Radhakrishnan Chonat: Ladies and gentlemen, welcome to another episode of our Fund Manager Series and the first for 2025, in fact, we’ve dive into the strategies, insights and experiences of some of the finest minds in the investment industry.
And today, we are thrilled to have with us Mr. Shridatta Bhandwaldar, the Head of Equities at Canara Robeco Asset Management Company. Mr. Shridatta has an impressive career spanning over 18-plus years in Indian equities. Now, before joining Canara Robeco back in 2016, he had held pivotal roles at SBI Pension Fund, Motilal Oswal, Heritage Capital and MF Global. And at Canara Robeco, he has been instrumental in managing an AUM of over 1 lakh plus crores and is the primary fund manager for several of the flagship funds, including the Canara Robeco Equity Blue Chip Fund and the Flexi Cap Fund. Known for his philosophy of investing in selective quality stocks to create wealth through compounding, Mr. Shridatta brings a wealth of knowledge and expertise to our conversation today.
Welcome, welcome to the show, Shri.
Shridatta Bhandwaldar: Thank you for having us on the show, Radhakrishnan.
Radhakrishnan Chonat: Excellent. Shri, let’s start with you. You have had an extensive career in Indian equities and walk us through briefly your journey so far. How did you end up in investment management and your journey so far?
Shridatta Bhandwaldar: Sure. So I think I never thought about actually getting into equity markets because fundamentally I come from a Tier 2 city in Maharashtra, Aurangabad, which is now known as Sambhaji Nagar, from a typical Maharashtrian middle class family. So this was never a interest at least at that point in time. I did my Engineering from Aurangabad, B.E. Mechanical. And during Engineering, I thought that probably I’m not so inclined towards doing technical stuff. So I didn’t want to do post-graduation in — on that side. So I ended up actually coming to Mumbai and doing my MBA from Sydenham Institute.
And that’s when fundamentally I developed gradually interest in macros first, macroeconomics first and then in markets. And how it largely happened is that, typically I was a avid reader then also, now unfortunately we don’t get as much of a time as we used to get to read. And as I started reading and initially when you start reading the pink papers, you always have fascination for a lot of concepts that you see around. And those actually got me interested in actually looking at lot of concepts and how they actually interact with each other. And that’s where the first interest actually started in understanding macroeconomics, how the economy functions, how the interest rate, inflation and various parameters actually interact with each other, growth, how the government policies impact not only the external, internal factors, but the growth itself. And then gradually I got interested into markets and that’s how the journey started.
In fact, I joined from a campus bank in corporate banking, but left in six months and then immediately joined equity market. That’s predominantly how the journey started. It was just random, but the first interest, of course, got developed more from a macro perspective and then into micro. One of my senior was working with one of the firm, MF Global. He said, why don’t you try this? Because you seem to be — at your age, you seem to have good understanding of these things. So that’s how actually it largely started.
Radhakrishnan Chonat: Very, very interesting. Shri, you have a — you have a clear focus on holdings, you know, selective quality stocks, let’s call it that way. So if I were to ask you to elaborate on your investment philosophy and how it aligns with Canara Robeco’s overall strategy?
Shridatta Bhandwaldar: Sure. So fundamentally, lot of these concepts that are talked about in interviews and lot of interactions that you see in media and some of these interactions like what we are doing, people get confused between things. So when typically, when we tend to say not only as public money manager, but personally as an if I were investor and this is just a hypothetical situation. Fundamentally, what is it that I would want to be aligned with? Who are the people with whom I would want to align with? Which are the businesses where I would want to be aligned with? That’s exactly what we try to do. It doesn’t mean there is a set of basically bucketed businesses, okay? Lot of these businesses go through various phases, but there is a core set of characteristics which lot of promoters, which is the owners and lot of businesses inherently have, which some of the others can’t have. And that’s where this definition typically gets loosely used, okay, these are the quality businesses, these are the value businesses. I don’t largely subscribe to that for us as a house, Can Robeco and me personally, quality is the starting point because those are the businesses and promoters where you want to align with because you know how the wealth has been created in the past and what is a sustainable way to create wealth is just like a simple basically life example. If you align with good relatives, good friends, probably you’ll end up doing well. That’s exactly the same in investment.
