Tarun Birani and Niraj Shah_The Mutual Fund Show | Infrastructure funds | Top investments for a winning strategy| TBNG Capital

Thanks for tuning in to The Mutual fund show. I am Neeraj Shah and as we told you in all the teasers that we did for the show the conversation today is pretty riveting. I think the budget and we did some pieces around this immediately post the budget because the budget seems to be an infra budget. The point is as we pulled out and the question that we are posing to our guest today. The question is: Are infra sectoral mutual funds a good place to invest in or is it another false storm of course he will also be talking about the china plus one strategy and how to play that through mutual funds; but I’m pretty kicked out of the infra-sectorial funds because over the last 10/12/15 years there have been a number of false starts in these. Can this time be different? It’s also important to try and get an additional view on this topic and some other topics as well, something that we do every show and therefore let’s get into Tarun Birani, will talk about his thoughts about this.

Q: Tarun, Good evening and thanks so much for joining in. we were just talking to Mr Sunil Subramanyam for the last 15 minutes I want your brief view on infra before we move on to the topics that we discuss in every show but first a view on infrastructure funds so they have promised a lot in the past and failed to deliver. Do you believe that this time around could be different? Why and why not?

Tarun Birani: A- Good evening Neeraj and thank you for having me here. So I have a very different view I feel investing based on suitability is one of the most important parts, it is not something one can jump in, if it is like a herd mentality moving in the markets. I have observed that the infrastructure sectors in the past have not been a wealth-creating sector and normally when we look at long-term investors, we don’t anybody to tactically keep on moving and moving out, so we did a rolling return research of across 10 year plus infra funds available in the market as well as the category. And to my surprise, there has been almost 26% of the time one should be prepared for negative returns with a 5-year horizon in that study. So, that tells me that why can’t I live without an infra fund and rather my fund manager in either a diversified large-cap or a mid-cap or a multi-cap fund takes a tactical call in the infra front and that would be a better way. I continue to believe there is a strong momentum going on for infrastructure. I was hearing Mr. Subramaniam also, there are a lot of positive things which are happening in the infrastructure sector as we speak in our country and this could definitely lead to a lot of positives but at the same time looking at the track record in the past, it doesn’t give me a lot of confidence and I feel the risk-reward ratio looking at the past historical track record doesn’t look that attractive to me so I would rather play an infrastructure story through a means of a diversified fund rather than a sector-specific infrastructure fund.

Niraj Shah: So viewers, let me try and distil this so that you don’t get confused also. Tarun’s point of view is that because he wants his set of investors to try and make the best possible returns with the minimal possible risks, he is saying, go out for maybe diversified funds or some of the other funds because their analysis over the last 10 years and mentioned the rolling return analysis as well doesn’t quite give the confidence to him to advise his clients to go out and invest into those funds and they are better options available. If you believe in Mr. Sunil Subramanyam’s argument; his argument is that he in his experience and wisdom believes that don’t look at the past returns because tactically as per their calculations the next few years might be great for infrastructure and therefore you are going to time it well. So here are the key viewers, if you believe that you can time these things well and then if you believe in Mr. Subramanyam’s argument and do your own research then you could go out and do it, else one might want to play it safe and play it the way Tarun was talking about. So that’s the long and short of this whole conversation keep in mind the budget gave a lot of emphasis on infra.

Q: So you have to keep that at the back of your mind however something that we do every show now, a point number one talk about one key mutual fund and the category surrounding it of course and the reasons for the mutual funds, of course, will be given by our guest today and then talk about one key recommendation from his end something that he or she is telling his particular set of clients. We’ll get a disclaimer from Tarun about what are the set of plans to which that fund would be suitable as well. But point number one first and Tarun I think you’ve chosen the Kotak Emerging Equity Fund which is apparently one of the best performing mid-cap funds. Can you talk a bit about this fund and if people have this fund what should they do, if they don’t have what should they do? And, then of course if you can also give us a sense of the category?

