`Mildly bullish, mildly bearish outlook' -- Mr Vivek Reddy, CEO, Kothari Pioneer AMC

Aarati Krishnan

Suresh Krishnamurthy

Kothari Pioneer Asset Management Company has been one of the better performers among the private mutual fund companies. In 2000, the fund showed a mixed performance with some of its funds weathering the downturn in stock prices quite well while others were not that successful. Business Line spoke to Mr Vivek Reddy, Chief Executive Officer of Kothari Pioneer about the fund's performance in 2000, their strategies and outlook for 2001.

Excerpts from the interview:

What is your outlook for 2001?

Mildly bullish for both the Old Economy and New Economy stocks. Returns are going to be tough to earn. And we have to work hard to earn those returns. If we earn a return of around 20-25 per cent, as a fund house, we will be thrilled. And you would expect our investors also to be happy with a 20-25 per cent annualised return. That will mean a two per cent growth in net asset value per month on an average.

This is what investors ought to be expecting and that is our goal. The tech stocks, overall, are fairly fully valued, though there is some scope for respectable appreciation. So, we are mildly bullish. Within the alternatives, the stock market is the place to be.

Bluechip fund has turned in good performance across various phases of the market. Is there any particular strategy that is behind this performance?

Bluechip has some singular attributes which are quite unique. It is a genuinely diversified fund. It has also been successful in calling the sector allocations correctly. When the tech stocks were out-performing, the allocation was about 40-45 per cent, while during periods of downturn, the allocation came down to 30-35 per cent on an average. It has had an appropriate allocation to technology which is why it has given a much more balanced performance.

In those days, some of the comparable funds had tech allocations of close to 70 per cent. We were at 40 then. Now we are down to 30-35 and they are probably still at 60. That is why the performance has been good lately in the calendar year 2000. So, the main factors are maintaining the diversification and within the diversification, doing the sector allocations correctly at different points of time. This is one aspect.

The second aspect is its focus on quality in the top 30 stocks and liquidity. That steadfastness on large cap, quality and liquidity through a bear market is always a defensive kind of strategy. In bull markets, it might not appreciate as much but in a bear market we are very well-off. If you give liquidity weightage, Bluechip will stand out even better.

If you look at the revenue accounts for the six month ended September 2000, Kothari Pioneer has booked more losses across all funds, especially in Bluechip, compared to 1999. Has this tendency to not shy away from booking losses also helped the performance of Bluechip?

I do not know if you are trying to say that is an indication of us having sold out technology and cut losses. A little bit of that was there. But it was more in terms of shifting our sectors, coming down on technology weightage and going up on our old economy weightage. So, it was a result of exiting from the markets or it was because of our sector shifting. May be a combination of both. But more of the latter. So, I would not say that alone contributed to superior performance.

But this liquidity factor is a big strength of Bluechip even today. Today, a big risk in the market is some of operator driven stocks. If the operator goes under, then you would find the liquidity dry up in some of the counters. That will not hurt Bluechip. Some of the other funds may get hurt.

In the case of Primaplus and Prima also you brought down the technology weightage by around February and also declared dividends. Yet, the performance has been disappointing?

The positioning of Primaplus has, traditionally, had a higher weightage to technology. The focus of Primaplus is on wealth creating companies, which is return on capital employed, far more than cost of capital. These companies are mostly in the technology sector.

In Prima's case, the exposure to technology has been very low. It is a small-cap fund and that entire sector has been decimated totally. And the second aspect is the SEBI's guidelines on valuation of thinly-traded securities. We followed those guidelines strictly and wrote down the value of some of the stocks.

These guidelines create much distortion in valuation. When you sell the stock you value, or when the stock gets out of the definition of `thinly-traded', you raise the value sharply again and the NAV shoots up. There are very few stocks in the market which would meet the threshold set by SEBI.

The threshold is a little too high and needs to be lowered. The guidelines should allow more stocks to be valued normally. In December, Prima will, probably, be one of the top performing funds in the country because of the impact of these valuation guidelines, as some of the stocks have come out of the thinly-traded group. Otherwise, the performance of the funds have been fairly consistent.

You have been declaring dividends now in a few funds when the markets are down, in the process, returning cash to unit holders. Is this because you perceive there are no investment opportunities in the market? You have also been holding lot of cash in some of the funds such as Infotech.

Yes. We are looking for investment opportunities. The other reason is to give tax-free dividends to our investors before the March 2002 deadline. You have to understand when we declare dividends that only around 20 per cent of the funds gets pulled out. A substantial portion of our funds is in dividend reinvestment category.

