PROBLEMS OF PLENTY

HDFC mutual funds (3 yrs ago):

• 40% of its portfolio was underperforming
• Booked profits mainly in FMGC and pharmaceutical stocks as its fund managers felt they were overvalued.
• Instead they bet on infrastructure related stocks. Resulted in loosing its no1. Position among equity funds.
• A year ago FMGC stocks tapered off after a spectacular rise while the pharma stocks were hit by US FOOD AND DRUG ADMINISTRATION actions related to pricing and quality issues
• 100% HDFC mutual funds equity funds have beaten the benchmark in last 1 yr and 97.5% for a period of last 3 and 5 yrs.

They didn’t hesitate to book profits when the valuation crossed their expectations .

They didn’t get euphoric when FMCG and Pharmaceutical stocks began to shoot up.

Equity fund is being flooded with cash from investors- SIPs bring 4200cr/month againt the 1500cr/month last yr. This results in lack of good companies trading at reasonable value as all stocks have risen in value and hence are less likely to give positive returns in short term. They cant even hold cash and not invest as it has its own opportunity cost.

JIGNESH GOPANI, head(equity) at Axis Mutual Fund:

• Pick companies with sound management principles and focused on the india growth story.
• Chose companies that will be tomorrows star and will and create shareholder value.

I.V.SUBHRAMANIAM, director of Quantum Mutual Funds:

• Doesn’t think inflow of cash is excessively large and it is ok to keep buying.
• They are currently sitting on 14% cash , which is nowhere near to their previous high of 30% cash of the total portfolio.
• Buy IT and Pharmaceutical stocks

S. NAREN, executive director and CIO of ICICI Prudential AMC:

• There is convergence of good and bad stocks with both trading at similar valuations.
• They will invest in large cap and quality stocks , which offer a relatively higher margin pf safety.
• Advocating “dynamic asset allocation” fund for lump sum investment. In such funds, allocations are based on price to book value(p/bv) ratios.
• Invested only 50% funds in equity, 15% in derivatives and 35% in debt markets. This formula can be questioned as 51% open ended equity funds of ICICI Prudential AMC have been underperforming their respective benchmark for past 1 yr.
• Look at stocks based on risk retrun tradeoff and valuations. Finding value in the current market is difficult.
• It has recently pulled out of the stake in a private bank.
• It is said to have picked Sun Pharma shares eventhough, like other pharma companies, its facing US pricing and currency problems because it has quality management and has a strong balance sheet.

MAHESH PATIL, CIO of birla sunlife mutual fund:

• Universe of stocks increased from 260 to 400 companies in last 3 and half years.
• Lost on short term gains
• Don’t mind picking costly stocks if they are of good quatily.

ATUL BHOLE, Vice president of investments I DSP Blakrock mutual funds:

• Pick quality stocks even if they are expensive if there is clear visibility of earning growth for the next 3 to five 5yrs and the company is expected to grow at 15-20% a year.
• There is a chance for such stocks correcting. They may underperform for 6-9 months but once earnings impove, they catch up.
• Around 60-70% of their portfolio consists of such stocks

IMPORTANCE OF DIVERSITY:

• Patil of Birla SunLife: Biggest mistake is to sell off too early.
• Gopani of Axis: we try to evisage possible event risks (situations that cn wipe out half of the value of stock overnight). We have started maintaining low weightage across stocks, diversifying and sticking to our mandate to stay fully invested in scalable companies. Axis restricts itself to 40 stocks
• Bhole of BlackRock: we’ve kept our single stock exposure at a manageable level ( around 4%). There are special opportunities in the secondary ipo. {ipo is the issue of new stocks from a company that has already made its ipo. This is usually done to get more capital to grow.} Its been a new opportunity where we have stock of companies in retail, hospitality and health care sectors.
• Fund managers have also been doing off market deals to avoid impact cost { cost of executing a transaction on the market due to the prevailing liquidity conditions of a stock.
• Fund managers have been picking up stocks through ipos or block offerings { deals in which stocks are brought directly from the company or private equity players}
• They keep in mind the liquidity risk and chose stocks that can be offloaded with low impact cost if market becomes difficult.
• Patil: we have managed a balance between growth stocks and defensive stocks. Defensive stocks wont outperform the sector but will be stable and prevent downslide. This is why , 6 months ago, we increased exposure in fmgc and oil and gas stocks. This will help them outperform the index even in adverse conditions.
• Patil has also taken contrarian bets in select companies in metal, capital goods and infrastructure sectors. He looks for companies that are deleveraging {reduce your debt} and have positive cash flow. He stays away from Power utilities and construction companies that have high debt in their books.
• HEMANT RUSTOGI, Wiseinvest Advisors : we sell diversified portfolio to clients. So when, Prashant Jain’s fund didn’t do well, we didn’t sell them but when Naren’s funds aren’t doing well, we are still selling them as their core investment policy is strong.

LIMITING CASH FLOW:

• There is a lot of cash flow in the mutual funds so some have imposed restrictions.
• DSP BLACKROCK has stopped accepting subscription for its micro cap funds. RELIANCE MUTUAL FUND has stopped accepting lump sums for its small cap funds as it is difficult to find quality stocks in that segment.
• SUNIL SINGHANIA, CIO of reliance mutual fund says that we accept money only through SIPs. They have stopped fresh investments into their small cap fund. Retail investprs in funds need to moderate their expectations. They have tild their investors that they should expect 15-20% returns. On post tax basis, this is the highest.
• PATIL of Birla SunLife says return percentage will be in mid teens. Their fund will outperform the index but only by 3-4% and not by 8-10% as in the last 3 yrs.
• FOR 2016-17, NIFTY RECORDED EARNING PER SHARE GROWTH OF 4%.

Stock market as a whole is still not in euphoric zone. In the last 3 yrs, return has only been 20% says SUNIL SINGHANIA.

The sentiment is just the opposite of that in 2007-08, before the debilitating(weakening) downturn, when stock valueation were high, sentiment bullish and earnings at their peak. Valuations are high once again but shareholders are being careful this time and it will augur well.