SBI Mutual Fund’s equity chief investment officer (CIO) R. Srinivasan has taken over the CIO role jointly with Rajeev Radhakrishnan for fixed income. He speaks to Mint about the road ahead for the fund house and his views on the equity market in India and abroad. Edited excerpts…
How has the transition to the new CIO structure shaped up? Equity and debt markets sometimes give divergent signals on a company or the overall market. How do you arrive at a comprehensive view?
The transition has been smooth. There is immense depth and talent in the team and people continue to do what they were doing. There is absolutely no change in our investing style or the investment process.
On the equity and debt collaboration, there are messages from either side that are useful to the other. For example, debt analysts get worried if the equity is showing signs of fundamental weakness and the inputs of the equity analyst is important for them to take a call on the spread or the credit itself. Similarly, the equity analyst draws inferences from credit spreads and views of the debt analyst to arrive at conclusions on the balance sheet strength, which is key to long-term equity investing. Our equity and debt analysts are effectively part of the same team and they constantly draw inputs from each other and work coherently.
SBI MF has shifted from a purely bottom-up approach to a combo of bottom-up and market timing. What are the changes that you have brought in?
We have traditionally focused on bottom-up stock selection because that is, we believe, a higher probability outcome process. As we get more confident on the market timing, style and capitalization drift approaches, we will look to implement this in some of our strategies, but cautiously.
It is pertinent to note here that at the core of our investment process is a strong fundamental and quantitative research team. A team of analysts who have long-standing experience and capabilities in understanding business, management and valuations. This has been and will continue to be the key driver for sustainable investment performance.
You have taken a defensive approach in the current market by sticking with high-quality companies. Do you anticipate a major correction going forward?
Markets are over-valued on traditional valuation parameters such as price-to-earnings or even a broader market-cap-to-GDP ratio. That’s also true of the world. You must have noted experts, why even the Fed chairman, talking about the inefficacy of P/Es on account of sharply lower bond yields. That’s clearly what the market seems to be saying. In other words, if you look at the equity premia instead of plain P/Es, the market does not seem that expensive. In fact, if you adjust for earnings cyclicality via a Shiller PE yield spread, markets look attractive. It is imperative for markets to sustain and deliver, going forward, that earnings pick up and sustain or bond yields remain low or some combination of the two.
Our in-house analysis indicates potential short-term performance in favour of stocks down the capitalization curve (as in mid and small caps) and in favour of value (from quality). The point here being that high quality should not be necessarily construed as defensive given where valuations stand.
What are your plans for international stocks in existing equity schemes?
International stocks enhance our available options and effectively expands our investment universe. From that perspective, we will continue to expand our exposure.