I would not link cash position in the Infotech fund to the dividends. But yes, we are looking out for investment opportunities now. In fact, in some of our stocks such as Infosys, we, probably, have a higher weightage. Let us say we like smaller stocks. But we may not be comfortable with more than 8-9 per cent weightage in such a stock. In a Rs 500-crore fund, even an 8 per cent weight is close to Rs 50 crore which may not give us liquidity in our exit strategy. Yes, we are looking for quality companies.

In the case of the technology sector, growth is probably going to come from small and mid-cap stocks rather than from large cap companies such as Infosys and Wipro. But the Infotech Fund has, consistently, maintained a higher weightage of more than 50 per cent to large cap stocks.

In theory, what you say is correct but that is not happening right now. Faster growth is happening in the bigger firms.

Your outlook is for that to continue?

Yes, for some time. Growth is definitely going to be there. There is no question about that. The issue is one of valuation. In the case of Wipro, the growth may be faster than in any small company, but the valuations are very steep. But we are forced to a hold a 10 per cent weight.

We, ideally, like smaller companies which are growing as fast as the leaders, then valuations would be a lot more easier and liquidity would also be better. We would love to fill up our portfolios with such stocks. But we have not been able to find such stocks where liquidity is good. There are some guys waiting on the wings who would come when the markets pick up. In the next round of an uptick, these companies will come into the market.

So, the 54 per cent weight to top five stocks and the 23 per cent cash position is mainly because of the liquidity factor?Liquidity and quality too. If we had found quality companies, we would have taken a one per cent exposure in such good small growing companies. We are not able to find too many of those.

Even if this allocation affects performance are you okay with it, because of the uncertainty involved in investing? It is possible that because of this allocation, the performance of the Infotech Fund may fall under the mid-quartile slot among the technology sector funds.

We are willing to settle for that kind of a performance. We are not able to enough find liquidity, growth and quality stocks. We do not want to compromise on these factors. If the tech sector does well, then, obviously, other funds that are 95 per cent invested, will do better, because the Infotech Fund is invested only close to 75 per cent. But it is okay.

The performance of FMCG and Pharma Funds have been quite disappointing. Do you regret the timing of their launch?

Perhaps, yes. It has affected the performance of the fund, overall. But we do not feel that active buying and selling gives better returns.

Is such a strategy necessary, given that the universe of investible stocks is small and when Britannia goes up, HLL goes down, and so on...

No, that is not how we look at it. We can try, but it does not work. What we will do is buy HLL when it is high and sell Britannia when it is low. Post-facto, we can notice all these trends. There is no connection that the universe of stocks is low and, therefore, an active strategy is needed. The `therefore' is what I disagree with.

We will never do that in equity funds. In income funds, we do active management. Equities, we are fairly passive. Actually, there is no problem filling up our funds. We have very small funds and all we need to find is just 12 stocks. The problem in the case of FMCG and Pharma is that the growth in the companies have not been as much as we anticipated.

We feel the affluence of the Indian population will grow quite dramatically. Those trends that we expected have materialised to the extent we projected. But it has not led to greater consumption. If we look back to March 1999, there were reasonable grounds to expect that the penetration levels of FMCG and Pharma which were so low, will pick up and that people will buy more soaps and medicines.

It is amazing it is not happening that way. In fact, Lever is looking at a flat volume growth which I am not able to understand. May be because of the monsoon. Still, more people are coming to the Net, the affluence level of the people, that is, the disposable income, is increasing, and because of higher income, a higher percentage will go to such products. If you look at macro level, these three kickers are that but none of them have led to volume growth.

There has also been a re-rating of the MNC stocks. Stocks which traded at 60 PEs are now trading at 30 PEs. Have you started out with a permanent handicap?

It is already reflected in the performance. But even at the time of launch, we said that it is positioned between a fixed income product and our regular equity offering. Very defensive, steady growth is what we can expect. Yes, FMCG should give a growth of about 15-18 per cent and, to that extent, it is disappointing. But from now, it should give steady returns.

Have MNC stocks been a big let down in terms of corporate governance?

Yes, certain MNCs have not been as minority shareholder-friendly as they should have been. The blind faith in MNCs is needless. Let investors be vigilant when tracking MNCs.

At a broader level, there appears to be a conflict of interest between overseas parent companies and their Indian affiliates in many cases. Do you think this is behind the under mining of minority shareholders?

I think it stems from the overseas shareholders feeling that they are carrying their minority shareholders on their back. They probably feel they are doing a lot for the company and the other minority shareholders just come for a free ride. So, that is the foundation on which all these distortions are forming. They do not realise they too have a lot of privileges as the managing shareholders. They forget the privileges they get, but take into account the contributions they make.