Lone Star

Meet the star of our fund house,” says R Srinivasan, head of equity at SBI Mutual Fund, introducing Sohini Andani, fellow fund manager in charge of the Bluechip and Magnum Midcap schemes. Both Srinivasan and Andani have made it into the list of top 10 fund managers in the Outlook Business-Value Research five-year ranking. If you thought Srinivasan was being generous with his praise, well, the 44-year-old has earned every bit of it. She was offered the role of a fund manager in 2010, two-and-a-half years after she joined the fund house as its head of research. A CA by qualification, Andani started out as an equity analyst, working for some of the most reputed domestic broking houses and later moving to the buy side as a senior analyst with ING Investment Management.

When she joined SBI MF in October 2007, the fund house was in transition following a churn that saw some fund managers making their exit. As the head of research, Andani was instrumental in building the team of analysts that today serves as the backbone of the fund house. “I know the strengths and weaknesses of each of my team members. Most of the analysts whom we hired were fresh out of college and very new to the market. But in these eight years, they have really shaped up well and their understanding of sectors and companies is impeccable,” says Andani, who continues to track IT and banking sectors closely. Even as Andani kept building on her team’s strengths, it was the impressive performance of her model portfolio — which she periodically kept showing to the fund managers — that landed her the job of managing the two schemes. 

What the management told her when she took on the assignment is what continues to drive her investing philosophy. Given that the fund’s historical performance for the previous five years was bad and that it had no room to surprise investors negatively, the mandate given to Andani was that come what may, the scheme could afford no further mistakes. “This meant that I had to build a portfolio which could generate maximum return with minimum risk. Even today, whenever I invest in a stock, the thought ‘what if I go wrong’ keeps playing on my mind. In that sense, the stocks you don’t own are also a source of alpha, especially in a falling market,” says Andani. Thankfully, so far, things have turned out just right for Andani. Her conservative approach to investing has worked wonders for the Bluechip fund, whose assets — which had fallen to Rs.1,000 crore before she took charge — more than trebled to Rs.3,800 crore, even as her five-year return of 15% dwarfed the 6.78% managed by the large cap-dominated BSE 100.

The stellar performance is also an outcome of judicious portfolio construction, which ensures adequate margin of safety. “If I go wrong in my decisions, what is important to me is how much I am protected and what is the counter-balance in my portfolio. This is especially true in the large-cap fund, which is a relative-return product. The emphasis is on counter-balancing risks so that the portfolio doesn’t become too risky or too defensive, which can prove to be detrimental one way or the other,” says Andani. Putting this in perspective, she points out how if she has Yes Bank in her portfolio, it is counter-balanced by an exposure to HDFC Bank. “So, if I bet on Yes Bank, which is perceived to be a huge risk given its corporate book exposure, I have been equally cognisant of not taking further exposure to stocks such as ICICI Bank or Axis. In doing so, I don’t end up taking too much risk and can focus on maximising my risk-adjusted return,” adds Andani. 

And in doing so, she doesn’t mind holding on to an expensive stock such as HDFC Bank as long as the bank is growing at 15-20% every year and there is no risk of de-rating of its earnings multiple. “The mistake most of us make is to forget that if growth is expensive in one year, but it gives return over two to three years as the growth continues to kick in,” explains Andani. Not surprising, then, that at over 6% of assets, HDFC Bank is currently the top holding in the Bluechip fund.

It’s the management, stupid
While betting on a stock, besides structural growth stories, Andani also looks out for companies coming out of a capex cycle or those primed for a windfall arising out of approvals, especially in case of pharma companies, which can give superior earnings growth. “We are always conscious of these two things [structural growth and windfall gains] in the portfolio,” adds Andani. But the big swing factor for her in any investment is the quality of management and what it is doing to address growth. It was this approach that led the fund to avoid IT bellwether Infosys, as it was in a state of inertia before Vishal Sikka took over. “That was a big decision considering that we were a blue-chip fund. But we generated alpha by betting on HCL Technologies — which back then was not counted as a blue-chip — and Tata Consultancy Services. These kept compounding at a decent rate,” says Andani. What worked in HCL’s favour was that it had an ambitious CEO who was betting aggressively on the future. “Under the leadership of Vineet Nayar, the company was investing in growth, but that was coming at the expense of margins, which were trending down. But our view was that even if the margins fell in the initial years, they would move up significantly when growth kicked in, resulting in positive earnings surprise and a re-rating of earnings multiple,” explains Andani. 

As expected, HCL’s growth story played out, and so did the share price, which zoomed from Rs.240 in June 2012, when the fund had the highest exposure at over 9.4 lakh shares, to over Rs.1,000 by March 2015. Andani used the rally to pare her exposure to over 4 lakh shares, as on date, with the price now hovering around Rs.820. Similarly, in the auto ancillary space, Andani took a position in Motherson Sumi five years back, as she liked the approach of the management and the fact that, unlike other promoters, Vivek Chaand Sehgal, was not taking any salary apart from dividends and hadn’t diluted equity to raise money from investors either. “The fact that the world’s top luxury car majors were the company’s clients and were willing to commit more business spoke volumes about the quality of the management. What was also great about the management was that even at the plant level,they were aware of the RoI of the machines,” explains Andani. Once again, instead of opting for blue-chip two-wheeler stocks Bajaj Auto and Hero Honda, the Bluechip fund loaded up on Motherson. 

