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Suresh Krishnamurthy

ZURICH India Prudence is one of the better performing balanced funds in the country. In this context, Business Line spoke to Mr Prashant Jain, who manages Zurich Prudence, on the investment strategies followed by the fund.

<>Excerpts from the interview>

<> What strategies enabled Zurich India Prudence to deliver results across various market cycles?

>We have always maintained investments in good quality assets, be it bonds or equities, and always tried to invest in sustainable businesses with credible numbers. Obviously, risk control helps. Second, we have always remained diversified, which minimises the impact of any wrong calls that you take.

Why I am focusing so much on risk is, in the long-run, the key to generating superior performance or building your wealth lies not in targeting high returns in some periods but in generating reasonable returns across many periods and restricting the number of periods in which you lose heavily. The point I am making is that for Rs 20 to become Rs 100, the appreciation of 400 per cent will take years.

However, for Rs 100 to become Rs 20, which is a decline of only 80 per cent, that can happen in a matter of months. So, we do not want to make any big mistakes in any of our funds. The emphasis is on preserving whatever we have earned.

<>With respect to allocation to equity and debt, what kind of investment strategies do you follow? Was it different in various markets?

>In this fund, we move the allocation between equities and debt between 40-60 and 60-40. We are not making any short-term calls in the movement of prices of stocks and bonds. What we essentially do is to look at the gap between bond yields and earnings yields along with the outlook for interest rates and outlook for earnings growth. Till about three years back, we were overweight on bonds and underweight on stocks. That was because PE multiples were high and bond yields high. Some time in January 1999, we decided to go overweight on equities.

Since then, we have very consistently maintained 60 per cent allocation to equities. It has paid-off. For the foreseeable future, the outlook for equities is more attractive. Until equities move up two times or three times (that is roughly the level at which equities will become approximately fairly priced assuming present level of interest rates and steady growth outlook), we would continue to be overweight on equities.

There is another interesting reason why this fund might have done better. When you are targeting a constant asset allocation strategy, you are forced to sell equities when prices go up and buy them only when prices decline.

<>In this case, if equities keep falling, a constant mix strategy may not work. Is not a constant mix strategy dependent on trend reversals?

>It is not that markets keep falling. Trend reversals happen time and again. We are not in a situation where the market is fundamentally over-valued. If it is is, then it does not make sense to buy when stock prices fall. In our case, the stocks are under-valued. The constant mix strategy helps the fund manager not to become over optimistic when prices rise and not to panic when prices fall.

<>In 2000 and 2001, the markets kept on trending down. Would you not have lost money if you kept on buying when prices fell since they fell further?

>Only IT stocks fell that sharply; others did not. But, more importantly, we cannot predict market movements. What we look at is if equities are under-valued. If they are, then we will become overweight on equities. We are not saying that they will not fall further. We are acting on the premise that the value will find its level at some point. When markets stabilise after a fall, the under-valued stocks bounce back sharply.

The issue is not about moving with the markets but identifying stocks that will deliver superior returns.

<>The equity portfolio of Zurich Prudence is quite different from that of other equity funds of Zurich India Asset Management. What is the reason for the difference?

>As far as Prudence is concerned, the focus is always on quality and sustainability of business. This fund endeavours not to t over-pay for growth. We invest early when we signs of growth rate improving and exit early. Let us take two-wheeler stocks — moved in very early but we were out of it since growth rates will falter at some point. If you can catch that move, it pays off exceedingly well because the maximum money is made when you invest ahead of re-rating. We always want to buy growth. We will not buy asset plays or stocks available for lower than replacement value. Growth at a reasonable price — we call it GARP internally — is the strategy of Zurich India Prudence.

<>What is your outlook for mid-cap stocks? Do you think mid-caps and small-caps will out-perform over the next three years?

>We are not for or against mid-caps or large-caps. Wherever we find value and if companies are of reasonable size, we will buy them. As regards liquidity of our portfolio, we are not averse to buying small-cap stocks as long as they are within a certain limit of our portfolio.

We do not mind holding illiquid stocks or less liquid stocks as long as the portfolio liquidity is comfortable. What I mean by that is we should be able to liquidate 70 per cent of our portfolio in two days. We have been holding stocks such as Macmillan, Pidilite and Himatsingka Seide. Whenever we are buying less liquid stocks, we always buy more under-valued stocks or very high quality companies. I will not buy a less liquid stock for a 50 per cent target return in 2 years. It has to be 100 or 150 or 200 per cent. When we bought TVS Motor at Rs 80 or Rs 100, it was a less liquid stock but the potential upside was several times.

<>Is your active management restricted to equities and you are much less active with respect to debt ?

>I think that perception exists because people have been following this fund only in the recent years.

If you go back three or four years, the average portfolio maturity would have been three-four years. Then, it made sense to lock into long-term yields. In the past, we had bought bonds of Tata Steel, Tata Engineering and Tata Power at yields ranging between 18 and 22 per cent for five years and longer. Today, it does not make sense to take that kind of a risk, particularly for a fund with a substantial equity exposure.

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