When Sandip Sabharwal was head of equity at SBI Mutual Fund, he was named the 'Business Standard Equity Fund Manager of the Year 2004-05'.
Today, he is chief investment officer (equity) at J M Mutual Fund. In a chat with mutual fund research organisation Value Research, he spoke about his investing style.
On his stock picking strategy
I am a firm believer in the bottom-up approach to investing. This means I make investment decisions on the basis of evaluating a company on its merits.
Before investing into a company I like to meet the management of the company to get a proper perspective on their capabilities and ability to deliver good returns to its investors.
I also evaluate companies on the basis of various financial ratios and look at growth in sales and profits and trends.
I believe that the bottom-up approach to investing is more efficient than the top-down approach in terms of identifying investment ideas.
Sometimes the analysis starts from a top-down approach. For instance, three years ago when I was in SBI Mutual, we saw that a huge infrastructure boom was likely to happen in India. We then evaluated the companies most likely to benefit -- construction companies.
At that time, construction companies were operating quite unprofessionally. We realised that there was going to be a growth in the earnings of these companies. So we analysed and researched various stocks and picked up IVRCL Construction and Nagarjuna Construction. Both did extremely well.
Similarly, in 2004 we looked at the sugar sector. Oil prices were going up and the sugar cycle indicated that sugar too would be going up. The industry was growing and a number of these companies were setting up plants. So we figured that they would grow rapidly over the next few years. At that time, we picked up Balrampur Chini which gave us a great return.
On how he describes himself as an investor
I am an aggressive growth investor.
When researching stocks, I believe in doing a proper analysis and study and research. Once I am sure that I am going to invest in the stock, I do so with conviction and confidence. You must be willing to put your money behind your bets.
When I make up my mind to buy a stock, I pick it up whether or not other investors are looking at it. Then, I hold onto it with conviction. I am willing to stick to my belief. One also needs to be focused in this field.
But conviction comes from experience, being successful and with time. One also needs to learn from past mistakes after all the market is above everyone.
Why stock picking should be left to the experts
Equity investing is more of an art than a science.
The investor has to have the ability to analyse numbers and ratios. Besides, he must also be able to look at other issues such as management competence, understanding of the business cycle, future business environment, the competitive positioning of the company, the potential of the business in which it operates, if there is and will continue to be a market for its goods or services, etc.
Evaluating a company is not totally scientific. Gut feel and experience play an important role.
Also, the parameters used to pick stocks will vary from business to business.
If I am looking at a commodity stock, I will not lay as much emphasis on management competence and ability to grow the business. I will consider it but give more importance to the cycle of the business. Is there an upturn round the corner? If yes, then is the company in a position to make use of the growth prospects ahead?
If I am looking at a mid-cap stock, subsequent to doing the business analysis, the management capability is the first thing I will focus on. Since the management in mid-cap companies does not have a proven track record, you have to see whether or not they are able to perform and deliver.
On whether or not there are any stocks in the market that can give good returns this year
High returns from the overall market look improbable at this point in time. But in an economy that is growing so rapidly, one can always find a few good stocks that can grow aggressively.
At the start of last year, no one expected such fabulous returns from real estate stocks. So though the overall market went up 40%, most real estate stocks moved up by 500% to 1,000%.
In the last one year, there are a huge number of companies that have gone up by more than 100%. Every year you will have such kind of companies. As long as economic growth is strong, it creates huge opportunities for companies to grow.
Historically, the long-term return from equity is around 18% per annum. I think this year the overall market growth should be less than that. But, the test for fund managers will be to pick up sectors and stocks that will grow by a much higher percentage.
Value Research is a mutual fund research organisation.
