increased. Our neighboring country China which has been the manufacturing hub is slowing down. It has seen some erosion of competitiveness because of reasons like increasing labor cost, currency situation, imposition of strict environmental laws.
In this scenario, India is in a better shape to take advantage of the situation. The government has also clearly articulated its intent to increase manufacturing sector’s output in GDP from 15% to over 25% over the next ten years. The growth for India over the next decade can be driven by manufacturing in a big way. It’s a multi-year opportunity for the sector.
This has been the case globally too. For instance, Japan’s manufacturing sector grew rapidly from 1960-90. In the case of China, the boom period for manufacturing was 1980-2010. A focused approach in this sector can yield good returns to investors. We have already seen sectors like pharmaceutical, auto, and auto ancillary benefitting from it.
Is your new fund as risky as a sector or thematic fund?
This fund will have a more concentrated portfolio of 40 stocks. It is a thematic fund with a broader mandate. It will be a well-diversified fund investing in a mix of large and mid-cap stocks. The fund can invest in up to 250 companies. Sectors like pharmaceutical and FMCG will provide a cushion to this fund. This fund would not be significantly different from a diversified equity fund. Thus, this fund is less risky than a regular thematic fund.
Which sectors the fund will invest in?
The fund would have an investment universe which would include auto, auto ancillary, pharmaceutical, engineering, textiles, industrial company goods, chemicals, consumer durable, FMCG, etc.
How many new companies have you invested in last year?
In the last one year, we have added a lot of companies in our investment universe. We added many mid cap companies in our portfolio. We added companies from the capital goods sector, consumer discretionary, and so forth which were earlier not so well represented.
Which kind of companies do you think will create wealth for investors?
We look at some important factors while buying a stock. These are earnings potential, pricing power, competitive advantage, reasonable return on capital, good management, and proper capital allocation etc. We expect that companies focused on domestic demand are likely to do well.
What risks does the market have currently?
There is slight uncertainty in the global markets. For instance, Europe is facing some problems. So there can be some flight of capital. The markets will lose momentum if the government is not able to implement the reforms.
By when do you think the actual benefits of various initiatives taken by government will help companies?
I think it will take time. I think in the next one year we will see some results. It’s just a matter of time.
Your flagship fund - Birla Sun Life Frontline Equity Fund has had an impressive track record. What worked in its favour?
We follow a very strict discipline while buying stocks. We try to ensure that we consistently beat the benchmark. At the same time, we don’t take unnecessary risk while trying to deliver performance. We focus on bottom up stock selection to drive performance. Some amount of exposure (5-15%) to mid-caps has also helped the fund. Thus, the fund has been able to beat its benchmark consistently over the last ten years.
Which style (value, growth, etc.) do you associate yourself with?
I’m biased towards growth. I buy stocks which can generate growth at a reasonable rate. This philosophy has generated returns across market cycles. For a very long time, India has been a growth market.
Your favorite book
I liked the book – ‘Built to Last: Successful Habits of Visionary Companies’ written by Jim Collins and Jerry I. Porras. The authors share facts and examples about what made some of the top companies succeed.
