Mr Sanjay Sinha, Chief Investment Officer, SBI Mutual Fund Management Private Ltd

SBI Funds Management Ltd. is the investment manager of SBI Mutual Fund. SBI Mutual Fund is a joint venture between the State Bank of India and Société Générale Asset Management, one of the world’s leading fund management companies that manages over US$500bn worldwide. Today, the fund manages over Rs317.94bn of assets and has a diverse profile of investors actively parking their investments across 36 active schemes with an investor base of over 5.4mn.

Sanjay Sinha, Chief Investment Officer, SBI Mutual Fund Management Private Limited, he joined SBI Mutual Fund in November 2005 as Head of Equities. He has over 19 years of experience in the mutual fund industry. Prior to joining SBI Mutual Fund, he had a stint with UTI Mutual Fund and was managing a corpus of over Rs28bn (over US$600 mn). He is a graduate from IIM Kolkatta.
Speaking with Anil Mascarenhas and Fahima Shaikh of India Infoline, Sanjay Sinha says, “FIIs have behaved in a logical manner and we are sure they will not stay away from the Indian market for too long.”
Inflation has been skyrocketing and oil prices have been soaring. How do you read the situation?

We are set to face more hardships as far as oil prices are concerned. However, I don’t see it sustaining at higher levels for too long time. Oil was trading at around US$80 per barrel, before it spiked to $120 in a short span of time. A demand spurt from India and China has been cited as a reason. This is surprising, as these economies have been growing their GDP at a strong pace now for the last three to four years. Therefore this is not a logical justification for the spike in oil price by around 50% in a short span of time. Secondly, if you look at history, oil price spikes were caused due to supply interruptions on account of various global events. I therefore expect the surge in oil prices to be temporary in nature. Whenever prices have sharply moved higher, the shrinkage in demand has been far more structural. The demand could start coming down resulting in cooling of prices. In the longer term, oil prices will start moving down because of this. Supply side constraints are not the cause for rise in prices this time around. Any commodity, which moves at a very fast pace without any fundamental attribute definitely comes to a sustainable level. By the later part of calendar year 2008, we see prices of oil and other commodities cooling down from their highs and settling at sustainable levels. Inflation, which is at record highs, would moderate and consequently interest rates are also expected to soften putting into motion the entire virtuous cycle.

The rupee has been volatile. How do you see it moving ahead?

Rupee weakness is coinciding with a spurt in oil price. However, we cannot be sure that if crude falls, rupee may appreciate by the same extent. The proposition that oil prices may come down is also based on the assumption that dollar will strengthen. This may get triggered by the expectations of a Fed rate hike in September 2008. At the same time rupee might also see some appreciation, as oil prices cool. It is difficult to get a clear view regarding the rupee on account of these conflicting factors.

To what extent could these factors impact corporate earnings?

If one believes that advance tax numbers are a genuine reflection then the coming quarter appears to be set for above expectation results. I think the true test will lie in seeing the actual quarterly results because many a times the advance numbers are a little deceptive.

If the first quarter results are relatively positive then the bane of high prices may pass on to the second quarter. High interest rates and inflation could be a dampener in the second quarter. But the third and fourth quarter results may be much better compared to the earlier quarters as companies would have a positive effect of cooling of oil prices and softening interest rates.

Even after a correction, global investors see India as expensive compared to other emerging economies. What kind of FII inflows are you expecting?

Equity as an asset class remains a risky proposition. Emerging economies are even riskier. To that extent, FIIs have reacted in very logical pattern and have behaved in a similar manner worldwide. They have sold 2.5% of their total holding in India, which is not a significant proportion. We are sure they will not stay away from the Indian market for too long. In April 2008, when markets were moving up from its lower levels, we saw some positive response from FIIs. They too look at the trend and act accordingly. Post the new P-note guidelines; there was a fear of FIIs slowing down their activities in India. However, the number of FIIs investing in India is on the rise and around 1400 FIIs have registered with SEBI.

Mutual funds have been sitting on large amount of cash. Yet they have been slow in deployment. Are the current levels still comfortable for investment?

