Perfecting The Script

There is something about Roger Federer’s simplicity and grace. No one can dispute that after watching the biggest sporting comeback of 2017. The Swiss tennis maestro won the Australian Open for his 18^th Grand Slam in an edge-of-the-seat five-set final against Rafael Nadal.

An avid admirer of the tennis star and arguably practitioner of a similar style, Anoop Bhaskar feels he had a role to play in Federer’s triumph. “When Federer was down 1-3 in the final set, I told myself ‘let me stop watching the match for his sake.’ After an hour I tuned in and saw Rafa speaking first (it is customary for the losing player to speak first) and realised that Federer had won 5 games back to back to clinch the title,” quips Bhaskar. Just like Federer’s humility shone through his acceptance speech, Bhaskar’s self-effacing humour gives us a glimpse of his grounded persona.

Bhaskar’s first tryst with the stock market started in school and continued through his college days. “Between 1985 and 1990, my dad and I dabbled a bit in the primary market. It was more out of curiosity and interest than any great insight. We had no access to management of the companies and hardly any information,” he says.

Going down memory lane, Bhaskar recalls how his dad (who worked in a power utility company) and he were excited about a company called Usha Rectifiers in 1986. “My dad was quite optimistic about this company’s prospects. He told me that this company is going from diode to anode or something like that and this change would give the company phenomenal growth. We ended up losing money,” he reminisces.

He and his dad did find some good stocks, but lacked the investment discipline to realise their full potential. For instance, they participated in Hero Honda’s IPO in 1985, but sold off quite cheaply. They sold the shares at R.43 in 1991. Today, Hero Motocorp trades at R.3,226, dividends aside. 

 That curiosity in the stock market never went away and getting into equity research became a natural way to satiate that curiosity. “I was very clear that I wanted to get into equity research and investing. I never tried to get into a retail bank or an investment bank. In any case in the 1990s between an MBA Finance and a CA, a CA was always better-equipped to get a job. If you were not from the top MBA institutions like IIMs or JBIMS, there weren’t too many jobs for MBAs from second rung institutions,” says Bhaskar.

Catching the next wave
However, Bhaskar didn’t get an immediate entry into equity research. After completing his MBA from Symbiosis, Pune, in 1990, he had to wait for another 3 years before landing a job that brought him closer to his ambition. “For three years, I was a rolling stone. There was no building left on Kasturba Gandhi Marg in Delhi where I had not worked. I was getting used to the buildings,” he says. He worked at a brokerage, a conglomerate and also worked as an analyst at a think tank of Ceat Group during those days. 

 Finally, it was a job opportunity with Kothari Pioneer Mutual Fund in 1993 that gave Bhaskar the break that he was looking for. It was a job that would pave the way for his entry into fund management. It came his way thanks to a friend who knew Kothari Pioneer’s CEO Vivek Reddy from an earlier job. His friend told Reddy that both he and Bhaskar were interested in equity research. They sent Reddy a report on the sugar industry. Reddy called them to his office in Madras and gave them the job with an annual salary of R.58,750. Bhaskar and his friend took a train to Madras along with a refrigerator and two folding beds. He ended spending his next ten years at Kothari Pioneer. He worked as an analyst and was part of a team that was headed by fund managers like KN Sivasubramanian and R Sukumar. He says that observing Siva from such close range helped him learn that one could generate flamboyant returns, but didn’t necessarily needed to be flamboyant about it.

Another trick of the trade he learnt from Siva and Sukumar was that fund manager’s job was not about owning great businesses. It was about selling them at the right time. “I learnt that a fund manager should never overlook valuations. We are not Warren Buffett. We are not strategic investors. We buy shares to sell them. Our job is to manage money and keep identifying opportunities that are cheaper than what is there in our portfolio,” he says.  

 These learnings helped Bhaskar a great deal when he got a crack at managing funds at Sundaram Mutual Fund. By the time Bhaskar left Kothari Pioneer in 2003, the fund house had been acquired by Franklin Templeton (in 2002). Bhaskar wanted to manage funds. Franklin Templeton did give him the opportunity to run a PMS fund, but he didn’t want to run a PMS. He maintains that he would never manage a PMS as he feels a fund house has a responsibility to the larger public.

