`We are more conscious of liquidity now' -- Mr Ajay Srinivasan, MD, Prudential ICICI AMC

Suresh Krishnamurthy

Prudential ICICI is one of the asset management companies that has grown rapidly in the last couple of years. With assets under management of more than Rs 4,000 crore, Prudential ICICI AMC is trying to consolidate on its growth. Business Line spoke to Mr Ajay Srinivasan, its managing director. Excerpts from the interview:

How do you rate the performance of your equity schemes?

I think any performance has to start with a benchmark. And to just evaluate the performance without understanding the benchmark is difficult. What is important is that the performance benchmark has to be constant across periods of time and, sometimes, that is where we can make mistakes. Sometimes we choose an index and at other times our peer group. I think any performance number has to be linked against the benchmark and its objectives.

In 1999, the broader indices -- Crisil 500, BSE 200 -- outperformed the narrower indices -- Sensex and Nifty. In 2000, it has been the other way around. If you had benchmarked yourself against a narrower index, your equity schemes would have underperformed.

That is exactly what I mean. The benchmark is an important part of evaluating performance. If you say I am benchmarked against NSE-50, and if I had 5 or 15 per cent in NSE-50, then my benchmark is wrong. If I am investing 80-90 per cent of my money outside the benchmark, how can the benchmark be relevant. If I had 50-60 per cent in technology sector, then my benchmark cannot be the NSE-50, since it has only 30 per cent in technology.

Mutual funds are turning over their portfolio on an active basis. How do you reconcile that with the objective of long-term investing?

I think the market volatility has increased substantially. And with it, the need to look at a longer term becomes more and more important. Many stocks have, in a short period, corrected substantially. But over a longer period, they still return superb numbers. The more volatile the market, the more important the longer-term perspective. Yet, volatility allows investors to capture value in-between. I do not know if you can do it consistently. But it definitely provides an opportunity to capture some value mid-term. But it does not take away the fact that an investor in equity should technically look at it over long term.

How relevant is long term for Prudential ICICI? Would you invest and stick with a stock for a long term. Or, book profits and seek to re-enter at lower levels?

We have a price target for stocks that we buy. The price target could be absolute or it could be relevant to a benchmark. We normally assume that this would happen in 9-12 months. That is the kind of horizon we look at. Sometimes it could happen much before. When that happens, we have to look at our analysis again.

You would have faced this situation in March. How did you react to that?

We had taken some amount of cash in February and March. But the problem in March was that the market collapsed without giving anybody a chance to escape because of the circuit-breaker system. We never had an opportunity to get out. We were left like many other people, trying to get out after the market had collapsed.

What about timing the market?

I think, typically, fund managers are not good at timing the market. Where they can add value is in choosing stocks -- in choosing stocks better than somebody else, understanding business models and picking out which will win and which will not. Our own preference is to choose stocks better than somebody else rather than trying to time the market. It is a game that you cannot win.

After March, what has changed your perception of IT stocks, or your approach to their valuation?

I do not think our view has changed. What it has done to us overall is it has made us much more conscious of liquidity in our portfolio. In a market that has become volatile, the more liquid your portfolio, the more important it is. Today, we have much more liquidity in our portfolios than before -- in terms of the cash we keep and in terms of the liquid stocks in our portfolio -- typically, stocks we can trade or get out of in less than three days. Our redemption period is three days. I need to have stocks that can be liquidated in three days.

Even if that leads to lower returns for the portfolio?

Yes. Liquidity is clearly becoming more and more important in a portfolio.

For equity portfolios, would you say that the extent to which a portfolio needs to be diversified has come down over the years?

You do not need to be diversified for the sake of diversification. It should lead to some reduction in risk without diluting returns. Therefore, you have to ensure that when you buy something in the name of diversification it does not dilute returns. And that is the test you have to use. We typically find that between 28 and 30 stocks you get that kind of diversification in a diversified fund.

Would you invest in stocks of companies that have a poor track record in terms of corporate governance but profess a change for the better? Or, would you invest after they acquire a track record?

You have to find a mix between the two. You have to see what has already happened and if you believe in the new business model. And I think you have to take a decision based on that. I do not think you can have a rule and be fixed about it. You could find people who want to change their business model totally. If you feel they have no experience, if they come from a different background and have no capability, then it is a different matter. But if you feel their background is reasonably similar and what they are saying makes sense from a business model point of view, then I do not think that should stop you from looking at the stock.

Even if the track record, in terms of corporate governance, is not satisfactory, if their business model is strong, would you invest in them?

Yes. You would then use a different parameter. You would not expect a premium for that stock. I may put a discount to it. You have to understand that.

With respect to income funds, large-sized funds such as Prudential ICICI Income Plan have underperformed smaller funds. Is there a case for stopping fresh inflows into large funds?

We still have not got used to the concept of closing funds when the size is not right as an industry. But our income fund is nowhere near the size that you need to worry about. We are about close to Rs 2,000 crore. That is not a fund size that it unmanageable.

In the context of an highly illiquid market such as India, is that not a fairly large-sized fund?

In an open-ended fund you are looking at liquidity which means you invest 25-30 per cent in gilts. This is essentially the same for both a small and a large fund and the impact on the NAV would be similar. If you look at safety, the benefits of diversification are substantially greater in a large fund compared to a smaller fund. The other thing in a larger fund is you get economies of scale and lot of our costs are fixed.