DSP Mutual Fund’s Investment Philosophy in Managing Funds | Resham Jain | Fund Manager Insights

Radhakrishnan Chonat: Good day, ladies and gentlemen. Welcome to another episode of Fund Manager Insights where I delve into the minds of influential fund managers in the Indian financial landscape. And today, I’m delighted to have the opportunity to sit down with Resham Jain, a seasoned professional with over nine-plus years of experience in the finance industry. Resham joined DSP Mutual fund in March 2016 as Assistant VP in the equity income team. And prior to joining DSP Mutual Fund, he worked for B&K Securities, Jaihind Projects, and Arvind Limited. Currently, Resham is at the helm of managing two significant funds, the DSP Small Cap Fund and the DSP Mid Cap Fund. 

So today, let’s delve into Resham’s journey, his investment philosophy, his views on the market, and much, much more. So, ladies and gentlemen, join me in this engaging conversation as we try to gain some valuable insights into the mind of a fund manager who I believe has made a significant impact in the finance world. Resham, welcome to the Fund Manager Insights

Resham Jain: Thank you. Thanks.

Radhakrishnan Chonat: Let’s start. Can you tell us about your journey from your earlier roles to becoming a fund manager at DSP right now? And what motivated you to pursue a career in the finance industry and specifically in fund management?

Resham Jain: So actually the journey in the finance field happened because of, let’s say, my family. They are into businesses and also into stock markets from long back. But I started my kind of business journey since my college days and that actually is a very big building block for me. I started my own kirana wholesale business during my college days and it was a business of jaggery and I used to do lot of accounting services related work also at that time. And then I chose to pursue Indian CFA and then later for initial five years of my career I was actually into the academics world. I used to train CFAs, CAs, and all. That also helped me a lot in getting the theoretical and the case studies which we used to teach. And then from there, I got a very different move into corporate finance world where I worked in Arvind. That also gave me a very practical world of how a company operates and lot of facets of finance part of a company, right from ForEx to accounting to consolidation to Investor Relations as well. 

And that helped me to understand how do companies think? How do companies strategize? And then because I was working in a textile company, I got an opportunity to work in the investment field. So since 2012 for last almost 11 years now, I’m in the investment field and I started as a textile analyst and then later I started tracking retail, few of the other sectors as well. And then from last almost seven years plus I’m into the fund management field. So I think the journey is multifacet and I think because I taught in my initial career, lot of student keep asking me whether one can shift from one profession to another and I think it’s not difficult. I moved from academics to corporate finance to sell side and right now to buy side over last 18, 19 years. So yeah, that’s the overall journey which I have. 

Radhakrishnan Chonat: Very, very interesting and very, very unique experience that I’ve come across. Tell me little bit more about your jaggery business during your college days. Is it right to call you the jaggery king of Mumbai?

Resham Jain: No, actually I’m from Ahmedabad. So I found a very unique model there in the sense I used to get three months credit. I used to buy jaggery from Kolhapur and I used to sell at one month of kind of credit period to my customers and I used to directly sell to like 100 plus kirana stores. And the business model was simple that I never used to have godowns. I used to simply have my truck going to the retail stores and just dropping. So, I can save lot of money on unloading/loading and my working capital was practically negative because I used to get three months credit. So, that’s how you used to do it. Every week I used to have one jaggery truck coming to my location and within my location, there were hundred stores. No one can sell cheaper than me in that location. So, that’s how I did that. It was not taking much of my time. So, this is what I did during my college days for almost two years. 

Radhakrishnan Chonat: Very interesting. So, zero inventory held. Just in time model like what Toyotas used to do in Japan. Right? 

Resham Jain: Yes. 

Radhakrishnan Chonat: Segueing back to your current role, Resham. So if I may to ask, what is your overall investment philosophy in general, right, when managing the funds, right? Currently you manage the small cap and mid cap funds where active management is needed. So, what’s your overall investment philosophy?

Resham Jain: So I think for us and DSP specifically, we have written investment document whereby we have mentioned what will be our framework, how do we think, how we have invested in the past, how are we thinking about stocks in the future. So, it’s a written document how are we going to invest in the mid cap and the small cap space in stocks and similarly across various funds? And earlier also we used to do same thing, but writing down what we are going to invest in makes lot of difference and this is public document. So it brings more responsibility, accountability to the whole process. So, I would say it’s very process driven and philosophy is not very different than what lot of people talk about. 

