This is the next post in the ‘Let’s talk investing‘ series. In this series, I write about my conversations with investment practitioners, people with real-world investment decision-making experience. My objective in these conversations is to understand their investment philosophy and process, to demystify, at least to some extent, what they do, and to walk away with some thought-starters to help all of us become better investors.
Note: These conversations do not offer advice on specific stocks or investment products
In one of his customary brilliant posts, Morgan Housel writes
“Your personal experiences make up maybe 0.00000001% of what’s happened in the world but maybe 80% of how you think the world works”
Replace “the world” with “investing” and the statement is even more relevant. Today, I spoke to Shravan Sreenivasula, until recently a fund manager with Aditya Birla Sun Life Mutual Fund. Among other things, Shravan helped throw some light on an asset class that tends to be a four-letter word for most investors, DEBT. He makes a case for fixed income to be part of the asset allocation of the retail investor. He also speaks of how fund managers spend their day, and of his transition to the broader role of Wealth Manager. Read on for some great insights.
Anoop: Hi Shravan, Thanks for taking the time today. Can you start by talking a little bit about your background and the path you’ve taken up to this point in your life?
Shravan: Thanks Anoop for the opportunity. Let me start by saying that I am an avid follower of your blogs and have learned a lot from your pieces. The main reason for me to do this interview is to help inspire or positively influence your readers in investing and creating wealth. I do professionally what they personally and hence they can relate better.
Coming to my background. I was and am always in pursuit of answers as to how the world around me works. I started as a programmer at an IT major and self-taught Accounting during a project to understand the system that was built decades back. This was under the mentorship of my senior colleague who suggested that I should pursue management studies. That was when I pursued my graduation from the Indian School of Business hoping to gain an ability to find more answers.
I was very clear that numbers excite me and a career in finance could quench my thirst for professional satisfaction. Since I was investing in markets, investments as a career choice appealed to me.
However, as it turned out, the route I had to take was non-linear. It was interspersed with a year of consulting, a year of financial media and then money management – which now has been for a decade.
Luckily, I had people who believed in me & my passion and they gave me an opportunity to learn and perform.
Anoop: You have been a career investment professional. What about finance and investing drew you to it?
Shravan: I was a major beneficiary of the 2003-08 bull market. Hence the natural bias was towards a career in money management. As I read about investing and tracked companies, I really enjoyed the journey. It was the work, the context of the bull markets and positive outcome of making money that lead me to investments. Since, neither I nor my family had any history in investing, missing of any one of the ingredients would have resulted in a different outcome. The role which came by was also different.
Unlike traditional fund managers, I got a break into a fund house that used to do only third-party fund of funds and mandates. Since it involved interacting with other experienced fund managers, my philosophy of investment got refined.
Anoop: Coming to your recent role as fund manager at Aditya Birla Sun Life Mutual Fund, what does a day/week/month in the life look like?
Shravan: The work of a fund manager entails reading, discussing, meeting, communicating and executing. This is in a decreasing order of timeshare. There is so much of information flow on a daily basis, both at the micro and the macro level, understanding of how it affects the portfolio companies is important. That’s where reading plays a major role and takes a major timeshare.
The fund manager is supported by an able team of co-fund managers and analysts. These apart from sell-side analysts from a good coterie of people to discuss ideas and developments. We keep meeting companies’ managements, their channel partners, industry experts and policymakers to be abreast of anything that affects stocks.
Fund management is all about judgment. Doing the above two provides a strong basis of judging what to buy or sell and how much to buy or sell. This is what leads to execution – converting investment thesis into portfolio holding.
Finally, the fund manager is an ambassador of his or her fund.
There is a perennial demand from distributors, advisors, and investors to interact with the fund manager. Communicating, training and hand holding the investors about the fund also form an integral part of the work.
There is no defined day or week for any of the above activities with the exception of communication which is usually after market hours. The job of a fund manager is practically 24*7 – reading, thinking, exploring and understanding new ideas and themes.
Anoop: Say mutual funds, and most investors invariably think about equity. Why is debt relatively less well-known in India compared to other markets?
Shravan: Yes! You are correct that the mutual funds are primarily associated with equity – which is changing over the last few years. This is because the fixed income needs were being met by banks through fixed deposits providing handsome nominal interest rates. Hence, the discussion about mutual funds was all equity.
Even today the term deposits in banks are eight times greater in size than that of the debt funds (over Rupees 100 lakh crores vs. 13 lakh crores).
Due to awareness of tax benefit, innovation by mutual funds to offer low volatility debt products and lower rates offered by banks, more money is entering the fixed income space and less volatile equity-oriented funds.
Let me touch upon the importance of debt allocation in investors portfolio. According to me, the benefit is immense. You might have advisors suggesting the formula of debt allocation = age (x) and equity allocation is 100-x. A 30-year-old can use the formula of investing 70% in equity and 30% in debt. The rationale is to decrease the volatility of portfolio with this mix. Also, whenever the portfolio is reviewed it gives a chance to rebalance between asset classes – those that have performed will be sold from the portfolio and vice versa (those that have not performed, more money is given to them). Investor has needs of entry and exit in different proportions from the portfolio. This mix helps to invest at any point in time and withdraw at any point in time. There is no need to worry about how the market is, will rise, will it fall etc. Debt as an asset class reduces volatility and helps good portfolio management.
Anoop: What does investing in a debt mutual fund mean? How does the risk-return profile differ from other asset classes? How can the retail investor learn more about allocating to debt?
Shravan: The beauty of mutual funds is that there are products that are suitable for one day, one week, one month, one year, one decade and multi-decade.
The investor has to know his time horizon and invest in those categories of funds that match their time horizon (which has become easier after re-categorization exercise by SEBI).