 Finally in 2003, Bhaskar got his dream job of managing a fund at Sundaram Mutual Fund. Never mind Sundaram was 1/5^th the size of his previous company and the fund he was managing was a measly R.15 crore. Bhaskar took the job as he needed the start. By the time he was done with Sundaram Select Mid-Cap, the fund had grown to R.2,700 crore, a whopping 180x bigger than when he had started. It was the largest mid-cap fund at that time.    

 Between 2003 and 2007, the Sundaram Select Mid-Cap Fund’s NAV grew on average by 74% every year. 

Strengthening the base
When he took over the fund, housing finance companies were drawing quite a bit of interest. However, Bhaskar thought that if housing finance companies are expected to do so well, real estate companies shouldn’t lag much behind. Bhaskar started buying real estate stocks. One of the stocks he bought during that time was Unitech. In 2005, he picked up one lakh shares at R.660. “The customer advances at R.1,100 crore were more than the market cap at R.660 crore. It was like a quasi-bank. They could fund their growth through this,” he points out. His learning from the Kothari days held him in good stead as he kept selling the stock since he felt the valuation was getting expensive and before the tide would turn against the realty space in 2008, he was out with handsome returns for his fund.

 Another real-estate stock that worked well for him was Ansal Properties. He bought and sold the stock for a profit of R.45 crore. This was the time when he was generally bullish on the sector. In January 2007, Ansal Properties had floated their second QIP. This time around he decided to stay away given the sharp run-up in price, on his boss’ advice. It turned out to be a good decision in the end as Ansal crashed post the QIP.

Besides real estate, Bhaskar made good money in the sugar industry. When his fund bought Bajaj Hindusthan in 2003, the market cap of the company was below R.150 crore. He bought and sold the stock at various times and made 10-12x. By 2006, Bhaskar had exited his position in the company. He recalls that while sugar mill-owners were investing in further capacity, there was a scarcity of sugar cane in UP and farmers were quoting high prices and that didn’t bode well for the industry. 

Despite the handsome returns in the sugar industry, Bhaskar feels if he had spent the same amount of time learning the nascent banking sector at that point of time, he would have been a much better fund manager than he is today. He got into banks since he felt the industry was a scale-game. So, somebody who is mid-sized is always at a disadvantage. “Till 2001, there were no banks in the benchmark indices and till 2003 analysts were still trying to understand the banking industry,” he recalls. He now prefers to stay away from the sugar industry as it is tightly-regulated.

After Sundaram, Bhaskar moved to UTI AMC in 2007 with a definite task on his hands. He was handed over UTI Mid-Cap Fund and UTI Equity Fund and both these funds were not doing very well. For instance, between 2005 and 2007, the Equity Fund generated a return of 61%, underperforming the benchmark by 25 percentage points. Similarly, the Mid-Cap Fund generated a return of 44%, underperforming the benchmark by 11 percentage points. 

It took some time before Bhaskar could revive the funds. In 2008, he became cautious much before others, so he held 20% of his portfolio in cash. Seeing the early signs of the sub-prime crisis and the frenzy buying that surrounded the Reliance Power IPO, Bhaskar felt the market was topping out.

The market cheered the re-election of the UPA-government in May 2009, and the Nifty was up 10%. Due to Bhaskar’s cautious approach, UTI’s funds didn’t gain as much as other fund houses’ schemes. The UTI Equity Fund gained 35% between January 2009, and May 2009, underperforming the benchmark BSE-100 that had gained 49% during the same period.   

 Bhaskar called up every strategist at various brokerages to understand what his portfolio should now look like. The consensus pointed him in the direction of infrastructure and PSU banks as UPA-II was expected to push infrastructure even more aggressively in its second innings. However, he decided to go the other way and decided to make an overall bet on consumption. So he started investing in Hero Motocorp, Maruti and Bajaj. Apart from auto, Bhaskar also invested in IT. For instance, the investment in TCS did well for Bhaskar as it quadrupled between 2009 and 2013. His logic was simple. If he was going down, he’d rather go down with good stocks. He didn’t want the next fund manager to be burdened with highly-leveraged infrastructure names.

