JP Morgan India Mid & Small Cap started off on a bad note but improved its fortunes in 2010. Since then it has been a steady player. In the 1-, 3- and 5-year periods, it is a top quartile player. Harshad Patwardhan, head of equities and portfolio manager believes that consistency in performance is what eventually pays off. Here he tells us why he believes his fund is a winning proposition.
JP Morgan India Mid & Small Cap was not a great fund in its initial years. What went wrong?
We launched our fund in December 2007. In hindsight, we can say that the launch took place at the peak of the bull run. With such bad timing, naturally the fund was hit when the market tumbled in 2008.
But there are 3 specific reasons I can give you regarding underperformance.
In 2008, the market fell in rupee terms by 52% - talking about the Sensex. During such tumultuous times, we stuck to our mandate of not taking cash calls as all our funds were open ended. So naturally our relative performance was hit when compared with funds that shifted to cash. But we never changed our mandate as we did not want to second guess asset allocation of our investors.
Later, in the first half of 2009, the market began to pick up. The election results saw the UPA form the government without the support of the communists. So expectations regarding reforms were high. At that time, some real estate players and infrastructure companies, whose very survival a while back was questioned, rose by 3 or 4 times. We did not buy such stocks - so naturally our performance was hindered. High beta, low quality stocks do not form part of our mandate.
The third reason is that we stuck to our mandate of investing a minimum 65% of the corpus in smaller companies - bottom quartile of the market cap. Mid and small cap companies got massacred during that time. So while other funds moved to cash or found refuge in mega and large caps, we stayed loyal to our mandate. Hence when compared to our peers, we did badly.
So in 2008 on the way down and 2009 on the way up, we did not do well relative to the market.
Was the management not concerned?
Of course. Debate took place within the India team as well as with our global counterparts. We acknowledged the fact that not taking a cash call hit performance but we were convinced that we should stay committed to what we believe in and what we have communicated to the regulator, the investor and the advisory community. Our funds are open ended funds that investors can redeem any time. We should not be taking asset allocation calls second guessing our investors in these funds.
What did that experience teach you as a fund manager?
Basically, the investment style we follow is one of bottom-up stock picking. This requires us to meet companies and understand their business. This drives our investment process. But 2008 and 2009 taught us that we cannot afford to completely bypass a top-down view, particularly at inflection points. For instance during the third and fourth quarter of 2013, we got very bullish on the stock market. This was the run-up to the general elections when numerous state elections were taking place. Opinion polls were stating that NDA and its allies will get a majority.
So we are still bottom-up stock investors but we do now incorporate an overlay of top-down views. For instance, the scare of the Greece exit from the euro would impact the Indian market in terms of flows. The economic linkages may not be that strong, but the inflows and outflows of FII money would have a direct impact on the stock market. Oil prices would also have an impact on the market.
So top down is necessary at times, but never sufficient. Ultimately, bottom up is what counts. For instance, take a narrow and homogeneous sector like cement or commercial vehicles. Whatever the macro backdrop, there could be a big variance between the stock performance of two companies in the very same sector. So there is no substitute for bottom up.
Would you say you have a strong value bent?
When we look for a stock, we seek growth. Global investors come to India because of the growth. We look for compounding stories - companies that will keep growing in terms of revenues and earnings - 15% or 20% or 25%, year after year. Not that they are easy to find.
But we will not buy a stock just because it is cheap. If we see a company that does not have much growth to boast of but is fairly stable, we will not buy it at 30 cents to a dollar with the objective of selling when it becomes 80 cents. We will buy a business that is fundamentally worth Rs 100 now but could be worth Rs 300 in 2 years or Rs 500 in 5 years, just to give an example. We want to look at businesses which will be a lot bigger 5 or 10 years from now.
Having said that, at times, there are some stocks which double in 3 to 6 months, for whatever reason. We will not hesitate in booking profits at that time. Let's say we buy a stock with the expectation that it will deliver 40% over the next 12 months. But, it surprises and delivers 30% within 3 months. We would have no problem reducing the bet and reallocating that capital somewhere else, where another stock can give us a good return.
What is the USP of JP Morgan in this highly competitive fund industry?
I would say our investment process is our strength and the fact that we are spread out across the globe.
My colleagues are based across the globe and we have specialists in emerging markets. We collaborate with each other - no working in silos. We share knowledge. Let's say an emerging markets' fund manager in London meets the management at an oil company in India. He would do a comparison with what he sees in Brazil and Russia and his views and thought process are shared. The results of his interaction and his impressions are now easily accessible to me. That sort of perspective is invaluable.
From 2000 onwards, many Indian companies internationalised their operations. Tata Motors acquiring JLR and Tata Steel acquiring Corus are some examples. Even smaller companies acquired operations in Europe and China. Motherson Sumi gets a large part of its revenues from Europe. Bharat Forge too. So it is important when evaluating these businesses to understand what is happening in those markets. The state of the European passenger car market and the U.S. truck market will help us analyse these businesses better.
And this is where JP Morgan has a strength.
