The Portfolio Manager | SBI Funds Management's Gaurav Mehta | NDTV Profit - video Dailymotion

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- Navigating liquidity issues in SMIDs - Opportunities in realty space - Identifying stocks in #SBIMF ESG fund   Sajeet Manghat in conversation with SBI Funds' Gaurav Mehta on 'The Portfolio Manager'. #NDTVProfitLive

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00:00 ES and diversified funds and so on. So there is very little direct equity exposure there.

00:05 But the more sort of retail PMS is where we take direct equity exposure and we have two

00:10 schemes at this point in time, ESG PMS and the EON Alpha portfolio. But I think the overarching

00:18 principle for us is that as you have seen so much of flows into mutual funds, what's

00:24 actually happened is that the investable universe on the mutual fund side has started to shrink

00:28 because several of these small companies you can't invest, let's say, in a large fund because

00:37 there is not that much of free flow available or even if, I mean, these are like, think

00:40 about a thousand, two thousand crore market cap company, it becomes very difficult to

00:44 get a decent exposure there in a large mutual fund scheme. But ordinatives and PMS is where

00:50 you have relatively smaller sizes and to that extent you can buy these stocks and concentrate

00:54 to the extent that you want. The other thing is then as you go down the market cap spectrum,

01:00 there is research arbitrage that's available. So a two thousand crore company, if it's not

01:05 worthwhile for a large institution to bother about, then a lot of sales side analysts etc.

01:10 also tend to ignore these names. And there is a research arbitrage there that if you

01:14 spend the right energies and efforts, then you can create a differentiated view on that

01:20 company versus a large company which is covered by, let's say, a hundred, two hundred analysts

01:23 across the world. So this combination where there are several unexplored names where there

01:29 is research arbitrage available and your ability to express yourself freely across the market

01:34 cap spectrum means that we typically run portfolios where we don't necessarily have to bother

01:39 about the market cap. So a good large cap is as lucrative for us, but a good small cap

01:45 is even more lucrative to us because of this research arbitrage element. And which is why

01:48 the portfolio that we run usually tend to be a little more skewed towards mid and small

01:53 caps. That said, these are multi cap mandates. So to that extent, I don't have to ignore

01:59 a large cap if I like it. But if you just think of it in number terms, there are what,

02:05 a hundred large caps by SEBI's definition, 150 mid caps, and there is at least a thousand

02:11 or decent small caps out there. So if you have to randomly create concentrated portfolios,

02:16 which is what we usually do on the PMS side or even for AIF, then you are just looking

02:21 at 20, 25 holdings at any point in time. And to the extent that, you know, just 10% of

02:27 let's say the top thousand companies is large cap, 15% is mid cap and another 75% is small

02:33 caps. There's a good chance that, you know, if you're just long term in nature, bottom

02:37 up driven and creating a portfolio of 20, 25 stocks, you will end up with a disproportionate

02:42 number of small caps, just sheer numbers and base rates and probabilities. And which is

02:47 why, you know, we, and that's the skew that you typically see in our portfolio, that this

02:51 is not as much as 75%, but let's say we are comfortable owning 40, 50% of the portfolio

02:56 in small caps and the remaining in mid and large caps. So it's very market cap agnostic

03:01 in that sense. How do you look at liquidity? Because small

03:03 caps have this liquidity issue. So even though if it's a 2000 crores or 5000 crore company,

03:09 entry and exits are little, you know, are price sensitive in that sense, right?

03:15 Absolutely. So as a PMS and AF, how do you manage that

03:18 kind of risk in your portfolio? Right. So there are two or three aspects to this.

03:24 I think the first aspect, as I mentioned earlier, is that versus a conventional mutual fund,

03:28 AIS and PMSs, because they are nichely distributed, they tend to be relatively smaller in size.

