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The last three years of its existence were eventful for Religare Asset Management Co. Ltd with the company turning profitable (the company is yet to make its annual report public) in such a short span. Equity markets have been challenging too and continue to be so, but its chief investment officer, Vetri Subramaniam, feels that shares of many companies are now available at good valuations. But shifting the portfolios completely to sectors where valuations are perceived to be cheap may not be the best strategy, says Subramaniam, because that could be risky. But what makes sense, he says, is to focus on whether the companies the fund house invests in can survive tough times.

Religare AMC has just completed three years. Any lessons learnt? Would you have managed equity funds any differently?

Vetri Subramaniam, chief investment officer, Religare Asset Management Co. Ltd.

Obviously in a different kind of environment, companies had made different kind of growth plans and investments were made. These companies—and us too—have realized that in many cases, projections were not met, demand did not meet expectations and plans were delayed. The thing we have to increasingly tweak—and lay a lot of stress on—is emphasis on the strength of balance sheet and capital return ratios.

Right now we are in an environment where everyone is disappointed. So the issue is not so much who is managing to grow, but who is managing to limit the damage to the business and who has the balance sheet that has not been much affected even if the business has slowed down. That’s one small change we have incorporated. Let’s not look at the fastest growing company. Which are the companies that will survive and be around tomorrow and grow even if the growth is disappointing on the business side is what we have emphasized more and more in this crisis period.

That’s been the story so far. But with present valuations, do you feel the need to get more aggressive? Your industry peers are urging investors to look at equity now.

Yes, things have changed since the last six months. The price-to-earnings (P-E) multiple of equity markets in the past six months has been at a slight discount to the average (three-year) P-E ratio. So valuations don’t carry a red flag; they are, sort of, in a comfort zone.

But it’s been tricky. A lot of steady growth, non-cyclical businesses such as consumers and pharmaceutical sectors have seen their P-Es reach highest levels. And cyclical businesses in many cases are trading at a discount to their historical averages. It gets tricky here. In the short term, the benefit of performance still comes from non-cyclical businesses, which are handling the harsh environment better. But it’s very hard to justify putting money here at these (high) multiples (and thereby high prices).

We try to stay away from non-cyclical companies where valuations are not conducive and are now a bit more open to taking risks in cyclicals. Though they face macro headwinds, we choose them if they meet some criteria. Do they have healthy balance sheets in terms of debt-equity, interest coverage ratio and strong cash flows? Is the return on capital above a certain threshold (meeting liability is not a problem)? Can the company survive if the bad period lasts? If yes, we don’t worry if it doesn’t do well for one or two years because they will emerge winners in the long run.

Though the size of your mid-cap-oriented funds is small, they seem to be overly diversified. Why?

Our approach is that it doesn’t matter whether you are running a 5 crore, 100 crore or 1,000 crore fund. The actual asset size is irrelevant. What usually happens is fund houses start with a corpus of, say, 15 crore and set out to do, say, five things to get to 1,000 crore. But tomorrow when that success brings additional money, the fund manager may have to change his strategy to manage a fund that is now beyond 1,000 crore. This brings a different challenge. Can it repeat the performance now that it is a 1,000 crore fund as it did when its size was just 15 crore?

There is a lot of mortality in funds because they keep growing over time and then stop working if they don’t have a strategy to manage a larger corpus. For us, the strategy should be scalable.

What is the logic of Religare Mid and Small Cap Fund (RMSF) investing in large cap scrips, when it’s essentially a mid- and small-cap scheme? You have another such scheme called Religare Midcap Fund, which doesn’t invest in large-caps.

The definition of mid-cap companies in both these offer documents is different. In RMSF, we can invest in stocks whose market capitalization is between that of the highest and lowest of stocks that lie in the CNX Midcap index. Sometimes the highest market capitalization scrip of CNX Midcap index is higher than the lowest market capitalization scrip of the Nifty index. So we don’t intentionally invest in large-cap scrips, but due to the definition, it may appear that way.

Religare Mid Cap Fund’s definition of mid-cap scrip is that whose market capitalization is lower than the lowest market capitalization scrip of Nifty index. So this fund appears to be investing outside large-cap scrips.

Any plans to merge the two in future? Both are mid-cap-oriented.

So far we feel that we have maintained a distinction between these two schemes. But if someday we believe this distinction is no longer working, our trustees will take a call.

What’s the minimum time frame to stay invested in equity?

Three-five years is a time frame that you must look at.

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