Passion and discipline. For Mirae Asset Global Investment’s Neelesh Surana, these two words encapsulate the opposing forces that every successful fund manager must learn to master.
With more than 20 years of equity research and portfolio management experience behind him, Citywire AAA-rated Surana has had plenty of time to reflect on what separates star performers in the industry from the also-rans.
‘To perform in any profession, you need a passion for whatever the task is. Investing is no different.’ Surana says. ‘I would say that given the challenges in money management, passion is one of the most important attributes.’
The other half of the equation, the Mumbai-based investor says, is discipline. Surana earned a degree in engineering from the Regional Engineering College in Bhopal, India, and this taught him the importance of scrutinising the smallest details.
He credits Phil Fisher’s Common Stocks and Uncommon Profits with showing him how discipline also underpins successful investment. The book focuses on the basics of investment, such as conducting lots of ground-level work, not only looking at numbers but also trying to understand a company’s competitors.
Having been bitten by the investment bug, he enrolled in an MBA programme in finance at the Institute of Management Studies in Indore, India.
The performance of Surana’s Mirae Asset India Opportunities - Retail - Growth fund stands testament to the power of passion alloyed with strict investment discipline. The fund has returned 73.6% in Indian rupee terms against the benchmark S&P BSE 200 TR’s 45.5% over the three years to the end of December 2015. Since August 2014 Surana has been assisted on the fund by fellow manager Sumit Agrawal. Surana also runs the Mirae Asset Emerging Blueship Fund - Growth strategy, which was launched in September 2010.
Over the past few decades the Indian market has experienced a huge divergence, Surana says, both across different sectors and in the stocks within those sectors.
‘Because of the divergence among stocks, the market indices are not correctly reflecting the internals,’ he says.
This has highlighted the benefit of his bottom-up investment approach, which has helped identify the right stocks within the right sectors.
‘For example, if you look at the financial sector [banks accounted for 25.6% of his India Opportunities fund as of November 2015], we have seen a huge divergence of stocks, wherein the retail-oriented private sector banks have done significantly better than corporate oriented banks, particularly those that are state-owned.
‘Even if you are neutral on a sector basis, an overweight in private, high-quality retail banks would have helped you in terms of portfolio outperformance.’
Surana’s banking stocks include HDFC Bank (7.3% of the portfolio), ICICI Bank (5.8%), Indusind Bank (3.6%) and State Bank of India (3.6%).
Pharmaceuticals have also provided rich pickings for Surana. ‘We have held an overweight position in the country’s pharmaceutical sector (8.7%) for the past seven years, and we remain positive. The sector offers growth opportunities both in domestic and global markets.
Domestic healthcare provides about $15 billion of revenues, and it’s growing at double digit rates.
‘While the domestic market has secular growth potential, most of the Indian companies have proved they have the capability to address the large US generics market. Also, they have been moving up the value chain in complex and speciality products.’
The pharmaceutical sector has been a consistent source of alpha for Surana. One current bet is Sun Pharmaceuticals Industries, with a 3.1% weighting within the portfolio.
In addition to the healthcare and financials sectors, Surana is also positive on both consumer discretionary and staples.
‘The penetration level of many products within the consumption space in India is significantly lower than in most other large economies. Therefore, it is worth investing in some high-quality companies in this sector,’ Surana says. He highlights media stocks as a sub-sector with huge growth potential, as penetration levels are very low.
Domestic consumption is a theme that has been in force for decades now in India, Surana says, and it will continue to influence investment trends. ‘This is related to population growth, favourable demographics with increases in the working-age population, and urbanisation,’ he says.
Urbanisation is continuing apace thanks to rising educational standards and a move towards ‘nuclear’ families instead of earlier ‘joint’ families. While nuclear families typically comprise two generations living in a single dwelling, joint families often see many generations living together under one roof, usually with a grandparent acting as head of the family.
Looking at all these factors, rising domestic consumption becomes an inevitable outcome, Surana says. ‘I would say this has been the single most important theme in India for decades.’ Nonetheless, the consumption sector’s continuous earnings growth has come as a surprise to many in the Indian market.
When it comes to the commodity sector, Surana says his fund is generally underweight.
‘There is minimum exposure. There is only one stock that we are betting on, and that is more to do with the bottom-up analysis. We have been more positive on downstream oil firms, which are mainly into marketing.’