03:32 So that takes away that disadvantage to some extent. The second thing is that, you know,

03:38 we have access to one of the largest research teams in the country. So we have, you know,

03:43 15 to 20 dedicated equity research analysts. And which is why, you know, we spend a lot

03:48 of time on the long term fundamental merits of a company rather than focusing too much

03:53 of too much on here and now trends. And to that extent, you know, in general, our positions

03:58 are companies where we would typically want to be invested in three, five years or even

04:03 longer than that. And which is why that sell decision or your ability to sort of keep moving

04:08 in, moving out and hence bother too much about liquidity becomes less relevant. I'm not saying

04:12 it completely takes that away, but it becomes less relevant. And the third aspect is that

04:17 to complement this large research and investment team, we also have an equally strong risk

04:22 team and risk compliance and all those teams in place. And which is why, you know, there

04:27 is a proper risk template that we follow for each of these funds, which takes care of the

04:31 liquidity aspect as well, you know, with respect to your total AUMs, what proportion of your

04:36 AUM theoretically, you know, if everyone puts in a redemption can be liquidated in 10 days,

04:42 15 days and so on. I think that again, acts as a check and balance that while we want

04:46 to be, you know, flexible in terms of moving across market caps, we also are cognizant

04:53 of this ill of that illiquidity risk. Although as I said, it's less relevant here, but that

04:57 risk template ensures that to whatever extent is relevant is completely adhered to.

05:02 You know, you also have this institutional portfolio, which is there. And within the

05:08 institutional portfolio, while a large portion for pension funds and others is into debt,

05:14 the equity portion is more into ETFs. Do you look at, you know, small cap ETFs or, you

05:20 know, or is it the active ETFs that you look at when you invest?

05:25 So, I think, you know, typical institutional mandate, I mean, again, you know, varies depending

05:30 on the client, but usually you can invest up to 15% of money in equities, right. And

05:37 there again, I think there's a limit of about 5% that you can put in diversified funds.

05:41 So usually our approach is to, and again, you know, this will vary depending on client

05:45 mandates, the market situations and circumstances and risk capitalization and so on. But typically

05:50 5% goes into active funds and about 10% goes in index ETFs. But largely, you know, our

05:57 approach is to keep it into liquid ETFs, as in the large cap end of the market cap spectrum,

06:04 although we are not sort of constrained by that. But usually that exposure is not too

06:08 much into, you know, a thematic baskets like, let's say a small cap fund or a sector fund

06:14 or so on. It's much more diversified and usually more skewed towards large caps.

06:19 So you have two funds, one is the SBI ESG fund, and one is the SBI EON, which EON is

06:26 mainly into med cap and small caps. ESG is basically you're looking at how the governance

06:33 and how they're friendly to environment and others. Do you have enough pool of stocks

06:39 which fall into that, you know, ESG pool for you to invest? And how do you, you know, assess

06:47 those stocks? Because ESG has different meaning for different EMCs and asset managers and

06:53 there's no common way to read them.

06:55 No, absolutely. And which is why, you know, we have tried to objectivize it to the extent

07:00 possible. But to your first question, so, you know, as a research team, for example,

07:05 we would be covering something like 360 odd stocks as we speak. And in that live coverage

07:11 of 360 odd stocks for the ESG fund, we make two levels of exclusions. First, there are

07:16 certain sectors, you know, for example, tobacco, fossil fuels, etc., which are outright exclusions

07:21 for us. But these are usually small sectors with not a lot of companies in them. But apart

07:26 from these small sectors, everything else from a sectoral standpoint is investable to

07:31 us. But what we also then want to ensure is that, you know, for example, think of chemicals

07:35 as a sector, right? There'll be companies there which are following the right, you know,

07:40 affluent treatment practices so that hazardous material doesn't go into the environment.

07:45 For their employees, they might be, you know, putting in the right safety protocols in place

07:49 so that they are not subject to hazardous working conditions and so on. But there'll

07:52 be other chemical companies where all of this will be absent. And you do want to differentiate

07:56 that in an ESG fund, right? So, what we typically do is we rely on some external rating agencies.

