N Sethuram Iyer, Chief Investment Officer, Daiwa Asset Management (India) Pvt. Ltd

N Sethuram Iyer, Chief Investment Officer, Daiwa Asset Management (India) Pvt. Ltd has over three decades experience with State Bank of India in the areas of investments, credit and forex. He was deputed to SBI Funds Management Pvt. Ltd. as the Chief Investment Officer from January 2003 to June 2007. During his tenure, SBI Mutual Fund has grown to be one of the leading fund houses in India. He has been instrumental in guiding the whole investment team to deliver good investment performance. Post completion of his deputation as the CIO, Sethuram rejoined SBI as General Manager of the Mumbai Circle in May 2007. He has also been the Senior Vice President (Credit & Investments) of SBI in Tokyo for over 4 years.

Daiwa Asset Management (India) Pvt. Ltd. is a part of the Daiwa Securities Group, which has a strong 100 years of history and is one of the leaders in the financial services industry in Asia. Daiwa Securities Group Inc. (“DSGI”) and Daiwa Asset Management Co. Ltd. (“DAM”) own 100% equity share capital of Daiwa Asset Management (India) Pvt. Ltd. DAM, the asset management subsidiary of the Daiwa Securities Group, holds 91% of the equity share capital of Daiwa AMC and the balance 9% is held by DSGI, the parent company of DAM. Daiwa Asset Management (India) Pvt. Ltd. is the investment manager to Daiwa Mutual Fund, which is a mutual fund registered by the Securities and Exchange Board of India.

Replying to Anil Mascarenhas of IIFL, Sethuram Iyer says, “The current low valuations and the expectation that growth would rebound to over 8% in FY 2013, lead us to believe that the equity markets will rerate and deliver handsome returns over the next one year.”

Brief us about the investment philosophy of Daiwa. To what extent has it changed over the years?
At Daiwa, we believe additional value can be provided over the medium to long term, through discovery of hidden worth by using balance of fundamental analysis and quantitative techniques with the application of a consistent process and appropriate risk control measures. This investment philosophy will work in all market conditions.

In your interactions with large investors, what are some of the key concerns they have?
The primary concern of most investors is regarding the volatility in the equity markets. The volatility increases as macro-economic news flows from US and Europe tend to impact the market apart from domestic developments. Fall out of political corruption related news tend to increase concerns on corporate governance issues of certain companies.

What factors would increase appetite for investing in mutual funds?
The market volatility calls for taking timely and well researched investment calls. It is not easy for persons who do not understand the markets fully to invest in equity on their own. In such situation, Mutual Funds offer a safe way to invest as they offer well researched and professional investments.

Mutual Funds are now offering a number of innovative product features. These include multiple product classes (funds which invest in Debt, Equity and Gold), dynamic asset allocation to reduce risk (where the investments into riskier asset classes are varied depending on the risk in the markets), Capital protection orientation, etc.

Mutual Funds also offer features like SIP (Systematic Investment Plans) and STP (Systematic Transfer Plans) which allow regular and systematic investments enabling investors to plan and optimize returns.

How do you compare Indian valuations with other emerging markets?
Indian markets trade at a 15-20% premium to emerging markets as a whole, although this premium was contracted over the past 7-8 months. A number of major emerging markets have commodities as large sectors in their benchmark indices. Besides this, the technology sector in many emerging markets consists of hardware manufacturers, which operate at considerably lower margins on a structural basis, whereas Indian technology companies comprise software service providers, which have a completely different business model. In that sense, Indian equities’ higher valuations are justified.

Indian valuations are higher, but it also accounts for the potential of higher growth in the market/economy.
One of the positive features in equity investment in India is the long term growth prospect of the economy. Over the last two decades, we have progressively shifted into higher growth path and barring certain exceptional years when the whole of the developed world slipped into recession, Indian Gross Domestic Product (GDP) growth has been strong and among the highest in the world. India is expected to deliver growth rates of over 8% over the current decade. As the Indian corporate sector has become highly professional and competitive, earnings growth in a normal year is comfortably over 10%. This is the primary factor why Indian equity markets trade at a premium valuation to both the developed economies as well as emerging markets.