While the management was a big pull with Motherson, in the case of Bharat Forge — given that the company had incurred huge capex in the past — it was a big beneficiary of operating leverage playing out, aided by a recovery in the US market. “The management had invested heavily to bring the cost structure down, which is an internal advantage that no player can take away from you. So, when the cycle turns for the better, margins go up and the company ends up gaining market share,” says Andani. Longevity of top management is something that Andani also likes to bet on, which is not surprising when you realise that PSU banks don’t find space in her fund. “We don’t invest in any PSU banks because the chairman’s tenure is just around 2.5 years. By the time one understands what needs to be done, more than a year has passed, and before you set the ball rolling, the chance is gone. Also, changing priorities at the top confuses employees about future outcomes. Basically, whether Aditya Puri will run HDFC Bank for two decades or more makes a lot a difference in taking a view on the stock, because that acts as a big kicker to the performance of a bank or company,” says Andani.

That overemphasis on management has also led to situations where Andani has exited from stocks even when the going is good. Highlighting an instance where the fund pulled the plug on a stock, Andani mentions how they got excited about Omkar Speciality Chemicals, a manufacturer of inorganic and organic intermediates and active pharmaceutical ingredients, which went public in 2011. “It is a good company with strong manufacturing skills, technical know-how and marquee clients. They were coming out of a big capex programme, which meant that return ratios were set for an improvement. We were right about all those factors, but the more we interacted with the management, the more we realised that it was a one-man show and that there was nobody else there apart from the promoter,” says Andani. The company neither had any strong processes in place nor did it have a professional set-up to ensure longevity and sustained growth. “It’s not that we don’t like family structures, but in the absence of professionals, the company could in future very well see its competence erode if outside competition came in and undercut the business. This kind of competitor will not make money but will definitely make the incumbent’s life miserable. In that sense, Omkar looked quite vulnerable,” explains Andani. Since the fund held a significant portion of the mid-cap company’s equity, exiting the counter would have become a challenge if it waited for its assumptions to play out. There was merit in what Andani did, as she could have easily instead overlooked the fact that the stock was minimal as a percentage of assets. But in an absolute sense, at over 8%, the fund held a substantial stake in the company’s equity. “We slowly started exiting the counter once we realised that the thesis by which we had bought the stock no longer held true. Since there was no negative news flow, we were lucky to get out with negligible impact cost within a year’s time, ending up with 25-30% return,” she adds. 

Playing to her strengths
Being aware of one’s shortcomings is not a trait that comes easy to most people, but for Andani, it’s second nature. That is also one of the reasons why she has stayed away from commodity stocks -— because of the number of variables at play in the space. This is also why metals and aviation stocks don’t find place in her portfolio. “In the case of metals, you have to get the cycle right or you will miss the opportunity. Who would have expected crude to fall from $60-70 levels to $30? Having said that, we did take a look at some aviations stocks but weren’t comfortable about whether the managements were disclosing enough profits; besides, aggressive competition had bled even the strongest players,” explains Andani. In cement space, the fund has bet on Ultratech and mid-cap Ramco Cement. With Ramco, which was hit by a slowdown and overcapacity in the south, the company worked on improving its cost structure, and that worked to its advantage. Despite a slow recovery in the sector, the company has improved its Ebitda per tonne from Rs.300 to Rs.1,200 over the past six quarters. “In a bad market, the cost structure will help us stay competitive and in a good cycle, it will help generate higher profit,” explains Andani. 

Unlike ACC and Ambuja, which have not invested in fresh capacity given the current environment, the country’s largest cement producer Ultratech has increased capacity. “If the cycle turns in future, ACC and Ambuja will do well till they reach full capacity. But that’s not the case with Ultratech. In other words, both the cement companies in my portfolio have advantages that are uniquely inherent,” adds Andani, who holds both the stocks in the Bluechip and mid-cap schemes. 

In the coming years, Andani feels industrials and capital goods will see the first to come off the bottom as they have been the most beaten down stocks. Already in a weak environment, some companies are faring well because of their low-cost structure. However, financials is not something that appears exciting for Andani. “There are still asset quality issues, besides the challenge of raising additional capital. I believe this sector will not be the prime beneficiary of an economic recovery and, hence, I am not overweight financials,” says Andani, who expects the market to compound 15-20% over the next five years. Her reasoning is that the fruits of government’s push in reviving the economy will only be visible after a couple of years.

But for all her optimism and a strong five-year track record, the fund manager sounds modest when she states that in periods of high momentum in the market, her funds tend to underperform. The mid-cap fund, in particular, underperformed during the pre-Modi rally and ended in the fourth quartile, as the fund did not buy into stocks based on hope and expectation. But once the rally fizzled out, the fund was back in the reckoning. “I am willing to be an underperformer based on my investment philosophy rather than being an outperformer without any substance,” smiles Andani.