Pioneer fund manager debunks some investing myths
21 July 2019
Kunj Bansal: Pioneer fund manager debunks some investing myths
With nearly 25 years of experience in investing Kunj Bansal has been in the mutual fund industry when it was in its nascent state. Learning and working with the best in the industry he talks about how professionals in the business think.
Shishir Asthana@moneycontrolcom
In our series on fund managers and traders on Moneycontrol, we have generally featured those individuals who have a passion for markets and are self-taught. They selected their own paths to understand how the market works, and chose a winning route to financial freedom.
Today, we feature a fund manager who has 25 years of experience in the market working with some of the top asset management companies in India and managing top performing schemes in these fund houses. The idea here is to showcase how professionals train themselves and think about investing.
Kunj Bansal has been at the right place and right time. He was a fund manager with UTI when it was the top fund house in the country and the economy and investing in mutual funds as an asset class was just picking up. Having trained under the best in the industry, he brings years of knowledge in evaluating companies and sectors.
When he is not investing, Kunj Bansal can be found on a golf course or playing squash. He also bets on horses, but after mathematically working out the odds.
In an interview with Moneycontrol, Kunj Bansal talks of how researching a company have evolved over the years, managing money in different structures like mutual funds and PMS. He talks of how he as a partner and Chief Investment Officer of Acepro Sarthi Advisor goes about picking stocks.
Edited excerpts
Q: With 25 years of experience in investing, you have had a front-row view to the industry. Can you walk us through your journey in the investing world and how you got into investing?
A: Born and brought up in Ajmer, I had my first brush with investing when my father used to take me out to meet his friends on Sunday afternoons. It was a small group of people who used to discuss stock ideas. This was at a time when we used to get Economic Times in Ajmer after 2-3 days. There was no digital economy back then.
My father worked with LIC, but had a keen interest in investing, which probably has been passed on to me. He read Annual Reports of companies where he was invested and also borrowed reports to read. This was at a time when even in Mumbai, few invested by reading about the fundamentals of the company.
After completing my Engineering from Ajmer, I completed my MBA from NMIMS in Mumbai. My campus placement was with Unit Trust of India (UTI) which was the largest mutual fund house back then. A coveted job, it further blossomed my interest in investing.
I started off as an analyst and was tracking sectors like telecom cables, banking and automobiles. Back then, there were few conglomerates, company structures were simple and fewer sectors to track. Researching companies back then was simpler than looking at companies with complex structures now.
From UTI, I moved to Reliance Mutual Fund and managed their top performing schemes Vision and Growth fund in early 2000. From managing mutual funds schemes, I moved to other structures likes offshore funds and managing portfolios through portfolio management schemes (PMS).
Q: How different is managing a PMS from a mutual fund
A: While managing both mutual fund and PMS is about managing money and investments, the similarity ends there.
In mutual funds, a fund manager can keep a well-diversified portfolio but in PMS it has to be a 15-20 stock concentrated portfolio. Thus your stock picks in PMS has to be more thorough and better researched.
Apart from that, PMS is a highly transparent structure where the client comes to know the moment you have bought shares in his account, thanks to exchanges sending messages to the clients immediately.
This affects the fund manager in two ways. One is the client wants to know the reason why the stock is bought and counters it with his reasoning. On account of this, client interaction is high, which was not the case when I was managing a mutual fund. But after the first few interactions, a rapport is built with the client and his trust is earned and the number of interactions comes down.
As a fund manager, I have to make my decisions irrespective of these pressures keeping in mind that my goal is to give them reasonably better risk-adjusted returns for a reasonable period of time, 3-5 years. While we know equity investments are for a much longer period, but the investor would like to see some traction in his account in 3-5 years. He would expect that the returns to be better than similar products in the market.
The second way these interactions affect the fund manager is he thinks twice before he buys a stock. He would not want to buy any stock on market news or what in market parlance is called ‘tips’. He would not like to own any stock where the quality of management is questionable.
Q: What are the challenges in switching gears from an analyst to a fund manager?
A: It is a big challenge. As an analyst, you are restricted to certain sectors where you gain expertise. But even after you become a fund manager, you tend to fill your portfolio, naturally, with stocks that you know well.
I have known some pharmaceutical sector analysts who became fund managers, but for many years their portfolio had pharmaceutical stocks from anywhere between 60-70 percent.
When you move from an analyst to a fund manager, you need to broaden your horizon, especially if you are managing a sector-agnostic fund. You have to have the courage to take hard calls, even if the stock may be among your top picks.
You should also be able to define your weight limits for each investment. The concept of risk and therefore of concentration of portfolio and diversification needs to be learnt.
You need to start gathering the courage to start taking bold calls. That is the reason investors will give you money.
An investor, when he invests on his own, gets emotionally attached to his investments and is unable to make buying or selling decisions when he actually should. Which is why he hands over his money to a professional fund manager who he believes would be a better decision-maker.
As a fund manager, you should learn when to take some money off the table.
And finally, it is all about the fundamentals of the company you are buying. You may go wrong in terms of pricing or valuations or even the expected holding horizon, but as long as the company you are holding has strong fundamentals, and management is strong, it is a question of the business cycle turning.
Q: How do you pick your stocks?
A: My stock-picking and investment style has evolved over the years. In the initial years, it was all about growth – both in the top line and bottom line. Those were the days – the late nineties and early half of this century, when growth was in focus after the economy had opened up.
Later with experience, you realise that while growth is important, a company’s cash flow is the most important.
Now over the last few years, along with cash flow, I realised that margins are also important. We have witnessed a slow topline growth in most of the economy. You cannot expect companies to grow at a 30 percent growth rate now. Growth rates have now come down to the vicinity of 10 percent, broadly speaking.