08:02 Plus, we also have an in-house ESG team and we've created our own ESG frameworks. Thanks

08:08 to the parentage of Amundi also. I mean, Amundi is a partner in the JV and they are one of

08:14 the pioneers in ESG in the global asset management space. So, through that learning and through

08:19 our own frameworks, we've been able to create an in-house framework as well. So, usually

08:23 the approach is that first remove these sectors like tobacco, fossil fuels, etc. Of all the

08:27 remaining sectors including chemicals and so on, you then tend to remove the bottom

08:32 one third of the universe of that sector on these external and internal ESG frameworks

08:37 which are all objective in nature, right? There is no subjectivity there. So, essentially,

08:42 when you start with a universe of 360 odd stocks, you are still left with roughly 200

08:48 odd ESG investable companies. How do you look at some of the stocks like

08:52 an ITC or Reliance, right? But by objective, they would may get eliminated. But from an

08:59 ESG point of view, these companies have a lot of work they have done so that they are

09:04 environment friendly, they are ESG compliant, they have a good rating. So, is that the only

09:10 thing? You don't look at how companies are performing on ESG?

09:14 So, I mean, I unfortunately will not be able to comment on specific companies.

09:17 No, I am not saying. I am just taking this as an example to…

09:20 But overall, our approach is that, you know, obviously, as I said, there is a sector level

09:25 exclusion. If something is falling in the wrong sector, it will have to sort of get

09:28 eliminated. But then the ESG scores per se, they change over a period of time as companies

09:35 make more progress. And again, you know, the ESG team and SBI funds management, we are

09:40 not just following a very passive ESG scoring and so on. We are a bit active about it as

09:45 well, wherein we engage with companies, we help them understand the areas where they

09:50 are lacking on ESG and potentially, you know, work with them on improving on that part.

09:55 So, it's an engagement driven strategy, not a very passive strategy. And as a result,

09:59 you do see that over a period of time, companies do change in terms of the actual practices,

10:04 the disclosures around ESG and so on. And hence, the ESG scores themselves may change

10:08 over a period of time and that's something that we are very open to.

10:10 I was a little surprised with the allocations which you have, which market cap based allocations

10:15 because between mid cap and small cap, you had what, nearly 70% allocation in the ESG

10:21 fund and large cap is 24%. One would have imagined that, you know, large caps are much

10:26 more ESG compliant. But it's the, you know, your exposures seems to be suggesting that

10:33 there are many more small and mid cap companies who are much better in ESG compliance.

10:37 So, you know, I think it's both. A, there is a bit of misperception that not a lot of

10:43 mid and small cap names are ESG compliant, which we disagree with. There are quite a

10:49 lot of good companies there, which, you know, they are small because they operate, I mean,

10:53 either they are very early on in their business cycles or they operate in industries which

10:57 are usually smaller in nature. But many of these companies are following the right sustainable

11:02 practices on ESG and so on. The other aspect is that we are running a

11:06 very concentrated strategy, right? 20, 25 names at any point in time. So 70% of, let's

11:11 say 25 names would work out to, you know, something like what, 16, 17 names at max.

11:18 So to get good, you know, a bunch of 16, 17, ESG friendly, investable companies, I think

11:26 that's not a challenge. And again, the other aspect that we all need to keep in mind is

11:30 that for us, ESG is not just best in class ESG investing, right? Where we're just buying

11:34 green energy or hydrogen or renewables. And so our main objective is to make money. But

11:40 what we're also doing is that by removing the bottom one third of the universe on ESG

11:44 scores, we are trying to eliminate accidents to the extent possible. And this is especially

11:49 important in the mid and small cap space, right? Because we all know that mid and small

11:53 cap investing is supposed to be very lucrative, high growth rates, early business cycle, early

11:59 on in their business cycles, decent valuations and so on, research arbitrage, et cetera.