We have this business, management, and valuation. These are the three parameters and each one of the capital market participant will look at these parameters very, very differently. So for us, business is very, very critical especially in the small cap, mid cap world where you see lot of disruption these days not only from the new age companies, but also from the larger players and which makes the smaller players much more vulnerable. So, we try and find out those kind of business models where they are probably the leaders in those field despite being small. So they might be INR1,000 crore top line, but they may be the largest company in India in that particular field. So, a lot of such companies are there in our portfolio and obviously we will then go for lot of checks in terms of specifically small cap companies, we do lot of scuttlebutts. We check with old employees, customers, suppliers, auditors. We’ll take lot of interviews. So, lot of stuff goes into analyzing some of these companies. 

And then obviously financial parameters are there, which is finding out basic hygiene factors of those companies. And so, that’s what we do. There are lot of in detail work over there in terms of trying to find out competitive advantage and stuff like that. So, business evaluation is very critical for us. And typically when we analyze a business, we typically analyze for slightly longer period of time, which is reflecting in our turnover issue as well. So if you look at our turnover issue, it’s like .13. So average holding period is like seven, eight years and our fund. So, we try and remain in the journey with the company for a very long period of time. So, that’s very critical. 

Second, very important for us is management and lot of management aspects is actually reflecting in their numbers; whether how they are looking at capital allocations, how are they looking at related party transactions, how are they looking about rewarding shareholders, how are they looking about debt as a philosophy? Are they averse to taking debt? Are they okay doing business for a smaller return on capital employed? So lot of answers to evaluate the management actually lies in the numbers. And then obviously we try and meet them, go to the factories, try and understand from that the culture. So, all those are very, very important aspects for us because we are staying with them for a pretty long period of time. So, management is very critical part. 

And the last and the most important is valuation and for us, valuation is very critical. And at the same time, margin of safety also becomes very critical for us because when we try and buy some stocks, you can imagine in a small cap fund there is an impact cost when we buy some of these small cap names. So, we have to create enough margin of safety when we buy a stock. Also, sometimes it might seem that some of the stock are probably at a slightly higher valuation. But when you look beyond one year, beyond two years, for a slightly longer term; the valuation may look reasonably okay. There is another aspect especially very important in last few years where market in general has become slightly more expensive than what they used to be, let’s say, in the previous decade. So yeah, that is the overall framework with which we work; business, management, and valuation.

Radhakrishnan Chonat: Excellent, excellent. Just as an additional question to know what you just said. Especially when it comes to small cap and mid cap, as you said, the valuations can skyrocket or vice versa, right, it can remain irrationally higher or lower. So as a fund manager, how do you balance risk and return in your investment decision? So, what’s the key there?

Resham Jain: So, risk is first. Because we are managing lot of small investors’ money, we can’t take risk. So, we will never venture into something adventurous. Unlike lot of notion of small cap funds when I speak to a lot of IFAs, distributors, and all who are just into the market, they feel that it’s like small cap, penny stocks. It’s not like that. We try and make sure that those companies are well checked, well thought about, and then we put that. Like I feel someone who has given us INR5000 out of his hard earned money, it should be deployed in a capital which is well protected. So, risk plays a very, very critical role. And obviously what happens is that there will be phase of this market. So if I just go into the cycle of last 15 years, there are three instances when market is corrected by 75%, 50%, 40% in last 15, 16 years and this kind of drawdown can happen. 

In this kind of drawdowns in small cap funds, large cap fund will have a slightly lower drawdown than this and reverse is also true. So, we have to make sure are we having right stocks whereby if it comes down by 20%, am I willing to put double the money on what I have put? That will show the conviction in a particular stock to me. So if I’m not willing to invest, obviously there will be limitation constraints of not investing in a particular stock because of weight. But the intention has to be that if it comes down by 20%, 25%, 30%; am I willing to double my position over there? So, I think those are the things which we keep thinking from a risk perspective other than lot of other things, but this goes in our mind when we buy some of the stocks.

Radhakrishnan Chonat: Excellent, excellent. So while you navigate through such market volatility, which is inherent in small cap, mid cap space, what challenges or I’ll say even opportunities you face with investors because we see large redemptions happening right at the time where they should be investing more? So, how has been the investor psyche playing out?

