Aarati Krishnan
Shanthi Venkataraman

I think people who invest on their own or through mutual funds will eventually graduate to using the services of portfolio managers. I also see the portfolio management business evolving to offer services across asset classes outside of stocks.

MR SAI KRISHNA TAMPI, HEAD OF PORTFOLIO MANAGEMENT BUSINESS, HSBC INVESTMENTS

HSBC Investments, which has a presence in the Indian market through its mutual fund arm, recently flagged off a portfolio management service that manages tailor-made portfolios for wealthy clients. Mr Sai Krishna Tampi, who heads the portfolio management business, says that its USP lies in its focus on under-researched small- and mid-cap stocks. In this interview with Business Line, Mr Tampi shares his views on market-related issues and explains product offerings.

Mutual funds already offer a diverse range of products spanning themes, market caps and sectors. A sophisticated investor can easily construct a good portfolio from these funds. So what's the value-add?

The proposition is a little different. If you want to go from place A to place B do you take a bus or a chauffeured limousine? It's a similar analogy. In a mutual fund, irrespective of the size of your investment, you are part of a pool and there is no individualised portfolio.

For instance, a banking executive may not want to have banking stocks in his portfolio. Somebody who is already heavily invested in real estate may like to avoid realty stocks. We try and accommodate such requirements and customise an individual's portfolio on these lines. In a mutual fund, the fund manager will simply invest in the stocks where he has maximum conviction.

The customisation is why I think the portfolio management business will continue to be a niche. I think people who invest on their own or through mutual funds will eventually graduate to using the services of portfolio managers. I also see the portfolio management business evolving to offer services across asset classes outside of stocks.

Who are your target investors?

Primarily high net worth individuals. We basically target people who are wealthy and don't have time to do direct investing on their own. If you look at the profile of our clients, we basically get two kinds — businessmen/SMEs whose owners are increasingly getting wealthier and senior executives in corporates. Salaries in Indian companies are increasingly becoming world-class and people have large disposable incomes. Such executives seldom have the time to manage their portfolio on an active basis given the demands of their jobs.

Give us an overview of your business and products.

The portfolio management service was launched recently. As of now, its small — we manage Rs 100 crore for 50-odd clients.

Since investment decision-making has to be completely segregated between the mutual fund and the portfolio management service, we have an independent fund manager, research analyst and dealer. However, we are allowed access to the research, company meetings of the mutual fund and we do make use of that.

We offer three basic products to our clients — the Signature portfolio, the Strategic portfolio and the 85 per cent Capital Protection portfolio (which is open until December 26). The Signature portfolio invests in 20-25 companies with a growth bias while the Strategic portfolio uses a value investing style.

The capital protected product offers 85 per cent protection and uses asset allocation between debt and equity to provide capital protection. We've got a good response for the capital protected product. Unlike others in the market, our product is open ended and investors can exit at any time of their choice.

How does the capital protection product work?

The fund will invest in a combination of a risk-free asset and equities, with the equity portion mirroring the Nifty. The objective is to maintain the portfolio value at or above the stated protection level of 85 per cent.

For instance, if we start with a portfolio value of Rs 100, we set Rs 85 as the "floor" which the portfolio value can hit; based on this floor, we allocate money to the risky asset — in this case Rs 15.

We have the flexibility to rebalance between debt and equity on a daily basis to protect the floor value. But we do not plan to use a purely formulaic approach, where you merely run the numbers on an excel sheet and rebalance automatically. We felt that this may lead to "buys" and "sells" everyday, translating into high churn and transaction costs. Therefore, we plan to take an active approach which allows us some discretion in our rebalancing.

We have done a lot of modelling on the behaviour of the equity markets over the past few years and that's given us certain insights that we will put to use. For instance, we found that downside volatility in the Indian context is much higher than upside volatility.

These insights will help us take an active management call in the equity allocation, with cash also being used as a tool. We also talk regularly to Synopia (HSBC's Hong Kong-based arm which specialises in quantitative analysis) for sharing views on Indian market valuations, volatility and so on, which will be used in the active equity allocations.

We see the open ended nature of our product to be a huge positive. Most capital protection products are close ended — you are locked in for the entire term. When the market drops, you may be left holding what is a pure debt fund.

Since our product is open ended without an exit load, if the market drops, an investor who does not want to remain invested in a debt product has the option to redeem his units. Our product has a self-correction mechanism, whereby the protection value is reset at the end of each year.

What distinguishes your investment style from other portfolio managers?

We are bottom-up driven and we focus on under-researched stocks. Before we invest in a stock, we meet the management, do a detailed DCF (Discounted Cash Flow) valuation and we only invest in companies that are trading at a price that offers sufficient margin of safety. We don't go purely by trading multiples or momentum, as many others do.

From a macro perspective, we do look at business cycles. But a lot of our ideas are in the small- or mid-cap space and we believe that these are companies that have the potential to give exponential returns that are not necessarily correlated to the economic cycle.

The economic cycle is much more important in large-cap companies. A high proportion of the stocks in our portfolio are from the mid/small-cap segment and here we feel company analysis plays a much bigger role than the broad economic cycle.

Mid-cap stocks are now trading at a significant valuation discount to large-caps. What's your view on them?

We think there is value in mid-cap stocks. We, in fact, brought out a note, `Value in mid-caps', in August when people were mostly running away from mid-caps. There, we spoke about the valuation gap and explained that mid-cap stocks had taken a severe beating, throwing up several investment opportunities in that space.

Since then, month on month, our mid-cap picks have outperformed the market. Our conviction has borne fruit, with our portfolios significantly beating the index. We continue to think that mid-caps are undervalued. However, individual stock ideas are usually what we go after and we do not like to give a view on the index.

In terms of sectors, we continue to be driven by the growth in the Indian economy, hence, we like sectors which are led by themes such as consumption and infrastructure, apart from IT.

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