12:03 But there are also a lot many accidents in the mid and small cap space because not a

12:07 lot of these companies are being run like institutions with a sustainable framework

12:11 for growth in place. So when you bring in a sustainability element like ESG, marry it

12:17 with mid and small cap investing, I think, you know, it makes for a good combination

12:21 where you can hope for the upsides while also trying to mitigate the accidents to the extent

12:26 possible.

12:27 Great. Gaurav, stay tuned. We will be back after a short break where we're going to discuss

12:32 some of the sector allocations and which are the sectors where, you know, Gaurav is very

12:38 bullish and some of the sectors where he is underweight. Stay tuned.

12:42 Thank you.

12:48 Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

13:17 Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

13:46 Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

14:15 Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

14:44 Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.

15:06 Thank you. Thank you. Thank you. Thank you.

15:07 Welcome back. You're watching NET TV Profit and this is the portfolio manager and my guest

15:10 today is Gaurav Mehta who is the CIO of Alternatives Equity for SBI Fund Management. Gaurav, what

15:18 I see in your portfolio is that you have a high concentration of consumer discretionary.

15:22 Can you give us an idea of why have you gone high bet on consumer discretionary and is

15:30 there any sub sectors within which you are more invested there?

15:34 Right. So, I think what we tend to follow is a GICS sector classification which includes

15:38 auto and auto ancillaries in consumer discretionary. So, I think the exposure that you see is comprised

15:44 partly of auto and auto ancillaries and partly of pure discretionary. That side you know

15:49 the specifics. So, of 36 percent how much would be auto?

15:51 So, maybe half and half. Okay.

15:53 But these specifics aside I think overall you know if you look at the GDP print for

15:57 example you will see that investments has done well over the last 3-4 years while consumption

16:01 has lagged and you know there have been plenty of reasons around that including the high

16:06 inflation and COVID hit and so on. But I think some of those factors have now started to

16:10 recede. Inflation is coming off. It was a big pinch on real disposable incomes. So,

16:15 that pinch is now sort of starting to wane. But beyond the here and now I think you know

16:20 we are at 2300 dollars per capita GDP at this point in time and history from you know economies

16:28 have moved from 2000 dollars to 3000 dollars per capita GDP suggests that you know you

16:33 see a very disproportionate benefit on discretionary consumption. You are already consuming sort

16:39 of hair oil and soaps and those kind of staple products, right. But your ability to spend

16:43 on leisure, air travel, on you know better health care, buy more sort of air conditions

16:51 and so on. So, all of that discretionary spend gets a disproportionate benefit when the per

16:57 capita GDP moves from 2000 to 3000. So, to that extent I think we are at that stage as

17:02 an economy where some of these categories can see a big fillip. So, the here and now

17:07 was unfavorable, but it is turning favorable because of inflation coming off. But the long

17:11 term structural story is as strong today as it has ever been over the past decade or two

17:16 in India. So, we continue to be very bullish on that as a secular theme.

17:22 What about financials? I mean within the financials are you you know bullish in certain segments

17:26 of the financials? So, I think you know one aspect related to

17:30 what I just said on discretionary consumption moving up as per capita GDP rises. The other

17:36 aspect of per capita GDP rising is that as you earn more, you save more, you invest more.

17:42 You know when you are earning less, a large part of your investment patterns go to or

17:47 a large part of your income actually goes towards consumption. As you keep earning more

17:51 you do not consume that much more disproportionately, right. You do consume more discretionary versus

17:56 staples, but then on an overall pie your investments into savings and investment related products

18:01 also increases. So, I think within financials that is one bucket you know investment and

18:05 savings related plays whether it is capital market and so on.

18:07 So, it is the normal banks you are looking at. So, even beyond banks I am saying you

18:11 know for example, capital market plays and so on. I think they also for us are structural

18:15 investment categories. Banks we have been very selective on, but I think after the massive

18:22 underperforming that banks have seen, the valuations there have started to turn very

18:26 reasonable, especially on some of the larger private sector names. And you know when you

18:30 think of the other aspect that is working very well in India at this point in time which

18:34 is this entire investments and manufacturing led recovery, you eventually need funding

18:40 for those projects, right. True.