According to the latest fund factsheet Hindustan Petroleum Corporation is listed among the top 10 holdings in the fund and accounts for 3.3% of the net assets.
Despite the fall in the oil price having a negative impact on energy-exporting nations, India is among those benefiting from the price slump.
‘There are multiple benefits. The most important being its impact in reducing the current account deficit.
The lower oil price has reduced inflation and improved government finances,’ Surana says.
Though India has benefited from the oil price slump, faltering Chinese consumption is sending shockwaves across the region.
‘The on-going adjustment in China, and related fall in exports to the country, has impacted other economies in this region, including Hong Kong, Taiwan and Singapore. It is one of the concerns in the Asian region right now.’
Looking at the past six months, Surana has not made any big changes in his India Opportunities fund, and those stocks he has added are all essentially leaders in their respective industries.
Identifying sector leader stocks has never been easy. Divergence has seen the leading names within different sectors change radically over the past seven years.
‘For example, seven years back, the IT sector had a different company which was a sector leader, and now the leadership has changed. While sector weight is important, it is equally important to be in the right stocks within a sector.’
Wealth creation potential
India remains a market where bottom-up stock pickers have the chance to identify tomorrow’s corporate titans, Surana argues. ‘Over time, we have witnessed companies evolving from being mid-sized firms to large corporations.
‘As of now, there are about 30 companies which are above $10 billion in market capitalisation, and about 70 companies in the range of $3 billion to $10 billion. Additionally, there are about 125 companies in the market capitalisation bucket of between $1 billion and $3 billion.
‘If you are able to identify quality businesses from the set of companies that are between $0.5 billion and $3 billion (that’s about 250 companies), then the wealth creation potential is huge.’
Getting promoted from the minnows to the big league requires three fundamental conditions to be met, Surana says. ‘The first is that the size of opportunity has to be large; the second factor is that return on capital employed should be decent; and the last factor is that a company should be run by competent management. This last factor is the most important among the three.’
Identifying the companies that will go on to become household names when they can still be had for a song isn’t easy though, and like all investors Surana nurses some regrets accumulated over his long career.
‘Not being able to identify a few companies that have created large amounts of wealth at an early stage has contributed to some of my career misses. Those misses are more to do with what I call errors of omission.’
Surana emphasises that these ‘misses’ are at the level of individual stocks as opposed to sector-wide trends. ‘In some cases, we were unable to visualise the potential of certain businesses and act at an early stage. These are misses in terms of stock picking.’
Despite following a strict bottom-up investment approach, Surana is still a keen watcher of India’s macroeconomy, the turbulent river in which his chosen plays will sink or swim.
‘I would say the Indian economy is on the side of recovery, given the significant improvement of macroeconomic indicators such as the reduction in the current account deficit, the fall in inflation and the improvement of government finances.’
Surana believes the investment cycle in India, which was initially started through government spending, will eventually lead to growth in corporate earnings – something that has been disappointingly muted over the past two years.
‘Consumption demand will also accelerate with the impending salary hike for government employees next year. Overall, considering the improvement in earnings, and reasonable valuations, our view is constructive on the markets,’ he says.
Although he’s generally positive on the economy, Surana is disappointed by the pace of reform from the government. Prime Minister Narendra Modi enjoys a sizeable majority in the lower house of parliament, but he has been held back by the fact that his Bharatiya Janata Party and its allies remain a minority in the upper house.
Given this tangled political backdrop, Surana isn’t holding his breath for the long awaited reforms.
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Although Surana’s schedule is all too easily filled with marathon analysis sessions dissecting the balance sheets of India’s most promising enterprises, he still makes sure to find out what has been happening across the globe as well as locally.
‘I spend 45 minutes or an hour to read newspapers every day so I am aware of what is happening,’ Surana says. ‘I read The Economic Times, The Times of India and Business Standard.’
In Surana’s spare time, he enjoys travelling across India to feel the vibrancy of economic development first hand. This also gives him an insight into the lives of ordinary Indians throughout the country, and how they are earning and spending their money. ‘Even if you are just travelling in your leisure time, you can still uncover lots of new trends,’ he says.
‘Many of these trends that we have right now in India were apparent in developed markets 10 years back or even a couple of decades ago, so you can literally visualise the economic and purchasing power improvements that are around the corner.’