Privileged to bring to you
Mr Neelesh Surana, Chief Investment Officer at Mirae Asset Investment Managers (India) Private Limited
Mr Surana, an engineering graduate with an MBA in Finance with over 26 years of experience in equity research and portfolio management; in his capacity as the CIO, currently spearheads the entire research and fund management function at Mirae Asset Mutual Fund.
He ranks amongst the top fund managers in India, and currently manages the Mirae Asset Emerging Blue Chip Fund and Mirae Asset Tax Saver Fund – both 5 Star-rated schemes as per PersonalFN’s rating methodology. Besides these, many other schemes from the stable of Mirae Asset Mutual Fund are among the top performers.
In this interview, Mr Surana shares his view on how he is navigating the waves of the COVID-19 pandemic and the approach investors should follow.
Navigating the waves of COVID-19
PersonalFN: When the novel Coronavirus or COVID-19 cases were reported in Wuhan, China towards the end of the calendar year 2019; did you envisage it spreading to the rest of the world – turning to be a pandemic – and causing havoc?
Neelesh Surana: None of us have experience of dealing with a pandemic which is once in a century type of event. During the initial days, it was a totally unchartered territory with a lot of anxiety across many unknown factors.
Subsequently, from the market viewpoint, we did realise that Covid-19 was a ‘one-off event’ which would impact one or two years of earnings – with this as an important assumption, when we do a DCF (Discounted Cash Flow) valuation of businesses, the fall in the intrinsic value is marginal compared to the severe correction in the stock prices we witnessed during the start of the pandemic. The price correction during March-April of 2020 was significantly more than the underlying value and thus provided exceptional investment opportunity.
PersonalFN: The first case of COVID-19 in India was reported in Kerala on January 27, 2020, and in the financial capital, Mumbai on March 11, 2020. Two weeks later, Prime Minister, Narendra Modi announced a nationwide wide lockdown. The Indian equity market tumbled and hit a low of 25,981.24 points on the S&P BSE Sensex on March 23, 2020. How did this impact the equity-oriented schemes of Mirae Asset Mutual Fund, and what were the risk management measures followed?
Neelesh Surana: When such sudden dislocation happens, it highlights the construction and psychographics of portfolios. From a risk mitigation viewpoint, a well-diversified portfolio is likely to emerge stronger when such large unforeseen events happen. It is thus important to have adequate diversification across – sectors, style, theme and stocks. Diversification does help mitigate the risk as some sectors were severely impacted by the pandemic like consumer discretionary; whereas few others were less impacted like B2B business, export-oriented business or IT/ pharma.
PersonalFN: Many mutual fund schemes from your fund house have fared well consistently even as volatility amplified amid the pandemic. What is the secret sauce behind this respectable performance? Tell us a bit about the investment process and systems follow at the fund house.
Neelesh Surana: I would like to emphasize that our approach is team and process-oriented, and the performance result is primarily driven by the contribution from the research analyst team. Overall, a disciplined approach to investing, with the focus on “quality up to a reasonable price”, has helped us deliver a satisfactory track record. The focus is more on stock selection, through bottom-up approach in growth companies, available at a reasonable valuation.
On portfolio construction strategy, we seek to construct a diversified portfolio, which could handle mistakes and deliver decent risk-adjusted returns. The most important part while constructing portfolios is to avoid big mistakes. We believe that no sector, stock, style or theme should be at a huge divergence to the benchmark. It’s important to construct a diversified portfolio, which could handle mistakes and yet deliver decent risk-adjusted returns.
PersonalFN: As we are in a strong second wave of COVID-19 currently, daily new cases have surpassed the last peak of September 2020 and we over 34 lakh active cases (and counting), and there is a possibility of a third wave in India around August-September this year; are you worried that this might weigh on the Indian equity markets and disrupt the wealth creation process?