Which are the sectors are you bullish and bearish on?
In the current uncertain scenario, we feel that domestic consumption oriented sectors, both discretionary as well as staples; will continue to do well on a relative basis. The discretionary sectors will gain traction as the interest cycle is expected to peak out soon, and commodity price pressures are likely to abate, thus helping margins. The domestic pharmaceuticals and fertilizer sectors should also do well in the near term. Valuations for the IT sector have reached attractive levels on an absolute basis, but uncertainties abound in terms of corporate discretionary spending in the developed economies. We would look at the IT sector with a positive view from here on, given that the risk-reward appears to be in favour for the larger companies. We would avoid global cyclicals and other export oriented sectors.

Have corporate earnings been in line with your expectations?
Results were mostly in-line with slightly below expectations. Even as revenue growth remains strong, margin compression continues across eight out of ten sectors. EBIDTA margins were under pressure in view of rising input costs. Among sectors, while capital goods disappointed with weak numbers, the order inflow guidance was also weak. Metals & mining stocks too witnessed disappointing results on the back of low volumes and rising raw material costs. Profitability of electric utility companies suffered due to lower offtakes (by SEBs) & falling merchant tariff rates. Real Estate stocks missed earnings estimates due to muted sales volumes. Cement stocks, on the other hand, recorded strong results aided by higher cement prices. Technology stock results were in line with good volume growth and stable pricing. Telecom results have been good with lower fall in RPM and ARPU as well. Pharma results have been in line with the high base effect dragging sales growth.

Comment on the performance of your funds.
We manage the Daiwa Industry Leaders Fund, which was launched in August 2009 and invests in leading companies across sectors, which are selected based on pre-specified criteria of market share, sales growth and profitability. The investment universe for the fund is around 150 companies, which constitute the cream of the best performing companies, largely in the large and mid-cap space. We have maintained a midcap allocation of around 10-13% in the fund for the past one year, and pick stocks on a bottom-up basis, after analyzing macro-economic conditions and their impact on various sectors. As on July 29, 2011, the Daiwa Industry Leaders Fund has outperformed its benchmark Index (BSE 100) since inception.

Every fund manager would give enough reasons to buy a mutual fund. For investors, when is an ideal time they should look at exiting a mutual fund?
Equity investment should be made with a fairly long term horizon. As such, Investors should consider exiting their investment in equity funds only in the following circumstances. (i) if the performance over a reasonable long period does not match that of the peers or benchmark; (ii) If the investment strategy in the Fund has been changed which alters the risk profile of the Fund to the extent that the fund does not suit the investor’s investment requirement and (iii) the investment objective is achieved – i.e the investment has given returns to meet a definite goal of the investor. There is no pre-specified investment time for which an investor should be invested in a particular mutual fund.

Your outlook on the economy, currency, equity market over the next 12 months?
The economy is likely to slowdown compared to earlier estimates, given that higher interest rates and inflation are affecting consumer demand and investment decisions. We expect GDP growth to average between 7.0-8.0% for FY2012. The Rupee could appreciate vis-à-vis the US Dollar to a certain extent, but we feel the appreciation would not be substantial, given India’s high current account deficit. Indian equities have had a lackluster performance during the last seven months due to well known concerns relating to inflation, interest rates, government policy and action inertia, and the global credit crisis, which has assumed serious proportions. However, most companies continue to position themselves for a more robust, longer-term outlook despite caution over the next 1-2 quarters. Weak commodity prices will result in inflation peaking over the next 3-4 months, which would indicate that we are close to the peak in terms of tightening of monetary policy. In terms of valuations, forward P/E at ~14x is at a 12-13% discount to long-term averages. These valuations appear attractive given India’s structural growth differential vs. the developed world.

Policy action from the Government has started – it has recently cleared 9 coal blocks, raised Foreign Direct Investment (FDI) limits on FM radio, approved e-auction of FM licenses and cleared the FDI in BP-RIL and Vedanta-Cairn deals, and is likely to approve FDI in retail, and has cleared the next set of fertilizer sector reforms. A consensus on adoption of Goods and Service Tax (GST) and the Lok Pal bill are the key reform measures which will improve market sentiment. We expect the equity markets to remain volatile in the immediate near term, as quarterly numbers will result in a few surprises and the uncertainty affecting global equity markets subsides. However, the second half, post September, should be better, provided a decisive solution is found to the Euro-area issues.