Tarun Birani: A- Sure, so Neeraj when I look at selection you asked me to select a category and select a fund so while doing that exercise I thought of a category called mid-cap, where I see in terms of valuation compared to a large-cap or a blue-chip category, continues to look more attractive to me and I see the possibility of getting better returns in this available sector. So, in the mid and small-cap strategy, one needs to be very careful in terms of the risk portion, the risk will be comparatively much higher compared to a blue-chip or a large-cap category, but while observing this category what I did as an exercise was I selected all funds with a 10 year plus track record and in that 10-year track record the top 5-6 names which came across I tried doing some analysis on that and my analysis was mainly focused around two factors, one was a quantitative another was a qualitative factor. While doing that quantitative analysis I looked at various factors like trailing returns, I looked at rolling returns, I looked at downside capture ratio while doing all these exercises what I feel right now the momentum is strong and we feel that next 5 to 10 years you could see greater returns coming from this category so I would like to go for a fund which can capture the highest upside in coming years that is what I am looking at again you can see that this Kotak Emerging fund has delivered almost 21% times more between returns between 15 to 20% and it has delivered almost 48 per cent times I think it is written wrong, not 4.86. This is 48.6 per cent times it has given more than 20 per cent return, so that again gives you a lot of confidence the kind of risk you are taking the rewards are also handsome. What I like again was the team which is managing this fund has a good track record for almost a decade and they are managing continually this fund so they have been doing it with a purpose and very smartly, so that is also one positive thing again the diversification since in mid-cap strategy you can go wrong also so you need to be much more diversified compared to let’s say a blue-chip strategy this fund has maintained that diversification and they end up taking almost 40 plus stocks in the portfolio so that is again a positive which I like the risk management of this fund is very good and as we speak currently they are bullish more on the cyclical and the infra oriented themes and almost 45% of the portfolio, so I would like to play the mid-cap strategy with this kind of structure that is my argument. Again the process flowing good, people flow is good, risk management is good and the performance has been good and the upside capture ratio is good and in terms of downside, we looked into last year when the Covid happened mid-cap category was down almost 40% this was down 30%. So again the downside capture is good in this fund yeah.

Q- Those numbers look pretty interesting and therefore thanks for this argument views keep in mind this is while Tarun is recommending the Kotal Emerging fund this is essentially a call on the category and therefore a fund within that category and the fund which is amongst the best now comes the key question about what is that TBNG capital advisors are advising their clients to do and out of the plethora funds that they may be advocating what is that one standout fund at the current point of time why so and what kind of people can apply or can invest in that fund. Tarun is presumed you are recommending the Parag Parik Flexi cap fund. Why this one? And what kind of investors can apply to this?

A: Niraj, we were trying to understand the environment where we are in currently. What kind of strategies can win and in that we reviewed a lot of strategies which are India’s only centric set strategy versus strategies which have the flexibility to go outside India also. So under that strategy, we came across this fund called Parag Parik long-term equity fund and which is renamed as Flexi cap fund. The good part about this strategy is that they have almost 30% of their allocation outside India which I think in the last 3-4 years have captured the imaginations of Indian and that they need to be allocation outside India. There are so many good companies outside India whereas an investor why should I only look at only India. So keeping that in mind we felt a global kind of location adds and brings more benefit and when you look at this funds downside protection we did this analysis for the last five years the downside protection is just 40% compared to the average downside which is at 70 /75 per cent for most of the other funds.

Niraj Shah: Q-What does that mean?

A: this means when the market goes down by 10% it goes down only by 4% so that gives you a lot of protection on the downside at the same time it has an upside capture ratio of almost 75%, a kind of ratio which gain gives you a power that if the market goes up by 10% it will go up by 7.5% plus. Again this fund under its mandate can go all out in India also by talking to that fund house we realize that they only have one scheme in the overall platter they don’t have like 30 or schemes, so that again gives you lot of confidence that focuses much more in this kind of category. Again, they have been very contrarian investors I have seen them taking in 2018 some amount of defensive calls also because they were not comfortable with the valuation at that point of time so they are ready to take contrarian calls also they picked up a stock called ITC when nobody was looking at it at INR 150/160, but at that point of time the dividend yield was attractive, their hospitality business was again most of the pain in that sector was over for them that’s why they looked at that as a value stock and today as we speak that stock is up 50% from that level. Yes, the entire market is up but I like the way they look at capturing the low PE stocks or value stocks in their portfolio so that is another good thing they compare to Maruti in India, in terms of valuation they look like Suzuki. So all these give me a lot of confidence that why as an investor I need to be restricted to only to India. I need to actually look at it as an investment opportunity across the globe right, why should I restrict myself.

Q- And this could give you a combination of both and I think that’s a pertinent point. Well, Tarun we would love to talk more but we are out of time completely on this show but we have captured most of the things you wanted to say any risk factors very quickly in a minute or in the Kotak Fund that you spoke about or in Parag Parik fund, any risks you want to point out?

A- As an equity investment if you don’t have from a suitability point of view if you don’t have a five year plus horizon please don’t look at equity investment. And, you need to be aware that last year equity as a strategy for some point of time has delivered 30 to 40% negative returns. If you don’t have the guts to bear that kind of loss don’t get into equity don’t get into paper loss and paper profit kind of concept plant it like a tree keep watering it then only you can generate long-term wealth creation. Thank You.

Niraj Shah: Okay that’s true for equities in general I would reckon and Tarun recommending that for the two categories that he spoke about as well. Tarun I take a moment to thank you for joining me today and giving your thoughts, really appreciate your time.

Tarun Birani: Thank you Niraj, Thank you so much