‘Expectations have run high’

At over six feet, S Naren comes through as a gentle giant. An occasional Tamil phrase pops out as he talks. He feels his three years in fund management has been a very different from his earlier stints in brokerages as he feels a fiduciary responsibility towards investors. But there is another side to him, as the head of equities at ICICI Prudential Mutual Fund. He is a tough man, very particular about complying with in-house and regulatory codes of conduct. And he doesn’t like to be quoted - “please don’t quote me on this,” “please don’t quote me on that,” he would ask you. Companies: Don’t quote. Stocks: Don’t quote. Regulator: Never quote. AUM race: mmhmm.  Excerpts from a chat with N Sundaresha Subramanian:

Being a top fund house, why can’t ICICI Prudential set standards? Why does it have to follow the herd in launching, say, a global fund?
There is certainly a case for diversification. We have a market capitalisation of $1 trillion. Our mutual funds have assets under management of just about 10%. I believe a fraction of this should certainly go into overseas assets for diversification. Besides, our market is weighted towards IT software, financial services and the energy sector. We have no exposure to hardware, IT equipment, semiconductor, etc. Investing in other Asian markets like Taiwan, Singapore and Hong Kong would give us exposure to the hardware side of the IT boom, too. Besides, by choosing to invest in Asia, we are insulating ourselves from currency risks. Our partner Prudential already had a fund running with a four-year track record. So we joined hands.

Are you not missing out on other global economies by concentrating only on Asia?
US and Japan are developed markets and are slowing down. We don’t see any great potential there. Among the BRIC economies, Brazil and Russia are commodity driven, there’s no real depth there. That leaves us with India, China and Asian ex-Japan. India is a trade-deficit economy, driven largely by the domestic story and the other Asian economies are trade surplus. Hence, even here, we are taking advantage of the complementarities.

How do you see the Indian markets at the moment?
We have had a good monsoon. I have been to places like Nagpur, Hyderabad and Chennai. Feedback from locals has been good. Inflation is coming down. Overall things are positive.

Do you see any negatives in the market?
The only negative seems to be managing the people’s expectations. Due to the bull run in the last three years, people are so used to 40%-plus returns. They think you are joking if you tell them you should bring down the return expectations.

What are the other fallouts of this secular bull-run?
Raising capital has become very easy and as a consequence, emphasis has shifted from value to growth.  Due to emphasis on growth, value investing as a concept has failed. Typically, whenever raising capital is very easy, growth companies tend to perform better. It happened in 93-95; it happened in 1999-2000 and it’s happening now, since 2004. Therefore, we see companies in FMCG and healthcare, which don’t need any fresh investment going to the background. Growth-oriented sectors like real estate, construction and suppliers to the companies in this sector are in demand.

Has this bull-run made your work any easier?
I came into fund management just about the time the bull-run began. Life has been good. The flipside is how to manage the soaring expectations when things slow down. Before getting into fund management, I have seen tougher markets when I was with brokerage houses. The period between 1995 and 1998 and throughout the tech boom and the aftermath was really difficult. During the tech boom, people even questioned why I am in this sector.

What difference do you see between your earlier jobs and fund management?
Unlike in other jobs, you have a fiduciary responsibility when you manage a fund. Whatever decision you take is going to affect a million investors.

What do you think is important in fund management — luck or skill?
You need luck, skill and emotional temperament. Everyone today has access to information. It is how you deal with the information makes the difference. Sometime back, US drugs major Merck got into trouble because of a judgment on its Vioxx drug. The stock prices of Indian Merck, which had no connection with the American firm plummeted 15%. We had the conviction that this should correct and acted on it.

You have moved from Chennai to Mumbai. Do you like the life here?
Life in financial services is good in Mumbai. Outside of it, I’m not very sure. In other cities, the industry itself is small and your options are limited to that extent.

How long do you see yourself continuing here?
Look at the recent fall and bounce-back. The cycles are becoming shorter and faster and making decisions is becoming that much more difficult. We can’t say 58 is the retirement age anymore. Given the pressure we are living with, it could be a lot earlier. That’s why I see the healthcare sector booming. People would need a lot of their services.

Any particular stock you see attractive in the sector?
Sorry, you can’t quote me on this.