Dear Friends,

Once again I am posting blog here with a good enough time lag…

I am sure you are missing me as much I was missing all of you…

So here’s a reward for your patience..

This time, I got the opportunity to interview one of the leading Equity Fund Manager from India’s leading Mutual Fund…

Mr. Manish Gunwani is India’s well known Fund Manager who manages ICICI Prudential Focused Bluechip Equity Fund I-Pru Balanced Advantage Fund (BAF); the first being a equity diversified largecap fund & th 2nd is an Asset Allocation Fund…

Mr. Manish Gunwani has done B.Tech. and MBA. He has overall 15 years of experience of which 8 years is in equity research and one & half years in fund management. Both the above funds have consistently been amongst the top performers in their respective categories…

ICICI Prudential & Mr. Manish Gunwani were kind enough to allow me to interview him as regards his fund management strategy…

I am presenting below the Q&A for the benefit of my blog readers…with their express permission…

Q& A With Mr. Manish Gunwani, Equity Fund Manager ICICI Prudential Mutual fund

1. You manage I-Pru Focused Bluechip Equity Fund & I-Pru Balanced Advantage Fund (BAF). One is an Equity Diversified large cap fund while the other is an Asset Allocation Fund. How has life been different managing these 2 funds? Considering that we are living in volatile times & that the velocity of money has increased many times over; is it not wise & better to invest in a VAP style fund then a pure equity fund like focused Bluechip?

Both the funds have a different risk-reward profile. Over the last few years volatility had definitely become a key feature of the market and BAF is ideally positioned to exploit this trend. At the same time, Focused Bluechip fund could form part of investor’s core portfolio as large-caps tend to offer sustainable growth and stability.

2. We promote equity as an inflation beating asset class. But over the past 6 years it has hardly countered inflation, forget beating inflation. Is Equity really a better bet than traditional savings avenues like Bank FDs, gold, Insurance Plans etc. considering the past 5 to 6 years of gross underperformance? Is it worth that extra RISK?

Largely, equity funds have beaten bank FDs in most of the investment horizons except 3 and 6 years. Going forward, we believe, that from a value perspective equities are attractively positioned compared to gold and real estate which have received most of the savings of Indian households in the last 3-4 years.

3. We normally quote Sensex data for past 3 decades especially since 1979-80, the time when Sensex was created. How wise is it to rely on the past Sensex data especially since: 1. Sensex constituents are not fixed but keep on changing 2. Low-base effect. 1991 to 2003 was practically a period of very nominal equity returns. It’s the extraordinary equity returns of 2003 to early 2008 that hide the less than average returns given by equity over previous decade.

It is a fact that changes in the index can distort historic performance but as long as the index is a fair reflection of corporate performance it would serve its purpose. It is true that in most markets, returns are concentrated in short periods of time – even indices of mature markets like Dow Jones and Nikkei have gone through decades without any returns. As far as India is concerned, among major countries it is likely to have one of the highest growth rates in nominal GDP for many years to come; therefore, across-the-cycle returns in equity are likely to become attractive. In fact, with the positive election outcome in the picture, we are bullish on equities with a 3-5 year horizon.

4. Indian equity has underperformed since its peak reached in JAN 2008. In order for the stock market to deliver average returns for past 6 to 7 years, it will have to give above average performance over next 1 or 2 years just to deliver a nominal 15 % CAGR returns for past 7 years. How confident you are that the markets will give extraordinary returns over next 2 years?

If you evaluate the market performance there has been a dichotomy between the large caps and mid-small caps. The better investment opportunity lies in the mid-small cap space as its underperformance in last 3-4 years has made valuations attractive. Over the longer term investment horizon, equities have the potential to offer reasonable returns.

5. We have heard that its only 5 or 6 large cap stocks that have delivered return over last few years. Had these funds not been there in one’s portfolio then that portfolio would have been a gross underperformer vis-à-vis Sensex/ Nifty. In such a scenario, isn’t an Index funds a better bet than actively managed funds?

We believe actively managed funds are better bets as such funds with robust investment frameworks and processes have given reasonable alpha on 3 years investment horizon

6. Based on your past 17 years’ experience, how easy it is to deliver alpha today? How many years in the future can alpha are delivered? Are we going the US way where less & less no. of funds is able to beat the Index?

We believe that a robust research process, an experienced team and a disciplined approach to investing can be combined to create reasonable alpha over medium to long term. While it is difficult to comment on performance of funds in USA, one substantial difference could be that the complexity and diversity of businesses in USA is higher than that in India especially in sectors like technology, healthcare and financials. One can argue that this makes things a bit easier in India.

7. There is a school of thought that believes “Asset Allocation Funds” are never a good option. If an investor wants exposure to multiple asset classes he can do it on his own. What’s your thought on the same?

We believe that asset allocation funds definitely have a big role in the universe of mutual funds. While theoretically an investor can manage multiple asset classes, a multi-asset fund has significant advantages – it can leverage the knowledge base of the fund house on multiple assets, switch quickly between assets with lower transaction costs and can  also incorporate a more disciplined and rigorous approach to evaluating multiple assets.

8. What is the investment process followed at ICICI Prudential Mutual Fund? How is it different & better than other AMCs?

At ICICI Prudential, fund management is process driven and not dependent on a single star fund manager. We have clearly defined internal processes on every aspect of fund management – cash calls, portfolio construction, stock selection, risk mitigation, portfolio review and monitoring.  With respect to the achievement of beating benchmarks, as a fund house, we have consciously switched from an absolute return approach to measuring performance on a relative basis where our fund managers aim to beat the benchmark consistently by 300-400 bps.

In fact, 100% of equity AUM has beaten the benchmark over a 5-yr and 10-yr investment horizon.

We focus simultaneously on the ‘top down’ and ‘bottom up’ strategies. The other cornerstone of our fund philosophy is that we do not change strategy after failure. Having said this, we do keep revisiting our rationales of buying and selling and look for any change in the variables and assumptions, and act accordingly. This has helped us to stand behind our conviction calls without worrying about short term performance, and focus on long term performance. We also assign very high weightage on corporate governance standards of the companies where we are invested and how they treat minority shareholders.

9. What’s the Debt Strategy for I-Pru Balanced Advantage Fund (BAF)? Can you through some light on the debt portion of I Pru Equity VAP?

Generally the debt allocation is short term in nature. However, opportunistically minor allocations could be made in specific long duration products. Our overall duration is typically in the range of 1 to 2 years.

10. Kindly paint the worst-case scenario for Stock Markets going ahead. Where do we park our funds for the next 2 years?

The risk of the monsoon due to the likely impact of El Nino is an uncertainty to look at. Given the big structural positive in form of election outcome, we believe that investors should move out of physical assets and switch to financial assets. We recommend them to maintain asset allocation within the categories like mid-cap and small cap space. Also, currently infrastructure and banking offer best investment opportunities. ICICI Prudential Focused blue-chip fund being a large cap fund needs to be a part of investor’s core portfolio, while BAF is an evergreen product and offers benefits of asset allocation.  On the fixed income side we believe long duration products are attractive.

To sum up friends, when EXPERIENCE speaks, you listen & listen very carefully…

It was a sheer pleasure having a conversation with Mr. Manish & getting to pick his brain…Whenever I feel skeptical about the future of stock markets, i pick up the phone & talk to an Expert; the confidence that they exude rubs off on you too…

Wise Investing…& remember what buffett said,

“Its only during low tide that you come to know who is swimming naked” so be careful as to what you buy…& how you Invest…

Seek professional advice…that way its difficult to go wrong…

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