The ongoing banking sector crisis caught all of us off guard. Since the banking sector is one of the highest weighted sectors in many benchmark indices, are mutual funds safe from the crisis? Sohini Andani, fund manager at SBI Funds Management Ltd, tells us that a crisis for one set of banks is an opportunity for another set of banks. Edited excerpts:
What are your expectations from corporate earnings in financial years 2018-19 and 2019-20?
Few sectors like automobiles did good. Consumer goods, information technology did reasonably well; nothing spectacular but no negative surprise and they delivered on the expectations. The big disappointment was the banking and financial sector.
Going forward, we will see more disappointments in the banking and financial space; be it private or public sector banks, especially those that lend significantly to the corporate sector. The sector is under greater regulatory scrutiny now, so we don’t know what can be unearthed. Earlier, the pool of assets were identified through the Reserve Bank of India’s Asset Quality Review program, so banks had to just provision for them. Hence, the pool wasn’t getting bigger.
Now, the pool itself is becoming bigger. There has been a discovery of certain new non-performing assets (NPAs). This impacts a bank’s earnings and we expect the pain to last for another two years. And whatever capital infusion banks have got will now be used to provide for NPAs. Which means, they will need more capital to grow.
The threat of more such NPAs being discovered in the light of what has happened also makes everyone cautious and slows down decision making. That will affect their businesses well. The banks that lend largely to retail population would do well, but private and public banks who lend significantly to companies, and even some old banks that were part of consortium lending, are in for tough times.
The metals sector is very cyclical and last year’s high metal prices will have an effect this year. But how will global trade wars affect metal prices, we don’t know yet. There is uncertainty there.
Overall, in view of uncertainties, the average earnings from corporates of around 15%, a typical expectation, looks tough. The economy is not really growing. On top of that, if interest rates go up— and they are likely to—capital expenditure might slow down as it might get costlier for corporates to borrow money. We have to watch out for that.
With banks giving investors a scare due to recent issues involving scams and lack of transparency, does it make it tougher for fund managers because banks still carry the highest weight in many benchmark indices? Typically, fund managers stay close to their benchmarks.
Our internal templates mandate us to invest in banking and financial sector plus or minus 8% of the sector weights for large-cap funds and +/-10% for mid-cap funds. We have to be within this band. In my funds (SBI Bluechip Fund and SBI Magnum Midcap Fund), banking and financial sector are almost the same as what they are of their underlying benchmark indices. I can go easily -8%.
Why haven’t you then?
Because we have stocks, which we think will do better. We don’t have exposures to the problematic names. We have names (shares of banks) which are benefitting out of the problems in this segment, like private banks such as HDFC Bank Ltd, IndusInd Bank Ltd, Kotak Mahindra Bank Ltd and well-managed non-banking finance firms such as Cholamandalam Finance Ltd, Shriram Transport Finance Ltd and Mahindra Finance Ltd.
Some of them are seeing cyclical upturn in their businesses. They managed their risks well. A problem for one segment of banks and financial firms is an opportunity for another segment. We’re trying to encash on the opportunity.
Do you look at the baking sector differently after the PNB scam?
Among state-owned banks, we have exposure largely to State Bank of India and a small exposure to Bank of Baroda whose shares we recently bought. We don’t have exposure to Punjab National Bank.
We were looking at state-owned banks thinking if it is cyclically a good time to enter into them because they were just about coming out of the NPA cycle and valuations were attractive. We were anyway not investing into banks which were doing so badly that government had to infuse capital. After recent events, we realise that we still need more margin of safety after the PNB scam. We became more cautious. The Pandora’s box has just opened. How much more can come out of it, we don’t know.
It is not very common to see the same fund manager managing a large-cap fund (SBI Bluechip Fund) and a mid-cap fund (SBI Magnum Midcap Fund). Tell us how you run two sets of filters and philosophies.
The basic philosophy—how you look at portfolio construction and stock selection—is the same, irrespective of whether it is a large-cap or a mid-cap portfolio. Only thing is that the universe (of stocks) is different. In a mid-cap fund, we pay more attention to management quality, past track record, the firms’ growth plans, execution and so on.
The promoter in a mid-cap firm has to be at a decent level, preferably at least 30-40% stake, else it makes us uncomfortable. Low promoter holding means his interests and those of the minority shareholder aren’t aligned. A high promoter stake also presents less chance of him deliberately doing something wrong.
How do you assess the quality of the mid-sized company’s business model?
The quality or robustness of the business model can be judged by the size of opportunity, the management’s track record on solid execution and efficient capital allocation. Take the example of Motherson Sumi Systems Ltd. It is an auto-ancillary company that supplies auto parts to global luxury car makers like Volkswagen, Audi, etc. It competes in a global space and has consistently delivered well on the rigour and quality standards that its customers (German Carmakers) expect from their suppliers. This reflects very well on the management’s ability to execute and grow its business in globally competitive environment, wherein, if successful, the size of opportunity is very large. It provides opportunity for multiple years of high growth for the company. The investors can benefit by investing early and enjoy multiple years of compounding as was the case with us for this company.
Speaking of fund managers, why are there such few women fund managers around? Why is fund management still a male bastion?
Aren’t so many occupations male bastions in our country? We have all grown up like that. But things are changing. Fund management is not a profession where men can be more successful than women. Perhaps the people who recruit are men and they could presume that since this is a job that requires decision-making, men could be more suitable for the job than women. In our culture, the decision-making was also done by the men.
But I disagree with them. Women can be just as good decision-makers or even better than men. One cannot generalise. One should come to this profession if you have passion. It should excite you.