So now we look for companies where margins are relatively better and are not eroding. You cannot buy a company with a 5-6 percent operating margin as a slowdown can bring it down to 2-3 percent, which in turn would affect bottomline growth despite modest topline growth.
If I have to choose a business I would expect it to have at least 7-8 percent margin, which is relatively stable, as seen in consumer durables.
In the evolution of stock selection over the years’ management quality and corporate governance practices have gained more importance.
Being in the industry for nearly 25 years, which has on an average seen a bull market of various proportions every five years, I have seen promoters who have come to meet me with a completely different business than what they had in the previous bull market. When asked about their previous business, they have no answer. Seeing through promoters and their practices come with experience.
Our basic stock picking filters are common as one would see with various fund managers and Asset Management Companies (AMC).
I still prefer to look for businesses with higher topline growth. Though the availability has reduced, you can still find businesses with 15 percent growth rate. We then look for companies with similar bottomline growth, which means margins should remain intact.
Then we focus on its working capital, especially collections, which has to improve and cash flows should be positive, at least at the operating level. If these numbers are in place, return rations are normally in place.
Because of these filters, certain sectors are automatically excluded like infrastructure and capital goods, although we invest in cement stocks. We also do not look at commodities, mainly because it is not a long-term game.
Within the investing circles, it has been a fashion over the last few years to invest in businesses with zero-debt. Though we invest in such companies, it is not a necessary criterion. A zero-debt company would generally be holding cash and investing in liquid bonds or low yielding bank deposits. This disturbs the Return on Capital ratio of the company.
This is partly because many feel that equity is free, that is why they think it is better to raise money from the market than borrow. But we know that equity is far costlier than debt. If you take reasonable debt, which is easier to service, it gives a tax advantage. Plus you do not have the perpetual cost of servicing the equity.
Q: What role do valuations play in your stock picking?
A: As for valuations in our stock-picking model, they have remained a challenge. This is where my beliefs are different from the market. Value investing as a concept was good at times when no one was looking at markets. You do not get value investing opportunities now.
In our internal approach, we have designed QARP, which stands for Quality at a reasonable price. And there is no definition of reasonable price. It’s a modification of GARP – Growth at a reasonable price model of stock picking.
We filter down stocks on all the fundamental parameters and if companies are not available at a reasonable valuation, we still start picking them. We may not make money on these companies in the current cycle or the immediate term but we will in the next cycle.
Instead of buying quality compromised stocks at a cheaper valuation, which is a value trap, we look at quality companies and buy it with the intention of holding them for the long term.
Q: Do you also look to invest using a sectoral or a top-down approach
A: We do form a view on the sector and then look for good picks within it. Here we look for companies where the near-term visibility is high.
We are in the business of investing, which is different than pure investing. As I had mentioned earlier, we have to show some returns in the medium-term hence we have to be on the lookout for good short and medium-term ideas.
We at times have to look at contrarian bets. For example, we have currently started looking at the automobile sector. We feel that the sector will be under pressure for at least two more quarters. June and September quarters will be bad, but the December quarter would be the quarter to watch out for.
The effect of monsoon will be visible in the December sector, plus there will be a lower base effect. It would also be the quarter when festival buying would be reflected in the numbers. And finally, whatever measures the government would take in this budget would be visible by the year-end. [This interview was conducted a week before the budget was announced].
Having said that, we know that the sector is going through a structural change. The electric vehicle is a big unknown. So within the auto sector, my preference will be in auto ancillaries.
Multiple things are working in favour of some auto ancillary companies. Firstly, they have a geographical advantage. They supply to both Indian vehicle manufacturers as well as international players. Not that foreign auto players are doing any better than Indian ones, but diversification helps.
Secondly, the smarter auto ancillary companies and their managements are increasing their wallet share by approaching their clients to buy more products from them. If an original equipment manufacturer (OEM) is buying camshafts from them, these players are now offering them to buy rings or pistons.
Next, in the existing offerings, they are adding value. A forging company is now doing machining to their forged components.
One needs to be careful about looking into companies that would not be impacted by electric vehicle. Like players in the transmission, braking and probably gear components may not be affected. Those supplying engine components will get affected.
Q: When do you exit from your investments
A: We normally assign weights to our investment. At the time of construction, the weight is around, say, 6 percent. Now if the stock does well and the weight increases to 9-10 percent, we would like to prune down our investment to 6 percent. This way if the market turns only six percent of the exposure is affected.
On the other hand, if the weight of the company comes down and the fundamentals and reasoning behind the investment are intact, we add to the investment to bring it back to the original level.
This is where the business of investing overshadows investing. Had it been investing one would prefer to hold on to the top-performing stocks.
We also exit if our investment thesis has changed as seen in the pharmaceutical sector.
We give the management of the company 2-3 quarters to perform in case they are affected by some unforeseen circumstances like government policies. But if they fail to pick up, then we may consider exiting the investment.
Q: What more is there to learn for you in the markets? And also a word for retail investors.
A: Learning is a continuous process in investing. There are new sectors that are opening up, which are still to reach the capital market. The pace at which changes are taking place is changing. We will have to learn to identify new sectors, opportunities, businesses, and learn to evaluate them through new matrices.
For a retail investor, it is important for them to decide whether are they investors or traders. Knowing that solves a lot of their issues. One can be both an investor as well as a trader and split their corpus between trading and investing. But he or she will have to put in the hours and have a disciplined approach if he needs to be a good investor. If he is not willing to invest in the hours, he is better off using the help of a professional to manage his money.