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Top down ace joins hands with bottom up champion

Anand Shah, Deputy CEO & Head of Investments, BNP Paribas AMC

19th July 2017

In a nutshell

It's a jugalbandi that created magic years ago, it's a team that's now come back together, albeit in slightly different roles. Ritesh Jain - an acknowledged top down ace has joined BNP Paribas' fund management team as CIO, bolstering the champion bottom-up focused team that Anand Shah has built - an alignment of complementary skills that Anand believes adds a cutting edge to the team's capabilities. Anand talks about what the recent top level additions to the investments team signal to the market and also walks us through two of their propositions that are increasingly attracting advisor attention: the Enhanced Arbitrage Fund and the Dividend Yield Fund.

WF: You have inducted Ritesh Jain as CIO even as you retain the overall Head of Investments title in addition to being Deputy CEO. How do you see the investments team dividing responsibilities, with the induction of Ritesh?

Anand: We are very happy to have Ritesh join our team as CIO - it is a significant statement about our intention to invest in the Indian business in our quest for accelerated growth. I am also happy to share that in addition to Ritesh, we have also recently appointed Chockalingam Narayanan as Head of Research - he comes with extensive senior experience from Deutsche Securities. We now have depth and scale in the investments team that is comparable with the much bigger players.

Ritesh adds a new dimension to our equity and fixed income capabilities. Our fund managers are predominantly bottom-up focused and specialize in their sectors, helping us pick good stocks year after year. What Ritesh can bring to the team - on equity and fixed income sides - is a strong top-down perspective. His grasp over global and domestic macro-economic trends and his ability to connect the dots especially the interplay between currency, fixed income and equity markets and use this understanding to translate into sector views on the equity side and duration views on the fixed income side can add a whole new dimension to our capabilities.

I think we have a very talented team that has proven its credentials with bottom-up stock and credit selection. On the fixed income side, I am pleased to share that while the industry has seen credit downgrades of over Rs.40,000 crores, we didn't have any exposure to a single downgraded paper. This capability will now be enriched with high quality top-down insights.

WF: Is there room for some conflict now - with Ritesh's leaning towards top-down and your leaning towards bottom-up? How do you see these styles working together to steer BNP Paribas' equity funds suite?

Anand: I think it will be complementary and not conflicting. We pride ourselves on our bottom-up stock picking skills - and that focus will continue. But what a good top-down input can give us is perspectives on relative sectoral allocations - which we are frankly not much active with at present. So, if we have top-down sectoral calls complemented by bottom-up stock picking within these sectors, I see that as complementary inputs that can go into portfolio strategy.

WF: You launched a unique Enhanced Arbitrage Fund last year. What is the proposition, how has it shaped up so far and for what kind of investors is this suitable?

Anand: The current fund construct is ~ 75-80% of the portfolio is a conventional arbitrage fund strategy. For the balance 20-25%, we build a portfolio of high conviction stocks, but hedge the exposure against Nifty futures. This portion also aims to delivers arbitrage returns (from rollover of Nifty futures), but if any alpha that the stocks deliver - over and above Nifty- acts as a return enhancer.

For 20-25% of the portfolio, our aim is to have around 30-35 stocks - primarily from the Nifty comprising 80-85% of portfolio and up to 15-20% from outside the Nifty 50 universe, but with strict limits of over/under weight and sectoral caps etc. So, we are not attempting a classic long-short strategy here - we are looking to improve the scheme performance by delivering stock selection alpha while neutralizing the beta with that 20-25% of the portfolio. This entire portfolio construct is within the permissible asset allocation and investment strategy mentioned in the Scheme information documents (SID).

We believe, spreads on arbitrage as an opportunity has come down post demonetization.Hence the attraction of such a proposition (which has enhancement) has only increased, along with equity taxation that the scheme offers. Investors with 3 months to 3 year horizon money may consider investing in this scheme

WF: Your Dividend Yield Fund has an enviable track record of unbroken monthly dividends over the last 55 months. In what ways do you shape fund strategy to enable regular dividend payouts? What have been the ranges of monthly dividend payouts over the last 12-18 months?

Anand: What's important is what goes into portfolio construction in this fund. So, while our B-M-V process is still the central part of stock selection, for this fund we put a lot more emphasis on companies generating sizeable free cash flows post capex. These are the companies that are able to maintain a healthy dividend payout. This focus eliminates many high growth companies that are consuming cash for capex - which are also perhaps the companies that may have a relatively more volatile market performance. Strong and stable franchises throwing up free cash flows find more favour in this fund - which automatically makes this fund more conservative in style compared to say our Equity Fund. This also lowers fund beta and provides the necessary stability in the portfolio.

One of the themes that runs through this portfolio is the emergence of gas as the fastest growing energy source in the country. We have stocks in this portfolio that capture the entire value chain of the growing gas story and the fund has benefited significantly from its presence in this theme.

The other theme that this fund has been capitalizing on is the heightened desire in China to reduce industrial pollution - which we think is structural in nature given China's desire to clean up its act as it becomes more prosperous. This is resulting in significantly lower dumping of Chinese products across a vast array of sectors including chemicals, metals, mining, tyres, ceramics etc. This directly eases the pressure that domestic suppliers have been under in recent years, and is opening up large opportunities for them now.

These themes apart, our house favourites of BFSI, consumption and cement are also prominent in this fund as well - and the fund has benefited from these thematic exposures as well.

WF: Your flagships - Equity and Midcap funds are back into top quartile in CY17, after a relatively muted CY16 performance. What's the strategy that has got your funds back to the winning ways we've been used to seeing in recent years?

Anand: You will recall in our last interaction (Bouncing back to the top of the league), we talked about early signs of a bounce back in performance. I am happy to share that this bounce back continues - without us doing anything significant to change portfolio strategy. As we discussed previously, our obsession to own high quality companies primarily in the B2C space made us take a sharp performance knock during demonetization as consumption got temporarily derailed. Consumption has come back and so have our stocks.

It is credit to our team that every fund manager held on to his convictions through that challenging phase, and as remonetisation took root, our portfolios recorded a sharp bounce back after a short and sharp knock.

The material contained herein has been obtained from publicly available information, internally developed data and other sources believed to be reliable, but BNP Paribas Asset Management India Private Limited (BNPPAMIPL) makes no representation that it is accurate or complete. BNPPAMIPL has no obligation to tell the recipient when opinions or information given herein change. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This information is meant for general reading purpose only and is not meant to serve as a professional guide for the readers. Except for the historical information contained herein, statements in this publication, which contain words or phrases such as 'will', 'would', etc., and similar expressions or variations of such expressions may constitute 'forward-looking statements'. These forward-looking statements involve a number of risks, uncertainties and other factors that could cause actual results to differ materially from those suggested by the forward-looking statements. BNPPAMIPL undertakes no obligation to update forward-looking statements to reflect events or circumstances after the date thereof. The words like believe/belief are independent perception of the Fund Manager and do not construe as opinion or advise. This information is not intended to be an offer to sell or a solicitation for the purchase or sale of any financial product or instrument. The information should not be construed as an investment advice and investors are requested to consult their investment advisor and arrive at an informed investment decision before making any investments. The Trustee, Asset Management Company, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained in this document.

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