Neelesh Surana: In the near term, the situation is indeed precarious and much worse than the first wave given the number of cases, and spread across age groups, rural areas, etc. Lockdowns now cover all major states and mobility indicators have plunged. Unfortunately, near term situation is likely to remain tough which has led to renewed disruption in economic activity until the pace of vaccination improves. Combination of a carefully calibrated opening-up strategy, and accelerated vaccination, we believe that time to reach 40-50% vaccination is crucial – if there is a delay in that timeline, the markets could exhibit volatility or correction. Unlike last year, the exports side is intact. The long-term impact would not be significant on the assumption that the pandemic would subside post-vaccination.
PersonalFN: India’s GDP after contracting sharply in Q1FY21 recovered sharply to +0.4% in Q3FY21. Do you view this as a ‘V-shaped’ recovery and believe that the Indian economy would continue to report positive GDP growth in the ensuing quarters as we are facing a “once-in-a-century-like crisis” and many states have imposed restrictions or lockdowns to curb infections?
Neelesh Surana: Lockdowns now cover all major states and mobility indicators have plunged – which will definitely impact FY22 growth. Given the favourable base effect, the year on year growth rate in FY22 will mask the underlying growth momentum of the economy. A seasonally-adjusted quarter-on-quarter growth rate will give a better idea about the underlying growth momentum.
There is negative impact from ongoing lockdowns, and low consumer sentiments where health is now the priority. The speed and success of the vaccination program will determine the timeline of economic stability and thus GDP trend over the next few quarters. While the current situation is fluid, we would assume that the negative impact of the virus could abate only after vaccination
Overall, GDP trend in the near term would depend on the duration of activity restrictions: If they last for a couple of months, they can be “looked through” – the rough cut impact on GDP based on the current situation and delay in vaccination by 2-3 months could be a downward revision of GDP by about 200 bps (basis points).
PersonalFN: Which sectors or themes in your view will lag and which ones will come out as the ultimate winners as we navigate the waves of COVID-19?
Neelesh Surana: Across sectors, we believe that strong companies will become stronger and get a higher market share. It’s important to spot these winners whose management exhibit exemplary thought leadership. For example, Covid-19 dislocation has led to significant adoption of digital across many aspects of businesses – this productivity gain would help better-managed companies to improve market share, profitability and emerge stronger on the other side of the virus.
Sectorally, export-oriented business like Metals, IT, Pharma are relatively not impacted by the ongoing second wave. The maximum impact is on consumer discretionary businesses, particularly those with a high fixed cost structure.
PersonalFN: Bond yields in the U.S. and India hardened in the recent past and then toned down a bit. Where are bond yields heading; will this trigger outflows from equities?
Neelesh Surana: Throughout the Covid-19 pandemic and even prior to that, the RBI has remained proactive in supporting the economy and financial markets through a series of rate easing and liquidity strengthening measures. Conventional rate easing measures have been supplemented by innovative measures such as OMO, LTRO, TLTRO, GSAP1.0, etc.
Given RBI’s proactiveness and easing of inflationary pressures in H2, we expect interest rates in India to remain benign. The RBI normalisation process is now delayed till the pandemic stabilises. Also, given that the current yield curve is already very steep most of the heavy lifting will be done at the short end.
PersonalFN: Members of RBI’s Monetary Policy Committee have expressed concerns about higher inflation — particularly core inflation. Are you sensing this to be almost the end of the current rate cut cycle? Also, what could be the potential impact on the rate-sensitive stocks and the consumption theme?
Neelesh Surana: Global Commodity price rebound this time has been stronger and broader-based. The commodity index (food grain, oil, metals, etc.) is up by a massive 50% in the last six months, which is among the sharpest increase in decades.
In the Indian context, these will impact more of WPI and less CPI. At the macro level, RBI has estimated CPI inflation at about 5.2% in H1FY21, which given last year’s favourable base should not see upside risk. More importantly, MPC is expected to look through the inflation trend in the near term due to the strong second wave and its impact on lowering the demand-side pressures. Overall, while the current situation is fluid as MPC members could tilt more to the need for low interest rates on account of massive impact of the second wave, ignoring inflation.
The consumer sector will fee dual headwinds of lower growth and hit to margin on account of high commodity costs.
PersonalFN: The COVID-19 pandemic has impacted lives and livelihood, but valuation-wise markets don’t seem to have corrected much. In your view, have markets run much ahead of fundamentals? How are you gauging the margin of safety in the portfolio construction activity?
