SBI Mutual Fund bagged Morningstar Fund Awards 2020 in four categories – Best Fund House (Debt, Equity, Overall). SBI Magnum Income Fund also won the Best Medium to Long Duration Fund category award. Navneet Munot, chief investment officer at SBI Mutual Fund talks about what helped the fund house deliver an exceptional track record at a time when market is so polarised. He also shares his views about what measures the government can take to bring the economy back on track, ESG investing and more.
Congratulations on winning Morningstar Fund Awards. What worked in your favour?
While asset managers always talk about people, process, philosophy and products I would say that we work with a deep sense of purpose which is the most important factor which has helped us earn this recognition.
We are deeply driven by a purpose to create wealth for investors. We have been able to build and retain a team of very talented people. The culture at SBI MF is non-hierarchical. The environment is stimulating. We are high on ethical values. We have probably the highest number of CFA charter holders in our investment team.
There are four critical things for delivering performance which determines the success of an asset management company:
- True to label funds: We have extremely well-defined investment philosophy and mandate for each of our funds. Thus, we were one of the least impacted fund houses during the recategorization process. So maintaining product sanctity has helped us in good stead.
- Robust Research: Research is our backbone and a key differentiator. We are an analyst-first organisation. Our team in equity, credit, quantitative, macro, ESG all work as one team and report to the head of research. There is tremendous focus on channel checks, alternative research, forensic analysis, etc. We have a strategy called SBI Multi Cap Fund which is managed by the analyst team and not a single fund manager.
- Portfolio Construction: The buck stops at the portfolio manager to deliver performance. While boundaries are set as per internal templates, fund managers have to do the allocation. We constantly look at portfolio attribution and various other tools to ensure that our portfolio construction is in line with the fund philosophy and template.
- Governance and Monitoring: While the team has complete freedom in managing the portfolio within defined mandates, it is important to have vigorous governance and monitoring process. At SBI, the CIO is not managing any fund. The CIO focuses on governance, strategy, monitoring and building a strong culture. Our business is about risk management. It is not an after the fact activity. It is deeply ingrained in everything we do.
With the kind of polarisation we have seen in the equity markets over the last few years, how do you stick to your investment process in such times?
The polarisation has been extraordinary to say the least. Polarisation was not just restricted to large cap, mid cap or small cap stocks alone. It was basically a much higher premium for quality stocks. In a growth environment, a large number of governance issues also came to the fore. Markets exceptionally rewarded companies with higher growth, stability and which were perceived better on governance. By and large, we have quality and growth bias as a house which actually helped. Since last year, we started building positions in cyclical. We played it through companies which have higher operating leverage rather than financial leverage. The focus on quality and bottom up research has helped in this polarisation.
How are you recalibrating your investment strategy given that an increasing number of businesses are getting disrupted from technology? In the listed space, which kind of companies are at the risk of getting disrupted and what are they doing to reinvent themselves?
It is not only about technology disruption. Disruption is caused by multiple factors. For instance, there is disruption in consumer behaviour, structural changes in logistics and also in the way of doing business. Ease of doing business also leads to disruption for a lot of businesses which are being run in a different manner. The pace of change is increasing in all spheres of life.
We look for management that is nimble, agile and focused on these changes. They must be willing to learn and unlearn. They need to disrupt others rather than get disrupted. Both in equity and credit, it is essential to ask this question of how the business will cope with evolving changes. It is the role of management to visualise these changes, adapt and constantly reinvent themselves rather than rest on your laurels. Since we have a long-term orientation in stock buying, we spend a lot of time looking at the structural changes. The process, competitive advantage, moat, are regularly discussed in our stock idea meetings.
You wrote that the corona virus could be a blessing in disguise for India. Could you elaborate on this?
Even before the COVID 19 outbreak, there was trade war issue with China. There are reasons for the world to reduce its overreliance on China. Also, over a period of time, the demographic advantage is in China is deteriorating. All the supply chains will have to readjust. Of course, India is not the only choice for the world. There is Vietnam, Malaysia, Taiwan, Thailand, Bangladesh, among others. I think India has certain advantages. We are a large domestic market, we have good demographic advantage, we have continuous supply of cheap labour for a long time. If India gets its act together in putting strong institutional framework in infrastructure and education, we will be in a position to take advantage of the supply chain. Falling oil prices has also come as a blessing in disguise because of this crisis, along with the cheaper liquidity available globally.
You stated that monetary policy has its limitations. What kind of fiscal measures are needed to provide a boost to the Indian and global economy at this juncture?
Globally, over the last decade, central banks have experimented with extraordinary monetary accommodation. After 2008 crisis, we have only increased financial leverage in the last eleven years. A large part of it has been supported by central banks. Our view even before this pandemic was that 2020 would be a tipping point where focus will shift from monetary policy to fiscal policy. As a reaction to COVID19, central banks have cut rates, they are capping yields, the U.S Federal Reserve is buying corporate bonds, supporting money market funds, and so forth. Most central banks are doing the same.
This year will be the tipping point where fiscal policy will play a bigger role. First and foremost, we have to tackle the health crisis. Then there has to be a substantial investment in building the healthcare sector. Secondly, we have to support the industry, businesses and people impact by the pandemic. Thirdly, we have to create a new social, physical and social infrastructure to create jobs, improve productivity on a structural basis which will provide sustainable growth to the world. The cost of building that infrastructure is zero because rates are at zero. The time could not have been more opportune, both in terms of the need of infrastructure and other challenges. This will be good for the world in the long run.
We have seen a spate of credit events in the Indian markets over the last 18-20 months, how are you navigating this space?
While we take a top down view on duration, credit research is pure bottom up. We have a large in-house credit team that reports to the head of research. We have internal templates at a granular level in terms of exposure to credit rating, sectors and security level concentration. While we look at external credit ratings we rely purely on internal research. We have also set limits on each credit at a fund house level to ensure that the exposure does not grow in line with the AUM growth. We do a detailed analysis of financials and the management. While people focus a lot on asset side, it is important to focus on liability side too. We have been very particular in ensuring that liability side is not concentrated. We have strict limits in our credit risk, medium opportunities fund, where we take slightly lower rated credit in terms of individual exposures.
ESG investing is picking pace globally, you have also spoken about integrating ESG in your AMC investment processes. How do you do it? Do you think it will be equally embraced in India?
We have been focusing on ESG for a long time now. It is part of our fiduciary duty of risk management. For alpha creation, it is important to integrate ESG into our investment process. We started with governance aspect. We started participating in voting in investee companies much earlier. We appointed an external proxy adviser. We then moved on to consider environment and governance factors. There is a checklist to look at all the ESG factors. Every analyst has to look at the ESG checklist while introducing any new company.
We launched an ESG strategy in our PMS which is very strict on ESG and socially responsible investing (SRI). We have integrated ESG in our entire investment process. In fact, we were the first fund house in India to accept CFA Institute Asset Manager Code of Conduct. We are signatory to The United Nations-supported Principles for Responsible Investment (UNPRI). We are member of Climate Action 100+. Currently, the bigger focus has been on engaging with our investee companies. We have dedicated people who are focusing on analysing governance aspect.
It is only a matter of time when ESG will be widespread in India. If you look at the situation in India over the last few years, markets have been underestimating the ESG risk. People can avoid ESG risk at their own peril.