The current low valuations and the expectation that growth would rebound to over 8% in FY 2013, lead us to believe that the equity markets will rerate and deliver handsome returns over the next one year. Even over the longer term, equities should deliver better returns compared with other assets, as India’s capex cycle is rejuvenated, and our structural demographic advantages attract long term investments into the markets.

Your view on the debt and money market? What kind of balance should investors have in these times?
With a view to combat high inflation the Reserve Bank of India (RBI) has been raising policy interest rates steadily since March 2010 and market liquidity has also been kept tight. While inflation continues to remain at elevated levels, given the signs of slowing in the economy, we feel that we are close to the peak in terms of policy rate hikes. One cannot rule out a further 0.25% rise in REPO rates in the next policy review in September 2011. The interest hikes have largely impacted the shorter end of the interest rate curve, with yields on short term papers climbing higher over the last one year.

At the current yields, investments in short term money market mutual fund schemes have become fairly attractive. Once the interest rates peak, which we expect over the next month or so, investors can look at Short term Plans and longer term debt funds. Investors can then hope to reap the benefit when interest rates climb down which can happen when inflations comes down to acceptable levels and it is no longer required to kept administered rates high.

What advice would you give retail investors in the present situation?
The current equity markets actually give an opportunity for retail investors to invest in equity with a long term view. The current valuations and prospects for a rebound in growth in the next year could result in the markets rerating and giving very handsome returns over the next year. However, over the next three to four months, the markets could remain subdued. Retail investors should start investing in a systematic manner.

Given that returns from Debt investments and Bank deposits are also fairly good, there has to be a balance in the investments in the various asset classes.

Source: http://www.indiainfoline.com/MutualFunds/Fund-Manager-Speak/N-Sethuram-Iyer-Chief-Investment-Officer-Daiwa-Asset-Management-India-Pvt.-Ltd/27989423

There can hardly be a better time than now to start a SIP

I'm not going to write about the obvious topic this week because I don't believe that there's anything new to be said. The shape of things is reasonably clear to every investor and whatever shall be shall be. However, for mutual fund investments, there's an interesting aspect to the current bear cycle that wasn't there earlier. Unlike earlier, Indian mutual funds are receiving significant regular inflows through SIPs ( systematic investment plans). Based on the numbers that I've gleaned by talking to various people in the industry, about 1,500 crore is flowing in through the SIP route into equity funds every month.

I do realise that this not a great level to declare significant - for a potential market of our size, it should be ten times this figure. However, it is at least much larger than it used to be till a short while back. The significance really comes from the experience these new SIP investors are going to have over the next couple of years. Historically, whenever the stock markets are down, Indian investors have never invested in equity. This time it is different.

Over the coming months, a good number of people are going to keep investing steadily in equity every month. This is the core logic of SIP investing - keep investing when prices are down so that you gain when they turn around. This is the buy-low, sell-high action that SIPs deliver automatically. Investors who will continue their monthly investments will eventually realise much higher gains if they stick with it long enough. Each rupee that they put into an equity fund now, at lower NAVs, buys them more units. When the time comes, the cheaper units would have delivered much higher returns, boosting the total returns they get.

Still, what is really important is not the gains themselves but that the impact that I hope this episode will have on the investing culture at large. Maybe I'm being a little optimistic but the experience that the current lot of SIP investors will have could be the seed for a larger change in Indian mutual fund investing.

Think of it this way: 1,500 crore a month could mean 5 lakh investors if each is putting in 30,000 a month. The number could be higher if the investment is lower. 5 lakh investors sounds like a drop in the ocean in a country the size of India, but actually, it's not bad as a seed population. I'm hoping that eventually, the impact on the culture of fund investing (if that's the right word), will be far more significant than the number indicates.

Incidentally, 1,500 crore is also not an insignificant number in terms of the total cash flows into the stock markets. While FIIs may have brought in 5,000 crore or 6,000 crore in one of their better months recently, 1,500 crore is in the same order of magnitude. Everyone connected to the markets keeps complaining that there is no serious retail participation in the stock markets now. However, this 1,500 crore of SIP money flowing into equity is far more important than whatever momentum-driven flows that day-traders used to bring in before 2008.