Mutual fund participation has been higher this calendar year. In 2007, MF houses were net buyers of Rs67bn of equities whereas this year till mid of June 2008, mutual funds have bought equities worth Rs75bn. Yes, we are sitting on a cash pile of around 13% of our average equity assets, which is much higher than the normal levels.

We had built a cushion to absorb the shocks of redemption, which is normal during a downturn. However, this time, we were surprised that there was no outflow. On the contrary, almost everyday we are witnessing net inflows even in these turbulent times. As part of our investment strategy, we are looking into moving into new sectors and stocks. We have been a little slow in deploying this cash in a falling market and that explains the reason why our funds are sitting on cash for a longer time.

Which sectors do you expect to outperform and under-perform in the coming months?

Opinion on this can be divided. One choice would be the sectors which are the flavour of the day like IT, pharma and FMCG, that are considered to be defensive sectors. Other choice for investment would be contrarian bets in the present scenario. Though these funds would not give an immediate result, disciplined investors can get fruitful gains for their patience. Currently, sectors one can look at need not be just the ones which have corrected sharply. Investors should look at stocks which have corrected and at the same time hold good promise when the situation turns benign.In such a scenario, sectors like banking, financial services, engineering and capital goods could be contrarian bets.

Last calendar year contra fund delivered outstanding returns of 65%. Would it be wrong to make a comparison for the short term as the contra funds have been underperforming in recent months?

Our SBI Magnum Contra fund has been in line with its objective. It was in the first quartile among its peers last year. In terms of five and three years’ returns, it is among the top five performing funds. This is an indication of a typical contrarian fund behavior, which is supposed to unfold its story over a longer period of time. Hence one should stay invested over a long term period in a contrarian fund. Short term gains can not be expected from contrarian bets.

In two of your funds, Contra & Tax Gain you have seen to be liberal and constant in declaring dividends. However, in Comma, Index and Pharma funds you have not been rewarding investors with dividends in the last two years?

In case of index funds, which are passive in nature, getting distribution surplus is less likely.
We have a practice to declare at least one dividend in actively managed funds every year. In case of sectoral funds, if we are able to capture any event in the industry, we would definitely part the surplus with our investors in terms of dividends.

Recent guidelines on REMF (Real Estate Mutual Fund) by SEBI expanded the asset class for investment. Any plans in the near future to launch such funds?

Mutual fund industry is at its inflection point. To move into a new phase, the industry has to first spread geographically. Secondly, the investor should be offered a wide range of innovative products. At present, our industry offers broadly two classes of assets i.e. equity and debt. Hence, real estate mutual funds can offer a completely new set of asset class to the retail investors. We are very positive and excited about REMF. As this industry has its own dynamics and complications, we are first putting in place an infrastructure to suitably manage this asset class. Once we set up the entire plan, we would definitely launch products in REMF.

Why are pension funds in India not gaining popularity?

Pension funds are least popular in India. The last time a fund decided to raise money for a pension fund, the corpus collected was very low. A sporadic savings plan alone may not be able to satisfy an individual’s retirement need. Secondly, investors are not very conscious about planning for their retirement. Investors can actually go for life stage financial planning. This is where the mutual fund industry can play a vital role to offer products that suit investors and retirement needs. Here, the SIP route would be most preferred and suitable in building a diversified asset allocation for retirement.

Issue like bringing down the cost in fund houses has been in limelight in recent days. What is your suggestion on this issue?

There have been suggestions of creating a common platform so that mutual fund investors can be given a consolidated statement, where all the holdings with different funds are captured in one statement. Currently, paper work contributes a large extent to the cost pie. Any common platform or standardization will bring down costs to that extent. This would be another investor-friendly reform in the industry.

What is your advice to retail investors?

Currently, average income levels in the country have gone up. Investors have a wider choice of investments options as compared to old saving avenues like bank deposits and National Saving Certificates. The higher pool of money has to be judiciously saved and invested. This is where investors need to pay more attention to financial planning. Once a proper plan is made, investors have to choose a suitable approach to fulfill that financial plan with different asset classes. Investors should be disciplined and regular in investing. This will save them from the trap of timing the market which is not part of any proper financial planning process.