Resham Jain: Yeah, we have seen this. This is classic actually because in 2017 or something, we have actually closed our small cap fund. We used to get lot of flows at that time and incrementally we thought that putting money at this valuation might not be optimal for us and we thought to stop flows at that time. Obviously after market correction, we opened lumpsum, we opened SIP. But we completely opened our fund in March ’20 when actually market was seeing a big event risk and this tells me that obviously there will be lot of apprehensions, fear when market falls and similar is true, lot of euphoria will be there when market goes up and that is where behavior comes into picture so behavioral.

So  analyzing a stock, managing fund is okay; but managing your own behavior is very, very critical in this kind of situations. So, I think best way for typical small investors to invest in small cap fund is through the SIP because there will be volatility. These are not straight line. Over a longer period of time; three years, five years, seven years; you will see that it has always given positive return in the past, but intermittently you will always have this volatility and you have to navigate through this volatility without getting your behavior come into picture and the only way to do it is through SIP. So we always suggest that in small cap fund, one should do SIP only. And obviously depending on the risk profile of an individual and all, they can do their allocation accordingly.

Radhakrishnan Chonat: Nice point. Resham, given your experience, right, how do you view the current market conditions in India? Especially we have seen small cap and mid cap gaining significant momentum. So, what’s your overall view of the India story?

Resham Jain: So for us, India story is good. Probably when we keep hearing what’s happening globally, then we find we are into a very good situation and macro factors are very favorable for us. Being a young country, being a country with much faster growth than lot of other nations, having a large labor force, every year we are seeing tax paying individuals going up, transparency increasing in the economy. With lot of reforms being taken over the last many years and some of the larger reforms like GST and all, we are seeing how the collections are of GST. So, all these things actually bodes well for India as a country. We are still at a stage. And when we compare the, let’s say, per capita consumption of lot of products; let’s say AC, furniture, you take any household items, any other items; you will see our per capita consumption is significantly lower than some of the developed as well as some of the other emerging countries as well. 

So, that gives me confidence that if you are into right category, you can have a very long runway of growth in some of those categories. So in our fund also, what we have done is almost 45% to 50% of our weight is into consumption oriented stocks which is India focused and these are like smaller items; it can be a kitchenware item, it can be a tableware item, it can be furniture, it can be QSR, it can be consumer durables. So stuff like that, almost — building materials. So 45% to 50% we have kept in those names and these are market leaders. They are like Number 1, Number 2 player in India and solid distribution, solid brand, niche technology. It can be various moats related to those companies why we might have invested in those. So, answer to your question is that very positive on India’s story. 

Second, very, very important theme which is emerging is manufacturing for India and we have seen that playing out in, let’s say, sectors like chemicals. Last 10 years we have seen a significant growth in this space led by, let’s say, China Plus One. Now people are talking about Europe Plus One. And good part is that companies are investing. Typically Indian promoters are very conservative, they don’t want to take very high risk. But we have seen the mid cap, small cap companies willing to put significant amount of capital. Last three years, four years they might have invested equal to probably they might have invested in last 10, 15 years. So, that kind of investment is happening in some of the sectors where globally customers are also willing to — they are fine. They want to find a new alternative supplier to China. So that’s where the theme is emerging. 

Third very important theme, very powerful theme is import substitute. Unlike China, we import a lot and we import a lot from one single country and that creates — and government has brought lot of PLI schemes. Lot of environment they have created for those kind of sectors to do well. So, that’s again — so whole manufacturing theme is what I find very, very attractive. Third very interesting theme for India is infra and environmental. I’ll put both this thing into one bracket because the amount of capexes which are happening from government, from private sector, sentiment also is turning positive because for private sector capex to pick up, you need good sentiments. And government is doing right things by pushing their agenda correctly, whether it is roads, metros, on the power side. So, lot of things are happening on water side. So we have this infra/environmental companies because five years, 10 years, 15 years down the line, you will see the transition — energy transition happening and those set of companies which are doing right things, who are into that right space supplying more environmental friendly products is where we are looking at. This is the third powerful theme for us. 