Neelesh Surana: Unlike last year, valuation has not corrected and thus the margin of safety is limited. Markets are assuming that this too will pass – during the next few months given vaccination. Any serious change in assumption to lead to market volatility, i.e. correction in the near term. Investors should either invest via SIP or take 3-5 yr. approach while investing at the current juncture.
Our long term positive view is intact which is primarily on the thesis that we entered the crisis, when the economy was coming out of recession with PAT/GDP at a 15-year low at 2.5% in FY20 – post solution to the ongoing pandemic, over the next 3 years we would see PAT/GDP increasing to about 4%.
PersonalFN: The AMFI data reveals, many mutual fund houses launched several Index Funds. Your fund house too didn’t stay back from launching passively managed funds. Is it that fund managers are finding it increasingly difficult to pick stocks, generate a remarkable ‘alpha’ (justify the fees/additional cost charged), or is active investing losing its appeal?
Neelesh Surana: We firmly believe that it’s not Active Vs Passive products but it is Active and Passive as both could co-exist. A combination approach will work: A 100% active makes one vulnerable while a 100% passive makes him unhappy with only average returns. A combination strategy – say core and satellite approach would evolve. For many investors’ passive will be a tactical or satellite strategy with active as the core strategy and vice versa, depending on investors need, risk appetite, time frame, cost-effectiveness, etc.
At Mirae, we need to provide a full suite of offering across both Active and Passive products. Both can co-exist – however, Active in the long term should demonstrate the right to win by consistently outperforming the benchmark. Because of Passive (products), there is pressure on active FM to perform and there has to be “Right-to-win”, for a product to scale. We would like to highlight that while a lot of debate is between Passive Vs Active we are seeing an increasing trend of active-to-active churn as the gap between winners and laggards set to widen. The churn would in favour of stronger and consistent alpha generators, and those with an edge in the investment framework.
PersonalFN: Considering bond yields, inflation trajectory and intensified credit risk environment amid the COVID-19 pandemic, how are you approaching the Indian debt market now? Which types of debt mutual fund schemes investor may consider adding to their investment portfolio?
Neelesh Surana: The fixed income strategy would be based on three assumptions. One, we would expect a delay in rate hikes till the pandemic settles. Two, the rate hike will not only be delayed but will also be very gradual. Lastly, given that the current yield curve is already very steep most of the heavy lifting will be done at the short end.
In context of the above assumptions, we would advise for a medium duration strategy (2-5yr) in high-quality portfolio which offer better protection given two conflicting situations: (a) Increase in bond yield over the medium term; and (b) Current unusually high steepness in the yield curve. Alternatively, we believe that high-quality Dynamic Bond Funds could be core (of the) portfolio from a long-term viewpoint.
PersonalFN: What are your observations as regards investor behaviour during the current pandemic? In general, what will be your advice to investors amidst the pandemic and even otherwise; how can they be smart investors and make investing a habit?
Neelesh Surana: We believe that investors should be structurally equal-weight in equities from a long-term viewpoint. We would advise investors not to get deterred by noises (based on the ground level checks) and follow a well-crafted asset allocation with equal weight to equities via the SIP route. Many a times the action required when investing through SIP is “nothing” i.e. simply following a well-disciplined asset allocation with planned diversification.
As regards to new investment, we do not rule out volatility in the near term based on the glide path of second-wave, and thus would encourage fresh investment only via SIP.
PersonalFN: Which are the three books or blogs on investing that you follow and would recommend to investors?
Neelesh Surana: The book I will recommend to investors is “Common Stocks and Uncommon Profits” by Phil Fisher. The book is simple to understand, and instils rigorousness of research. Fisher’s main point is to look beyond numbers for a better understanding of business. The book’s worth is also borne by its longevity, as it was published in 1958, and most of his thoughts are still so valid. Other books which I would recommend are “The Warren Buffet way”, by Robert G. Hagstrom; and The Intelligent Investor by Benjamin Graham.
PersonalFN: Thank you, Mr Surana for your valuable time and insights. At PersonalFN we are sure investors will immensely benefit from your views.