Having decided to start a new profile series on key mutual fund personalities in this magazine from 2018, I first thought of 'Chai Pe Charcha' as the new column name. But my debut conversation with Soumendra Nath Lahiri, the Chief Investment Officer of L&T Mutual Fund made me discard that idea. The 45 minute long telecon with the quick witted, reticent and yet disarmingly honest fund manager was nothing like a leisurely gossip session over chai. It reminded me more of a rapid fire round in BBC's Hardtalk. If Soumendra's passion for stock picking came through clearly in his responses, so did his impatience with questions that he deemed open-ended or vague.
Pure value doesn't work
It is Soumendra who set the ball rolling. Having run his eyes through the questions I had sent across, he remarked, 'You have cast L&T Mutual Fund as a value oriented fund house. I don't agree with you. While selecting stocks, we try and buy growth at a reasonable valuation. Moreover, we look for stocks where growth is better than that of the market and the peer group.' He then explains why he isn't a fan of pure value investing. 'Let me put it this way. We like to buy growth stocks when there is still some value in them. In India, there can be so many value traps in stock selection. You can buy into a lot of companies thinking there is value but the 'value' never shows up. Therefore, we would typically look for a catalyst for that value to be unlocked. It can simply be a pick up in earnings growth or an event like a demerger or a spin-off. It is the trigger that leads to stock price appreciation. The principle of buying one dollar at 70 cents rarely works in India.'
He adds that pigeonholing stocks into growth or value styles doesn't work. 'It's a question really of whether the risk-reward ratio is in one's favour or not. We bought a couple of stocks in the cement sector at one-fifth of their current valuation. But is it a good idea to sell them just because valuations have run up? No, the call depends on how we see business prospects today. Rather than chasing the same stock, we look for opportunities at every level of the market. This is probably why our funds own a large variety of stocks in their portfolios.'
Catching them young
Yes, L&T does hold a large number of stocks in its fund portfolios. But given that focused funds are in vogue now and SEBI has even created a category around it, will L&T Mutual Fund think of launching a concentrated fund?
'Holding more stocks in the portfolio helps in risk containment, especially in small and mid-cap stocks. But as to the future, yes, we would like to offer the whole suite of products. As a fund house, we strive not to be a one trick pony and we give all our funds equal attention in terms of performance.' That's true. Many of the L&T funds have been consistent top quartile performers and the AUMs of as many as nine of the 12 equity funds are above Rs 1,000 crore, and two funds have AUMs above Rs 5,000 crore.
I come to the question I've been asking many fund managers lately. In the last year or so, we have seen a rebound in beaten down cyclical sectors such as PSU banks, metals and realty. Did they spot the reversal and catch these stocks early?
'In some cases, yes. In metals, we spotted the reversal quite early. In realty, we were among the earliest fund houses to spot the opportunity. We bought into the sector post demonetisation owing to reforms, particularly, RERA. As a fund house, we are underweight PSU banks and find private sector banks more attractive.'
I ask about the governance issues with real estate firms. 'See, it is not just real estate stocks that have governance issues and you can't paint them all with the same brush. There could be many stocks in the market with governance issues. However, our focus is high quality businesses run by good management and at reasonable valuations. Apart from governance, good capital allocation is another key factor we look at.'
There is a belief that commodity and cyclical stocks cannot be real wealth creators over the long run. Does he agree?
That gets a categorical reply. 'Not at all. We are sector agnostic. Every sector is attractive at a certain point in time at a certain valuation. You should just know when to enter the sector and when to exit. A lot of people today believe that consumption stocks do well, but how many people have held some of these for the last 20 to 30 years? In my belief, there are only a handful of people in India who are true investors. Given that we run open-ended funds, flows can be uncertain and hence it is difficult to hold stocks for a long period of time.'
Secret sauce
'I would like to know what your USP is. I do see that L&T funds have differentiated portfolios. What's your secret sauce?' I ask. Soumendra isn't willing to give in that easily, 'Why should I give you my secret sauce? After all, it is proprietary.' I persist, 'You need not give me the recipe to the sauce, but can I know how you pick tomatoes?' I joke. Thankfully, he laughs and thaws to give me a very insightful answer. 'Every month, we run a screener, ranking all the companies in the listed universe by market cap and then by profits. This method has helped us identify some very good ideas in terms of mismatches between the market opportunity and the size of the largest player in a sector. As fund managers, we try to understand a business deeply, evaluate its prospects and ascribe a value to it. We are very passionate about what we do,' he ends on a serious note.
His money
I reluctantly abandon the fund questions and get to his own money. What is Soumendra's own asset allocation?
'If you put a value to my portfolio, more than 60 per cent is in equities. I do not invest in real estate as an asset class. Once I invest in a stock or a fund I don't sell it, unless I need the money. In recent years, over 90 per cent of my equity investments have been going into mutual funds only.'
What about the fixed income part? 'I am not a fixed income investor per se. My daughter's education is a financial goal I am saving towards and that's why I have invested in a combination of debt funds and tax-free bonds,' he explains.
Selling's tough
So, what are the mistakes Soumendra has made over his equity career?
'You can write a book on the mistakes I have made,' he says. 'Personally, I find deciding on my sells quite difficult. You do read about 'stick to your winners' and 'accept your mistakes and cut losses'. But the wiring of the human brain is such that you often do the reverse of this. In many cases, I have booked profits way ahead of time instead of simply holding the stock and letting compounding do its job.'
So, it is possible to learn from mistakes or are we destined to repeat them?
Soumendra says that he has changed a lot as an investor. 'I now do a lot more analysis before booking profits. There are a lot of stocks in our fund portfolios which we have been holding for long. Unfortunately, there are very few investors in India who hold onto their stocks for very long periods and therefore reap the multi-bagger returns you hear about!'
Given his obvious passion for poring over companies, does he get any time for hobbies? He reads quite a bit and cites Howard Marks and Seth Klarman as his gurus. What about sports? While Soumendra says, although he isn't a fitness fanatic, he loves watching sports. 'I am a basketball fan, particularly NBA. When I have the time, I travel to watch my favourite team in action.'
After extracting a promise from him to meet up at Chennai, I close the interview with some relief. This is one interview where I've got a good taste of how it is to be the interviewee. But investors can rest assured that their L&T funds are in safe hands with a fund manager who drills down to the last details and doesn't take his eyes off the ball.