Fourth very powerful thing, again as of today we feel it’s a young country. But over the next 20 years, 30 years journey, will see healthcare going to — India is also going to age not now, but let’s say 30 years down the line. And the healthcare sector is where I feel incrementally people have become more conscious, people need better services. And if I look at the per capita kind of consumption of India in healthcare versus some of the other countries, we are still far behind that. So, healthcare according to me is again a long-term story. So similarly we have — we feel that there are these larger stories. But obviously when we invest in the stocks, we do bottom-up. We should keep this in the back of our mind that these are the broader themes which are emerging, this is how country is changing. And good part is that we have examples of how similar companies have done globally. So, it gives us a kind of good benchmark to monitor that how Indian companies may grow eventually. So yeah, that’s how we think about investing in various sectors and stocks.

Radhakrishnan Chonat: Very interesting. Let me ask you a different question. Can you share any particularly memorable investment decisions or experience from your career as a fund manager so far? Something that nobody believed in, but ended up being a multi bagger or any themes? Anything you would like to share?

Resham Jain: So, obviously multi baggers are known in hindsight only. When we buy the stock, it’s very difficult to gauge how things will prevail and there are lot of apprehensions in our mind when we buy a stock. We have to keep checking our thesis every now and then. But I think one stock which has DSP as a house is one of the chemical companies and that’s almost in 2012, 2013 we identified this name. We saw that company transitioning from some of their other businesses to capital or allocating incremental capital into chemicals and we saw that the investment is quite massive compared to the size of the company. And they were doing number of buybacks at that point of time and stock was obviously available much cheaper and they are also buying back their stock. So there were lot of these indications with that investment happening that gave us confidence that okay, there is enough margin of safety to take a bet on this company. They’re doing something different, which they have not tried earlier. But we liked the management, we liked the approach with which they were doing, and obviously over last 10 years that company has maybe given us 70x, 80x return. But important thing to note is that during this 10 years’ journey — 11 years’ journey, every year our thesis is being challenged, is being tested. 

The important thing is you when you go back and check whether your thesis is still valid or not and you might have bought that stock, let’s say, at 5 times, 6 times P/E multiple; then you get — yourself you start questioning whether at 15 times is it peaked out, at 20 times it peaks out. So if company’s continuously growing and at decent ROEs, we feel that you can write that name for a very long period of time. So we bought this, let’s say, in our Small Cap/Mid Cap fund when it was a microcap stock. We actually sold it recently, exited from our fund when it was large cap. So, that’s the journey. We have other journeys also, which are not so great. But yeah, you have to — you have that hit ratio to be much higher, it’s then okay to have both the sides of the coin.

Radhakrishnan Chonat: Right, right. So the other side of the coin, the one that didn’t work out as well, what was the biggest takeaway or lesson from that experience?

Resham Jain: So, I think the biggest lesson of some of the companies where we didn’t do well or we actually misjudged the overall business or management is to do with, let’s say, three important things. There are many things, but I think if I have to classify different mistakes into different buckets, then one is capital allocation. Promoter or the management has decided to invest in something else from their core. So, that’s one of the biggest kind of mistake which we have done. Second is corporate governance related stuff, which was not there when we bought, but then companies started having lot of related party transactions and ICDs and stuff like that. So, I think that was second other mistake I would classify. And third, probably would be not having too much weight in a regulated sector. I think that is again if you see our portfolio will have very, very less weightage in stocks which are regulated and the policies keep changing every few years. So, it’s very difficult to predict are we in a good cycle or a bad cycle. So, I think those are the three major buckets and those are the lessons also. So if you read our document, we have actually categorically mentioned what kind of companies we’ll avoid. As an investor, we want to remain in certain themes so certain times we cannot completely keep that stock out of our portfolio, but we can have a measured way keeping risk into mind. And avoid some of the other names, leverage names for example. So, I think those are the learnings and lessons out of the mistakes which we made.

Radhakrishnan Chonat: Nice. Resham, in terms of shareholder activism, right? In the West, it’s a big theme, right? Most of the fund houses have a say especially the examples that you quoted, it just came to my mind. So as a company DSP, how active are you guys in terms of voting patterns and stuff? Do you do you guys have a policy in terms of saying yes or no?