By the end of December 2009, the fund had recovered. He made a 60-70% return from his investments in Maruti and Hero Motocorp. During this period, the UTI Equity Fund generated a return of 35.29%, outperforming the benchmark by 15 percentage points.

 However, the Mid-Cap Fund still had some construction names. It had 12%-13% exposure to the construction space. It took another year for him to clean up the fund and get quality stocks in the portfolio. The fund started exiting from position in GMR, GVK and Jaypee Group. “Even though the Mid-Cap Fund  was just Rs.1,000 crore in size, it took some time,” he says. “In 2010, we did well as I started going after quality in a big way,” adds Bhaskar. 

For Bhaskar, the best period of his investment career was between 2011 and 2013 at UTI. During this period, UTI had no CEO. “We ran a good shift during this period and managed things with discipline on a day-to-day basis,” he says. But with the market highs came the lows. And 2013 was not one of his best years. Bhaskar didn’t make the most of the euphoria that was gathering pace in the expectation of a Modi-led government. So, UTI Equity Fund’s return in 2013 were largely in line with the benchmark. The fund delivered a return of 7.5%, while the CNX Nifty was up about 6% during the same period while other funds outperformed. He says this made him realise that sometimes one should be less intellectually arrogant about one’s views and go with the market flow.

Bhaskar finds Howard Marks, Oaktree Capital’s co-founder’s thoughts on investment quite useful. “Howard says that the true sign of a good fund manager is someone who is second quartile in a rising market and top quartile in a down-market. I have shown that if you consistently remain in the second quartile for a long time, you would end up beating the top quartile by a wide margin. However, in India this idea is not applicable,” he points out.

Bhaskar understands investors obsession with short-term returns and takes it in his stride. He tries to make sure that his one-year return is good. He calls this as hygiene and says that if you are third quartile in one year, why would anyone want to talk to you! He sums up his investment style: to protect capital and yet beat the benchmark consistently. To limit your downside and still participate in market rallies. However, the industry doesn’t always reward such an investment style. As Bhaskar recalls that one of his proudest moments was at UTI when his funds fell the least in 2008. The UTI Equity Fund was down 45%, while the equity diversified funds category was down 53%. But it was quickly forgotten when his funds didn’t rise the most when the market recovered. 

As he looks forward, Bhaskar feels that urbanisation is going to be the next big theme. “You have to go beyond the top-25 cities and find out what is happening there. People are moving for the first time from low-income to mid-income and they will look for brands as brands are a symbol to mark one’s upward mobility. So, it is not the bottom-of-pyramid stories that will work, but companies that are able to draw people from bottom to the next level,” he explains.

After joining IDFC AMC in 2016, Bhaskar has taken some calls on emerging companies in the financial space such as Equitas and RBL Bank, shows data from Morningstar. “I have missed out on housing finance and personal loans, I don’t want to miss out on these emerging segments in banking,” he says.

When he needs to take a break and unwind a bit, Bhaskar likes to draw inspiration from the sporting world. He follows the NBA team San Antonio Spurs and had even travelled to San Antonio last year to watch them play. So, what does he think of an Indian like Sim Bhullar who is now in the NBA circuit? He feels that Indians have a long way to go as we are not physically as adept as Americans and Europeans. It is not about the strength or height, it is about the speed and reaction time and he feels Indians still lack those attributes.

He adds that San Antonio is an investment case study in itself. They have had the same coach for 19 years and 3 players who have stayed with them for 17 years. One of them, Tim Duncan, has just retired. So, investors can learn a lot from that. The team has won five NBA titles and is in close challenge for the 6^th in the ongoing 2016-2017 season. Just like the San Antonio Spurs, Bhaskar has delivered a consistent performance over a long-winding career. That is why, he is among the top fund managers of India.