If someone wants to invest only for a few days, liquid & ultra short-term funds are suitable. If someone is looking for parking for a few months, ultra short-term and short-term funds are suitable. For a longer period, income and dynamic funds make sense. There are accrual funds (both high quality and high yield funds) for getting a little higher returns. The expectation should be that the returns should beat inflation.
The proof of the pudding is in the eating.
The very fact that the investor does not pay income tax until he or she redeems from the fund unlike in fixed deposit where the tax is paid on accrual means a lot of benefit for investors. Every July, it’s always fun to show off tax return filings to fixed deposit investor as to how we deferred and lowered taxes (if investment is greater than three years).
Also, the investor has to define an explicit period of fixed deposit period and has to reinvest incase it matures (in which case the interest rate could be lower for lower tenors). Whereas in a mutual fund, you keep it until you want it. The introduction of instant redemption facility provides liquidity for investors in few minutes. So, the benefits are many.
There are a lot of campaigns that mutual funds have launched to create awareness. Investors may go through the videos and literature on mutual fund websites. Just ask your advisor/distributor or attend any investor education programs happening in your area. Simple googling also results in plenty of information. As mutual fund investing has become easy, experience could be the best teacher.
Anoop: How should a retail investor think about allocation to debt? How does it differ from a 30-year-old to a 45-year-old to a 60-year-old?
We have discussed the allocation of debt in investors portfolio based on age (x to debt and 100-x to equity) or any other formula. I do not want to complicate here with that of HNI portfolios which may a different allocation methodology based on needs and personal choices.
For any age, goals take precedence. A 30-year-old may be planning to buy a car in 6 months. She may want to buy a house in five years. A 45-year-old may have to buy a house in three years and fund children’s education in five years. A retiree may need regular income.
Upto a six months to a year period, investment has to be in liquid and ultra short term funds (or arbitrage funds) so that principal is not at risk. For a 1-3 year period, choice can be short-term funds. For greater than three years, the choice can be income and dynamic funds.
Buying tax-free and corporate bonds after analyzing coupon schedule can provide regular income for a retiree. A systematic withdrawal plan from the invested fund, at a pre-defined rate every month, could also be an option. Hence, as normal investing, debt investing is also an art balancing investment with needs.
Anoop: You are making the transition from fund manager to wealth manager. What does this mean in terms of your key responsibilities? How do they differ?
Shravan: The entire wealth management space is at an inflection point. Particularly in the affluent category, there will many new multi-millionaires created as economy grows from USD 2.9 trillion this fiscal year to USD 4 trillion in next four years. The needs and aspirations of this segment would be very different from an average investor. I am trying to port the knowhow learned over the past decade onto this segment of investors. There will be a wider product basket to deal with. Money management aspect remains the same along with the principles of investing – it’s just that the platform varies. That’s what the thesis is. We shall know in due course of time.
Anoop: Do you invest in your personal capacity? If yes, what is your investment philosophy?
Investment philosophy for both the fund and personal investments remains the same. It is choosing the best for the best. We try to predict the segment that could do well and allocate an overweight position to it. Different fund houses and fund managers are good at different things. As we study who does what the best. At an appropriate time, the money is allocated to them. Discipline is the key to investing – be it asset allocation, fund manager allocation, identifying the segment, monitoring performance.
For instance, If I have identified that mid-caps could do well over the next year or two, I would invest in the best or second best fund manager (based on my criteria) and monitor it regularly.
Anoop: A slightly uncomfortable question, without getting into specifics, what would you attribute your biggest investing mistakes to?
We are in the business where VUCA – Volatility, Uncertainty, Complexity, and Ambiguity are all present (sometimes in abundance). The idea is to fulfill the fiduciary responsibility by taking prudent calls with the information and insights available. There are some missteps that happen but the idea is not to repeat the same in future.
The biggest learning from a misstep was to constantly monitor for breach of a strict stop loss. In 2013, the first quarter was bad for markets. I held more midcap allocation than what was warranted. As the correction happened, I was hoping for a recovery when in fact I should have cut when stop loss was hit. I never repeated so far and never will.
Anoop: Who are the top investors that have influenced your investment-thinking the most? In what way have they influenced you?
There are particularly two fund managers that have influenced me a lot. One is Mahesh Patil, CIO of Aditya Birla Sunlife Mutual Fund with whom I have worked closely for about four years and have invested for over twelve years. His understanding of mispricing of stocks and his adherence to defined risk buckets is worth learning. We call him the “Rahul Dravid” of mutual fund industry for his discipline and consistency of performance.
The second one is Kenneth Andrade, founder of Old Bridge Capital. His understanding of business cycles and patience to wait for opportune time to invest has been my biggest takeaway. He holds until the story pans out. He has done this consistently again & again and is aptly monikered the “Mid-cap Moghul”
Anoop: Lastly, what is the most counter-intuitive piece of advice you would give an investor looking to learn about investing in Indian markets?
Shravan: One thing I started doing and hope others will benefit is tracking funds/company performances using colors – red for the ones that have done well and green for the ones that are underperforming. Mentally, we shun the companies that have underperformed but the color green helps us to pause for a moment to evaluate if the opportunity provides value. The investment could be profitable if it is uncomfortable to invest.
Anoop: This has been great Shravan. Thanks for taking the time and wish you the very best with the next phase of your career.
Shravan: Thanks Anoop for the opportunity. Keep writing and keep inspiring!
Shravan tweets @sshravankumar
The ‘Let’s talk Investing’ series:
Raunak Onkar – Head Research at PPFAS Mutual Fund
Gautam Chhugani – Senior Analyst at Alliance Bernstein