18:42 And good quality lenders are going to provide that funding.

18:44 So, you have industrials and materials which is nearly 20 percent of your portfolio in

18:47 that. Yes. So, I think you know if I were to think

18:50 of three main themes that we are very bullish on at this point in time apart from this you

18:55 know rising per capita GDP which will lead to consumption and savings and investment

18:59 related plays. The other two themes are a manufacturing and related plays. So, some

19:04 of these private sector banks in that sense become important because they sort of supply

19:08 capital to this manufacturing led growth. But in general subcategories of manufacturing,

19:14 subcategories of investments you know are something that become a very important part

19:18 of our portfolio. So, overall you will see industrials, manufacturing, these kind of

19:22 names, some you know niche sub themes of these as a very disproportionate part of the portfolio.

19:28 So, that is the second theme, manufacturing, investments and related plays.

19:32 And the third theme that we are also bullish on which may you know be a little volatile

19:37 in the near term given the global growth backdrop is the fact that you know commodities have

19:42 seen a massive period of under investment, right. There is hardly been any capital expenditure

19:46 on that front for the past decade or more. They have underperformed financial assets

19:50 quite meaningfully. And then if you look at the world today, the policy mix is changing

19:55 from you know last decade was all about lose monetary policy, last couple of years or more

20:00 have been more about fiscal expansion, not just in India but across the globe. And as

20:05 governments spend more money in infrastructure creation so that they can spur job growth

20:12 and that in general leads to an environment where growth is decent, inflation is high.

20:16 I think that entire environment tends to be very conducive for hard assets, right, whether

20:21 it is real estate, whether it is infrastructure assets or whether it is natural resources

20:26 like commodities. So, I think that entire complex you know hard assets, infrastructure,

20:32 commodities, I think that is the third pocket that we are bullish on and which is why you

20:36 know you see that disproportionate share of materials and related sectors.

20:39 With real estate are you more bullish on the developers or the real estate allied sectors?

20:44 So, I think there are different ways of thinking about real estate. You play developers, you

20:48 play allied sectors like you know housing, building material plays and so on. And a third

20:54 play that we have also been very focused on is that you know when you think of this entire

20:58 overlap between real assets and physical assets doing well and discretionary consumption being

21:04 at a J curve at this point in time, I think something like let us say hotels, hospitals,

21:10 malls, they become very interesting because they are a play on both. As people sort of

21:16 earn more, their aspiration to spend on better health care or to go to a mall or to sort

21:24 of you know spend money on leisure and hence go to a hotel also increases. And then these

21:29 are also real estate plays, right. There is a hard asset that is already in place. As

21:34 inflation catches up, your revenues increase, but your cost does not increase disproportionately,

21:39 it is all fixed cost, a large part of it is fixed cost. So, the benefit to your bottom

21:43 line is quite disproportionate. Basically, the annuity income which comes in

21:46 in some form. Not even annuity, I mean for example, think

21:48 of a hotel company or a hospital company, right. The ARRs can grow at a decent clip

21:53 as inflation is high, but the cost that they have to incur is all fixed in nature because

21:57 that hospital is already in place, the physical infrastructure is already in place, the hotel

22:01 is already in place, the physical infrastructure is already in place. So, the pass through

22:05 to bottom line is quite disproportionate. You know.

22:07 So, I think that is another way of thinking about real estate.