Resham Jain: Yeah. So, it’s a very defined policy for us and we do engage with companies wherever we feel that this is not correct so we vote against and many times we suggest companies that you should change this. We write letter to the Board and this is an interest of both for the company also and for us also. And lot of the small cap companies, they have come from a very, let’s say, partnership kind of model to listing to growing and then suddenly in last seven, eight years, people have lot of interest in meeting those companies. So they are also evolving and many times we need to make them aware that these are not right corporate governance practices. And many of the times or most of the times we have seen Indian management try to change those things in ensuing period. So, we do this very, very rigorously and in small cap companies particularly, we do it very, very — like very often engage with the companies. Nowadays ESG also has become an important aspect. So lot of disclosures on environmental related aspects, gender diversity, pollution, affluence, renewable energy; all those aspects we keep telling lot of these companies about this, of what is happening globally and eventually how world is going to change. 

Radhakrishnan Chonat: Excellent, excellent. Resham, how do you stay updated and continuously improve your skills in this very, very dynamic field of fund management?

Resham Jain: Yeah, it’s a most challenging thing because you don’t have information, you have information overload. So, you have to stay away from some of the extra noise which is getting created because we live this businesses in and out and you keep getting this news flows every day of the same company sometime positive, sometime negative. And how to avoid some of the information which are not relevant for us, don’t take actions. But yeah, getting information is important. You should be top of the things. So basic stuff; newspapers, nowadays social media is very, very important for us. I track lot of companies on LinkedIn of how they do it, on Twitter, and magazines and lot of the sell side also helps us in getting updated. We also do lot of field visits like say for example along with fund, I also track agri. So every year I make sure that I go to fields, meet farmers, go to mundis, try and understand how the traders are thinking about market, how they’re thinking about government policies. So, I think that information can come from any place so keep our mind open. 

Radhakrishnan Chonat: So Resham of — you rightly said that right now you have to filter noise. So, how do you cool off? What are your hobbies? What are your other interests other than managing companies’ funds?

Resham Jain: So, I’m a big animal lover. I go for bird watching, I do lot of expedition trips. Earlier not during fund management, but let’s say in the past I used to do lot of bird rescue activity. So being closer to birds, animals, nature is what I like. So whenever I get time, I’ll go for these kind of trips.

Radhakrishnan Chonat:  Very nice. Very nice. That’s very unique hobby. We started seeing how you shifted different industries, right? So, what advice would you give to aspiring professionals who are listening to this or probably who are looking to build a career in the finance industry specifically in fund management? What kind of an advice do you have for the current lot?

Resham Jain: No, I think being very grounded because sitting in a room, you can’t manage funds. You have to go out, you have to experience things, and you need to learn all those aspects. That is more crucial. I think rest everything can be learned from books, reading books and all. But going on to the field will give you that real experience and that has helped me a lot. I keep traveling and that gives me lot of insights on how one should see the things. So, I think that is very critical. There are lot of other aspect, but I think for me this is very, very important.

Radhakrishnan Chonat: Very nice. You mentioned the other aspect, right? Other than reading books. So I’ll conclude by asking a standard question that I ask all my guests. For my listeners, what would be the top three books that you would recommend as a must read?

Resham Jain: So I think one book, which any fund management professional should read, is One Up On Wall Street by Peter Lynch. I can read that book anytime. Because we do same thing, I can relate to a lot of things which he has written and it makes lot of sense. So, that is one classic book. Second book which I actually recommend to lot of my companies because eventually we are in the business of making money and this is a book called as Outsiders written by William Thorndike and it has eight case studies and it talks about capital allocation. You have heard me talking about mistakes. I think this book talks about capital allocation and I actually recommend lot of my investing companies to go through this book. Very great book. And third book I think generally I like reading biographies of good people to get inspired from. So, lot of biographies is what I would say. Whosoever will inspire you, you should read the biography of that person. So, Swami Vivekananda is the first biography I read. And then I keep reading a lot of company, corporate biographies, lot of history on historical celebrities, and all the stuff to get inspired from them. So, I think this is what I read and I would recommend people to read.

Radhakrishnan Chonat: Excellent. Resham, it’s been a pleasure catching up with you. Before I let you go, where are you heading next in your travel plan?

Resham Jain: Not yet decided. But yeah, one of the safaris is what I’m planning for.

Radhakrishnan Chonat: Excellent, excellent. So, it’s been an absolute pleasure catching up with you, Resham. And I look forward to having more such catch-ups where we can get to know you better and your investment philosophy.

Resham Jain: Thank you. Bye. 

Radhakrishnan Chonat: Thank you.