The COVID-19 induced volatility brought many economies to a standstill. The Indian economy was not immune with some sectors like hospitality, tourism, aviation, travel & tourism, automobile and real estate feeling the most heat. On the other hand, sectors like Information Technology and Pharma were clear beneficiaries.
While most advisers would refrain from advising clients to invest into sector/thematic funds, Niranjan Sridhar, Investment Advisor, Ithought Financial consulting LLP, believes that keeping a hawk’s eye on economies around the world and closely watching valuations has helped their clients get in the right opportunities when most of the market would be ignoring them.
With an applied Mathematics degree and Financial Risk Manager (FRM) under his belt, Niranjan applies his love for numbers to identify the right opportunities for his clients. Of course, it is difficult to time the entry precisely, but it is worth the effort, he says. “We don’t hesitate to get into thematic funds. We advised clients to get into Banking Sector Funds in 2013. Our clients participated in technology/IT cycle three times in the last ten years and the FMCG theme for two cycles. We also advised our clients to invest into Pharma Funds when the sector was seeing headwinds in 2018. Today, we are out of Pharma Funds. Advisers would generally avoid thematic funds. We have been able to take such strategic calls as we have the backing of our strong research team. There is a clear possibility to buy when chips are down. You can get your thesis 100% right. You might be one or two months away from the bottom,” says Niranjan.
It is not surprising that the industry has received cumulative inflows aggregating Rs 14,000 crore YTD in sectoral/thematic funds in existing as well as new fund launches.
Niranjan has been a founding member of ithought, a Chennai-based firm founded by Shyam Sekhar. It operates three verticals: Portfolio Management Services, Registered Investment Adviser and Mutual Fund Distribution. It has more than 500 clients spread across India and abroad who are mass affluent, HNI and retail. On the PMS side, ithought runs three strategies which are Flexi cap, large cap and small cap. They play the value investing framework in PMS which entails scouting for growth-oriented companies that are facing headwinds and are likely to turn around in the future. They scout for buying leaders in the industry that have less debt and are available at attractive valuations.
Fund Selection
Niranjan cites the team’s success mantra to their in-house fund evaluation metric which focuses more on studying the forward earnings estimates of the stocks held by fund managers rather than looking at the past returns. “Most of the industry looks at the past performance while evaluating funds. Rather, we look at the current portfolio of the fund to understand how the underlying stocks will do going ahead. Our funds are usually not the flavour of the season,” explains Niranjan.
Niranjan is not worried about the fund’s assets under management growing large. He believes that while large fund size does pose an operational challenge to enter and exit stocks, ultimately it is the fund managers style and conviction that plays a larger role in fund performance. “Some fund managers remain out of favour for some years and their thesis plays out eventually.”
Niranjan’s team is conscious of how they can reduce cost for investors and at the same time deliver value. While Niranjan believes that Indian active fund managers can generate decent alpha in a developing market like India, one should not ignore passive funds. His team is also actively recommending ETFs/Index Funds like equal-weighted funds and thematic ETFs which can potentially add alpha to client portfolios.
He believes that smart beta funds have their drawbacks as their models may not work all the time and might require tweaks. His team believes in active advice by keeping costs low.
They are agnostic about the asset management company and the fund’s asset size. The fund selection process is determined by their proprietary process. “We try to quantify what is intuitive by understanding the fund manager’s style and his stock selection process. We are value investors.”
Since equity markets are on a roll and gold is losing its sheen, Niranjan believes that investors should start accumulating the yellow metal at this juncture. “We started advising clients to invest in gold from the start of 2019. It is a good place to be in as a lot of central banks are maintaining a dovish policy. There was liquidity infusion during COVID. The liquidity injected in 2009 did not get to retail. This time, it went to the last mile. Inflation will hit hard going ahead.”
ESG
Environment Social and Governance (ESG) has become mainstream in developed markets and is spreading its wings in India. Niranjan believes that ESG investing will take some time to be accepted by all advisers. “We don’t actively advise on ESG. Generating alpha could be a challenge in ESG theme. Developed markets have reached a plateau. They are looking more at preservation. We are a country where we need to grow.”
IPO frenzy
Niranjan believes that bull markets typically witness a slew of IPOs and one needs to be cautious while treading this space. “It is for investors who can trade in and out. We have never bought into IPOs from the beginning. When IPOs list, private equity guys exit. They don’t leave much on the table for the next investors. It is subjective and a function of opportunity. For instance, IRCTC was available at a throwaway price last year. It got listed and COVID hit.”
Going Global
Another theme that clearly emerged from the pandemic is the need to diversify beyond domestic equities. The assets under management in the international fund of funds category has ballooned from just Rs 2,734 crore in March 2020 to Rs 12,407 crore in March 2021. As of July 2021, the asset base has increased to Rs 20,331.25 crore. The number of funds has increased from 28 in March 2020 to 37 in July 2021.
Niranjan likes to take exposure to international markets for his clients through a mix of active and passive funds. “We look at thematic ideas. We advised NASDAQ last year. It paid off well. Today, we are not advising NASDAQ as the risk reward is not in favour. We are watching China and South East Asia. The PMI data from European countries is encouraging. We are seeing if it is fits within our value framework. We advise if the valuations are cheap and there is a possibility of cycle to turn.”
Currently, Niranjan is bullish on international gold and gold mining focused funds. “None of the gold mining companies are putting up capex. They had put capex at the top of the cycle all the way till 2013. They are now net debt free. They don’t plan to expand capacity for the next four to five years. The cost of mining gold is $1050 and the cost of gold is $1780. You have a margin of $600. We are advising gold mining funds from 2019 onwards.”
After identifying such opportunities, Niranjan’s team sees which clients have the risk appetite to participate in such opportunities. Niranjan’s advisory team undertakes a quarterly review of their client portfolios to see how they are progressing towards their goals. Besides alpha generation, the team emphasises risk management.
Going ahead, Niranjan believes that advising on international equities space offers a lot of potential for advisers.
