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Aarati Krishnan

Earlier, when investment decisions were approved by a committee, making a decision took a minimum of 24 hours. I felt that this would not work under current market conditions. Now, no decision takes more than 15-20 minutes.

MR N. Sethuram assumed office as Chief Investment Officer at SBI Mutual two years ago, when many of its equity funds were languishing, as they struggled to shake off the effects of the market crash of 2000. The fund house has made a dramatic comeback since, with several of its equity funds emerging as chart toppers in their category since 2004.

But Mr Sethuram tends to underplay his role in the revival. "The credit for the performance goes to Sandip", he says of Mr Sandip Sabharwal, who heads the research team, adding, "I don't like to interfere in investment decisions. I just made it easier for the fund managers to function".

Business Line met up with him in Chennai to discuss the revival in the fund house's fortunes and the sustainability of performance.

Excerpts from the interview:

SBI Mutual's equity funds have staged a remarkable improvement in performance over the past two years. How has this come about? Has there been any change in your investment strategy or in fund management?

There have been changes in both areas. Earlier, none of our funds had any specific focus and they would invest in a hodgepodge fashion in large cap or mid-cap stocks. Two years ago, when I joined SBI Mutual, we decided that each fund should be clearly differentiated. This has tremendously helped performance.

We decided to position Magnum Equity Fund as a large-cap fund with 90 per cent of assets invested in large cap stocks, with a market capitalization of over Rs.2000 crore. Magnum Multiplier Plus was to maintain a 60:40 mix between large cap and mid-cap stocks. As it was a small sized fund, we thought that Magnum Global Fund should be repositioned to invest in stocks at the lower end of the mid-cap space with a market capitalization of between Rs 100-600 crore.

Our fund managers were asked to adhere strictly to these norms and have been doing so since.

We also ensured that all decisions were taken with speed. Earlier, all our investment decisions had to get approved by a committee and 24 hours was the earliest one could take a decision. I felt we could not afford this delay under today's market conditions. The fund manager makes his stock calls only after extensive research. Now, no decision takes more than 15-20 minutes. When the fund manager puts up a proposal to me, I approve the decision on behalf of the committee and then get it ratified.

Apart from these two changes, we have reorganized the fund management team and brought it under Sandip, who is now the head of research. Earlier, the research team was functioning independently. Now, Sandip directs the research into the companies or sectors that he likes.

Are you looking at expanding your fund management team?

When one of our fund managers left us about six months ago, we thought it was time to reorganise our fund management team. Right now, Sandip heads our research team and oversees most of the equity funds. But we have been working on a succession path, so that he is not stretched. Nitin Jain, who was earlier our dealer, has considerable research experience and we inducted him into fund management a few months ago; he has been managing the Balanced Fund. Given the good performance of this fund, he is likely to be entrusted with a few more equity funds.

We also have an excellent research team with several researchers who have a four-five year experience. We are trying to groom some of them to assume a fund manager's role over a two-year time frame. We will also be taking steps to make sure that we do not lose any good people.

Performance has been driven by come a mid-cap focus for many of your funds. There are now concerns that mid-cap valuations are stretched and that large-cap stocks may deliver better returns. Do you agree, and how are you reacting to this?

These concerns are, to an extent, valid. We cannot do much about this aspect in a mid-cap fund. But in our other funds, allocations have already been shifting towards large-cap stocks. Take the Contra Fund. A year ago, about 65 per cent of the fund was invested in mid-cap stocks. By last month, 65 per cent was invested in large cap stocks. Our Global Fund used to be 85 per cent invested in mid-caps, but this proportion is down to 70 per cent. In Multiplier Plus too, we have enhanced allocations to large caps. These shifts have happened as a part of our stock selection process and not due to a conscious decision to increase allocation to large- cap stocks. Fund managers bought large-cap stocks because they were attractively valued. Because I felt we were placing too much emphasis on mid-caps, we have also decided that our new launches this year will have a large-cap focus.

Several of your equity funds are small-sized at Rs100-500 crore. Has this helped performance because there is greater flexibility in management?

In certain cases, smaller size has been an asset. The Global Fund for instance, has managed this kind of a performance because it invests in smaller mid-cap stocks. A Rs1,000-crore fund could not have replicated its success. Similarly, when we launched our mid-cap fund, our fund manager indicated al size of Rs 600-700 crore.

In the case of a small or a mid-cap fund, small size can be an asset. But I don't see a problem with funds that invest in large-cap stocks. The Magnum Multiplier Plus is only a Rs 300-crore fund but it can easily expand into a Rs1,000-crore fund without difficulty.

Our asset size has grown from Rs 650 crore to Rs 2,000 crore over the past two years, but we haven't faced a problem with scaling up.

After performing well in 1999, SBI's equity funds did not weather the market crash of 2000 well. What measures do you have in place to prevent a repeat of this experience, should the markets reverse direction now?

That is a tricky question, but let me explain! We have now understood what mistakes were made in 2000. We then had no ceiling on sector exposures of our funds. At the time, a few of the funds had up to 40 per cent of assets invested in IT stocks; so when IT stocks crashed, our funds took a bad hit. Now we have internal norms on how much of the portfolio can be invested in each sector. This is linked to the weight in the BSE 100 index. My role is to ensure that the exposures do not deviate from these norms by more than 2 or 3 percentage points even in exceptional circumstances.

Over the last two years, I have also introduced an elaborate monitoring system for each fund. We look at the sector exposures, market-cap exposures and betas every month. The objective is to analyse a fund's performance relative to competitors and understand where its returns have come from.

When there is a large out-performance, we look for any abnormalities in the out-performance. We will be expanding this process to include liquidity analysis, as well. We expect to improve our risk control processes with the induction of a new person from Societe Generale of France, our new joint venture partner.

What has Societe Generale brought to the table? Will there be any changes in investment strategy?

We had several teams from their Paris office coming in to look at our operations. By and large, they were satisfied with the way things were being run, but said that they had a couple of capabilities to offer. One is in product design. They have unique products in their portfolio of funds.

They would also help us with the marketing of our funds. The second area is in investment monitoring and process control; This is an area they have superior practices that we would like to adopt. As to investment strategy, we would like our fund managers to retain their independence.

We have made it clear to them that the Indian markets are quite different from the European or the American markets where they are strong. We have to work taking into the account the peculiarities of this market.

We have explained that it should not be their endeavour to get involved in stock selection or in investment strategy. They, too, recognise that fund managers need speed of decision-making and the freedom to operate. This is already built into the system.

Would you also consider holding a larger cash position should you fear a corrective phase?

I usually do not interfere in the fund manager's investment decisions. I like to leave the decision about allocation also to him. By and large, I find that Sandip stays fully invested and does not hold cash.

What is the way ahead for you now?

I feel we have made a lot of headway in the equity side of the business, so I will now be focusing on the debt side. We set out to put our equity funds in the top quartile in terms of performance and I think we have managed it so far. I hope to improve the performance of our debt funds on similar lines.

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