HOME > MUTUAL FUND > EXPERT VIEWS
  EXPERT VIEWS
MUTUAL FUND NEWS
Investors should look at Banking as long term investment: Sanjay Parekh
Mon, May 05, 2014
Source : Jeni Shukla, Citrus Interactive

Sanjay Parekh, senior Fund Manager at Reliance Capital Asset Management Ltd. has more than 20 years of experience in capital market. He has previously worked as Head – Private Wealth Group at Prabhudas Liladhar, Head – Investments at ASK Investment Managers and Senior Fund Manager at ICICI Prudential AMC. Currently he manages funds like Reliance Banking, Reliance Monthly Income Plan and Reliance Regular Savings – Balanced Plan.
In an interview with Jeni Shukla he shares his views on the Reliance Banking Fund which has been a consistent performer in its segment.

What is the investment philosophy and fund management style/approach of the Reliance Banking Fund?

In terms of investment philosophy, the style is GARP (Growth at Reasonable Price) across my funds. Like other funds the idea is to buy a great business with good management at the right valuation. The added feature in the Banking fund is that we have an internal framework which takes into consideration certain economic parameters. We certainly have to have a top-down as well as bottom-up view. Parameters like GDP growth rate, IIP growth, inflation, currency, fiscal deficit and interest rates are used in our proprietary model. We arrive at a pre-determined valuation based on ROA and ROE and growth and its sustainability. We take a bottom-up view on the stocks as well as the Bank index (based on our frame work). This framework is the added layer in this fund.

 

The fund has been among the top 3 consistently in its category if you look at the last 5 calendar year returns and the 1,3 and 5 year returns as on 15th April 2014. What has led to its consistent out-performance?

There are two important aspects for alpha generation. Within banking there are 6 segments like old private banks, new private banks, public banks, housing finance companies, NBFCs and Insurance. It is very important to know in which segment your portfolio needs to tilt and by how much. So the first alpha you get is by selecting which segment you want to be overweight on. The second piece of alpha generation is stock selection.  Our strength has been stock selection and our stock selection has been differentiated. Even if you get the choice of segment right but if you don’t select the proper stocks you may not be generate adequate alpha. Thirdly, you also need to have a view on where you see the banking sector. If you notice the banking index is a lot more volatile than the headline indices. You need to know the right valuations at which you need to be more aggressive and at some points you need to be cautious as the sector has high volatility. We invested in some stocks outside the benchmark. Stocks like Bajaj Finance, Repco Finance and J&K Bank has helped us achieve the desired alpha in the past.

The fund also has the least expense ratio in its category. Would you like to comment on that?

The expense ratio is based on the SEBI regulations and we would endeavor to maintain the same at current levels

The category median exposure to private banks is 70 per cent currently whereas Reliance Banking Fund has an exposure of 59%. Also the exposure to housing finance companies is much higher than most peers. Why?

We wanted higher diversification in our fund. The benchmark has a significant tilt to private banks. We thought that we do not want to concentrate on one segment to the extent of 70%. So we added housing finance companies, NBFC, Old Private Banks which helps us diversify the portfolio and yet give us good risk adjusted returns.


What is your view on the banking sector from the next 1, 3 and 5 years’ perspective?

It is tough to take a one-year view. The market is volatile and we have seen Banking sector appreciating over 25% in the last 3 months. However, we are very positive from a 3 to 5 years perspective.

Should investors look at this fund as a tactical exposure or a long term investment?

Investors need to look at this sector as a long term investment and not as a tactical allocation. We have generated more than 11 times return in 11 years (25% CAGR since inception) – which is good return for a long term investor. In banking, the volatility in the short term is extremely high while it is low in the long term.

How much of churning can one expect in the portfolio?

We invest with a medium to long term investment horizon and will attempt to maintain a lower churn ratio. While we actively track the companies & sub segments of the sector we do not intend to churn the portfolio frequently.

Does the fund have a market cap mandate?

The fund will maintain optimal allocation to large caps and mid caps companies. Currently 64% allocation has been to large caps (greater than Rs. 10k crore); 48% to ultra large caps (more than 20,000 crore). 50% of the portfolio is aligned to benchmark. 18% in PSU banks; 16% in old private banks; 42% in new private banks; 10% in NBFCs and 12% in housing finance companies.

What is your view on rising NPAs in the banking sector?

The rising NPAs in PSU banks are surely a cause of concern.  PSU bank asset quality problem may remain for the next 1 or 2 quarters before it peaks off and then starts reducing. A lot would depend on the investment climate, timely execution of projects and continuation of reform process. We will be tactical in PSU Banks, and weigh the risk return balance on asset quality front and attractiveness of valuations.

 

 
 
|
|
|
|
|
|
|
 
blog comments powered by Disqus
  RELATED NEWS >>
September 17th , 2018
India’s long term growth story is intact: Harshad B
read >>
April 24th , 2018
Earnings pick up likely in infra, consumption, auto
read >>
December 20th , 2017
Equity Market Outlook – Mr. Anand Radhakrishnan
read >>
April 06th , 2017
Interest rate cut cycle is over: Suyash Choudhary
read >>
Most Viewed >>
May 06 , 2024
FPIs exercise caution amid US yield surge, awa
May 07 , 2024
Six-week long election leaves RBI with liquidi
May 08 , 2024
Sebi rejects NSE proposal to extend trading ho
May 08 , 2024
Heavyweights pull down Nifty for third day; Se
EXPLORE
© CITRUS INTERACTIVE
Designed & Developed Accord Fintech Pvt. Ltd.