SIP money is here to stay and will get actually invested in stocks selected on a fundamental basis. By contrast, most day trader money was just flitting in an out of momentum stocks and index F&Os, which may have been better for brokers (hence the moaning) but not for the markets or the investors.

Anyhow, even though the current bear phase will no doubt put a halt to the growth of SIP volumes, it's good to see that the fundamental trend is encouraging. And if you, personally, haven't yet started an equity SIP, then there could hardly be a better time to do that than now.

Source: http://articles.economictimes.indiatimes.com/2011-08-22/news/29915071_1_systematic-investment-plans-sip-investors-monthly-investments/2

Taking an alternative investment route

PE and VC funds, though riskier, could be a good avenue when traditional assets have remained lacklustre.

With equities seeing red and debt being only marginally ahead of inflation, venturing into alternative assets like private equity (PE) and venture capital (VC) funds is worth considering. These funds, on an average, give 15-30 per cent returns, considerably higher than other investment vehicles.

While the world of PE and VC comes under the more sophisticated investment products, meant for those with high risk appetites, the investment philosophies they follow are not as complicated as one imagines. Traditionally, these funds invest in unlisted companies and start-ups. Once the company grows, they sell their stake to either another PE firm or in the public domain.

Rakesh Sony, director, Motilal Oswal Private Equity Advisors, says: "When it comes to PE and VC funds, with different funds being at different stages and having different underlying assets they have invested in, it is difficult to gauge the returns. Most funds claim to give returns of 20-25 per cent but actual returns are not publicly available."

Domestic PE fund houses such as ICICI Ventures and IL&FS have been successfully running funds for some years and generating returns of 20-25 per cent. The Kotak India Real Estate Fund-I, which started in 2005 and had a seven-year maturity period, has already paid investors back their entire principal, as well as given 15 per cent returns. VC funds offer higher returns, in the 25-30 per cent range. These funds are riskier, though, as the investment being made is at a more nascent stage of the company.

In PE and VC funds, investors typically invest in tranches and, in some cases, the payouts made by the funds are also in stages. However, with many of the funds providing returns on maturity, knowing how the funds are doing midway is difficult.

While PE and VC ticket sizes a few years before were in the Rs 5-10 lakh range, the current entry point for most funds is Rs 25 lakh and can go as high as Rs 5 crore. However, if the new takeover code guidelines issued by the Securities and Exchange Board of India get implemented, it could raise the minimum investment threshold to Rs 1 crore.

GETTING IN
Investors usually get into PE and VC funds via their investment banker. Investors directly invest in PE projects as well, often as a group, pooling their money and investing. The advantage here is that investors can leverage the power of multiple investors, getting better deals and attractive valuations. Such investments are riskier than investing in a PE fund, wherein the investor pool is larger and the money collected is diversified amongst various projects and companies.

Another reason these funds make good investments in the current economic scenario is that they get better valuations and deals. In this sense, it is similar to investing in equities or in mutual funds, as a slowdown does provide opportunities as well. Also, with these funds having five to seven-year tenures, the slowdown is less of a concern, as the long investment tenure should ride out the short-term hiccups.

According to Rahul Bhasin, managing partner, Baring Private Equity, "From an investor standpoint, when looking at such a high-risk asset class, going with people who are really good at what they do and understanding their industry and this business well is the key." Here, your banker plays a crucial role, as you would be investing on his recommendation.

Investments in consumer goods, health care and education sectors are on the rise, as these areas have witnessed a lot of asset building. PE investments in India grew 22 per cent last year.

"One has to have patience and a long-term appetite when investing in these funds. In a portfolio, while five to 10 per cent would be set aside for such investments, these days 15-20 per cent is worth investing in this asset class," says Rakesh.

For Indian investors, consumer protection, far lower than that in the West, is an area of concern. A recent World Bank Group report placed India second-last in a list of 170 countries in terms of contract enforcement. "Protection issues for minority shareholders are impacting everyone and the structural bias and lack of protection in terms of payments, returns, inflows and exit clauses has led to investors being weary of such alternate investments," concludes Rahul.

Source: http://www.business-standard.com/india/news/taking-an-alternative-investment-route/446925/