Veteran CIO warns against popular yet dangerous argument
E A Sundaram
ED & CIO – Equities
DHFL Pramerica MF
WF: What is the core philosophy that influences your stock selection and portfolio strategy in your PMS offerings?
Sundaram: A PMS should always be positioned and sold as a product that is complementary to a mutual fund. A mutual fund would always be the first-choice capital market investment vehicle for a great majority of investors. Therefore, any attempt by a PMS to position itself as a superior alternative is not going to work, at least not sustainably.
That said, a PMS should therefore think of building an investment strategy around areas where a mutual fund would find difficult to go.
Done this way, a PMS would create a portfolio that does not have a major overlap with that of a mutual fund, and therefore meets the diversification need of the investor.
Each PMS tries to meet this need through a different method.
In our two PMS offerings, we first focus on quality of the business, its track record of the company and above all, its continued ability to compete, but purchase the shares when the company concerned is going through a period of difficulty. That way, the share price offers us an attractive entry price. Buying a good company “at any price” would not lead to a satisfactory investment return.
Our Deep Value PMS is a multi-cap PMS focussing on very well-established companies with a strong track record. Our Phoenix PMS is a mid and small cap PMS.
WF: You were very circumspect since 2017 on NBFCs and other sectors which, with the benefit of hindsight, appeared irrationally expensive. While you must be feeling very validated with the turn of events, it will be very interesting for us to understand how you try to distinguish irrational exuberance from genuine growth premium.
Sundaram: There were several points about the NBFC sector that deserve mention:
These were the reasons that we had stayed away from the NBFC/HFC space in the past several months. Of course it was not within our ability to correctly predict when the correction would come. But we have witnessed a similar situation in the TMT space in 1999-2000, in infrastructure/real estate/power in 2007-08 and in mid-caps/small caps in 2017. “History doesn’t repeat itself but it often rhymes”
WF: Quality stocks are still expensive, even after the recent correction –at least by historical valuation standards. Are high PEs the new norm we must expect for good quality or is there need for us to remain cautious with these high quality –high PE stocks?
Sundaram: We think that this is a dangerous argument. For a start let’s look at the following chart depicting the PE history of a blue-chip stock like Hindustan Unilever since Jan 1996:
The above chart is for understanding purpose only
The HUL stock, which enjoyed a PE of more than 60 in late 1999, saw the PE slip to less than 20 in 2003-2004. Similar PE corrections have happened to other blue chip stocks like Infosys, Colgate Palmolive, Sun Pharma and Maruti, besides several other stocks. If this can happen to HUL, it can happen to the stock of any company. A belief that “high PE is the new norm” is a recipe for investor heartburn.
This is not a recommendation/an offer to sell or solicitation to buy any security
WF: What are the strategies you offer in your PMS and how has performance been over 3 and 5 year time periods?
Sundaram: Presently we offer 2 PMS strategies, the Deep Value and the Phoenix. Their respective investment performances are as follows (as of 31st October 2018):
The Phoenix PMS will be completing 3 years in August 2019.
WF: What are the themes that appear most attractive to you from a 3-5 year perspective?
Sundaram: These are the themes that the two strategies are betting on:
WF: Are we done with the correction –can we look forward to a smooth equity journey in the new Samvat Year?
Sundaram: The equity market will never be “smooth”.
WF: For HNIs who can consider equity funds and PMS, what factors should govern the choice between the two?
Sundaram: A HNI should definitely consider both. What is important for the HNI to consider are the following:
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