22:09 In the real estate space, you know I just want to get your thought, you know the last

22:13 four or five quarters we have seen people preferring allied real estate and they were

22:18 not looking at real estate as such, they were playing on the theme of you know how consumer

22:25 centric allied real estate cable and wire companies and others are performing and we

22:30 are seeing good run up happening there. But there is always a risk of this governance

22:33 that comes to play for mid cap and small caps. Real estate always had that issue overhang

22:39 which is there. Now, we are seeing that happening in the allied sectors as well. How do you

22:45 manage as a fund manager that kind of risk? Again, you know I would not say that there

22:49 are not well governed names in that sector, I think there are. But yes, you are right

22:55 that you know governance is paramount and in ESG we obviously explicitly model it through

23:01 the environmental, social and governance measurements. But even in Eon Alpha which is otherwise an

23:08 unconstrained and more flexible strategy, even there governance is something that we

23:13 are very very very sort of cognizant of. So, anything where we have any doubts on governance

23:17 and again when I say governance we have tried to objectivise it to the extent possible.

23:22 The ESG team has a governance framework in place. We run an accounting framework, a forensic

23:26 accounting framework where we look at financial ratios, basis published annual reports and

23:32 then use those ratios to get some sense of whether the annual report actually does justice

23:36 to actual business performance or not or is it more you know creative accounting that

23:41 is at work. Because for us. Are you able to do that? Yes. I mean in the sense bifurcate

23:46 between creative accounting and actual ones? Yes, I mean I would think that the framework

23:49 does a very good job. Obviously, no framework is foolproof. So, there are always type 1,

23:55 type 2 errors. But on the whole you know our experience with the framework has been that

24:00 it does a very good job at identifying clean accounting companies versus suspect accounting

24:07 companies. Which are the sectors you are underperforming, underweight actually? Because I can see IT

24:11 is a bit 1% odd in your Eon portfolio, but you know as a whole I do not see IT part of

24:18 the, if I am not wrong with the ESG. Right. So, I think overall AAR approach in these

24:25 funds is to be very bottom up in nature. Right. So, at any point in time what we are trying

24:29 to say is that you know which are the 20-25 businesses that will give us non-linear returns,

24:35 not even non-linear, but they will give us superior risk adjusted returns for the next

24:38 3 to 5 years. IT unfortunately at this stage is a name where AAR from a earnings growth

24:45 point of view we cannot sort of build in a 15-20% kind of a narrative on IT. Because

24:52 you know when you are just buying 20-25 names you are looking at a high earnings growth

24:57 expectation to begin with, which is not the case with some of the IT names at this point

25:01 in time. Plus from a valuation standpoint I think you know IT stands at a point where

25:07 valuations are already you know maybe ranging between 1 to 2 standard deviations above historical

25:13 averages. And then when you think of the entire global narrative right, yes you were

25:17 expecting a recession 12 months ago globally, the economies have done relatively better,

25:24 but the lagged impact of the policy tightness you know to what extent will it lead to a

25:30 global growth slowdown is yet to be seen. So, to that extent the macro environment for

25:34 IT again does not seem to be very conducive. So, you know all of those factors put together

25:39 you know the longer term 15-20% growth expectation being very difficult to find in a sector like

25:45 that, the valuation still not being very cheap and then still some headwinds from the global

25:53 growth side. All of that you know at this point in time makes us a little underweight

25:56 on that sector. That is why you know for us no sector is like a complete no go, we are

26:00 always active in trying to identify the next opportunity, but yeah unfortunately at this

26:05 point in time. But it is a hard choice between return versus

26:07 governance standard or ESG score. You know thankfully IT is a sector where governance

26:12 has been. ESG score is very high.

26:13 Yeah, less of a challenge ESG scores are usually higher.

26:15 But returns are not coming. Exactly. So, and as I said at the beginning

26:19 right I mean our objective is not to buy something because it is high upon ESG right. We want

26:24 to generate returns and which is why we want to eliminate suspect ESG companies, but from

26:29 the remaining universe and thankfully to the extent that you are only creating portfolios

26:33 which are 20-25 stocks in a go. So, you can afford to be very very selective.

26:39 Gaurav, it was a pleasure talking to you. Thank you for joining us on the portfolio

26:43 manager. Thank you, my pleasure.

26:45 Thank you for joining us on NDTV Profit.

26:46 Thank you.

The Portfolio Manager | SBI Funds Management's Gaurav Mehta | NDTV Profit

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