If you align with good businesses, if you align with good promoters, they will share the bounty with you and they have track record of executing well. Inherently, businesses have characteristics which actually stand out as compared to the averages. And that’s the core thought process that when we say quality, the bedrock for us is, what kind of management you are dealing with because in emerging markets and particularly in India, it becomes very critical, primarily, the businesses are entrepreneur driven. So who are you aligning with? What kind of background that guy has? What kind of skin in the game that guy has? What kind of capital allocation that guy has exhibited over a period of time? What kind of execution capability that guy has exhibited over a period of time? And I typically tend to actually define promoters in basically on two parameters. The ability of promoter gets tested in P&L or income statement of a company and the intent of the promoter gets tested in balance sheet and accounting practices of the company. So that’s first stage, which is the management.
Then there is a business. It’s not that for various stakeholders, business can be good or bad, but I am an investor. So for me, there are certain characteristics which are very critical, I mean, if the business is not actually generating returns which are over and above the cost of capital in the economy and substantially as it goes up, it actually enhances the wealth creation for investors, but it needs to at least to start with on a sustained basis through cycle, cross the cost of capital, otherwise, I’m better off actually keeping that money somewhere else, correct? I don’t have to invest in stock. And that’s where this thought process that there are certain businesses which inherently have those characteristics because either they are B2C or they have certain technology advantages or they have certain scale advantages. They have certain distribution advantages. They have certain regulatory advantages. They have just first more advantages in certain sectors that they become so skilled that the next guy can’t come and actually beat them on some of those cost parameters. So — but lot of these inherent advantages can vary easily and discernibly defined for various sectors.
Yes, there will be outliers within those sectors also, but generally, these characteristics actually either fall in businesses, which eventually translate and manifest into itself into in a very, very simplified way, a respectable ROC. We don’t say that every business we own that has 30% ROC or 40% ROC, but it needs to have at least 15% ROC through cycle. It needs to have at least 15% ROE through the cycle. And that’s ROE, ROC just manifestation of a lot of these business characteristics. And that’s why when we say that these are the kind of businesses we want to align with and these businesses actually go one step further, there’s only one difference, okay? As I said, there are — these certain traits like B2C or basically regulatory advantages, technology advantages. They allow the cyclicality in the cash flows, profits and ROEs of some of the businesses to fall less than some of the other businesses and that’s where the deep cyclical businesses gets classified as value in a traditional term, we don’t classify them as value. I think they are challenging businesses, a lot of them. And there are businesses which are inherently very narrow cyclical. Their earnings will, in bad year also their earnings will at best be same, their cash flows will be same, their ROA, ROCs will be same. But there are businesses where there are so deep cyclicals that the deviations are huge. In certain year they will make 50% ROE and next year they will make losses. That’s in a very, very layman term we define as a bucket where we don’t want to participate in generally and there is a bucket where we want to predominantly be present. We are public managers, so sometimes we also actually participate in some of the deep cyclicals or some of the turnarounds. But this is a predominant basket where the quality of business saves the portfolio manager rather than the portfolio manager trying to basically outsmart everybody else and actually make money. So that’s the second parameter which is basically what kind of business you are dealing with and these characteristics actually manifest themselves into ROE, ROC, that’s why most of the portfolio managers will tell you, okay, we tend to look at 15% ROE, ROC, that’s second.
And third is balance sheet. What kind of balance sheet you are dealing with? So typically and again of course there are always exception for each of them because everything is, businesses are leaving, economy is leaving organism, businesses are leaving organism, so they keep changing. So there are exceptions, but typically balance sheets, in deep cyclicals we want to — don’t want to play leverage. In narrow cyclicals if there is a leverage, the businesses where I can predict cash flows even if there is leverage it will play in my favor. The businesses where I can’t predict cash flow even for next two cycles, I can get actually hammered very, very quickly and I can lose my share very, very quickly and that’s where balance sheet, what kind of balance sheet you are dealing with again becomes very, very critical. So when we say that we typically tend to or lot of people say we never said this frankly just to actually be very, very transparent, people said that because we were aligned to that side and we are aligned to that side for a very, very simple reason because it actually allows a predominant part of your portfolio to compound money over a period of time. And then there are always alpha opportunity, alpha generation opportunity creation which happens in the other part of the portfolio.
So that’s — that’s how we define ourselves whether it is me or whether it is Can Robeco where we typically tend to focus on quality of management, quality of business and balance sheet where you want to align with. That’s the bedrock, but that’s just a starting point, after that there’s lot of work that you need to do to create alpha over a period of time, sometimes we succeed in doing it, sometimes we don’t succeed in doing it.
Radhakrishnan Chonat: Very, very interesting and different take on how we evaluate management, I like what you said. Profit and loss and income statement shows their ability and integrity is coming through the balance sheet, very interesting. Shifting gears a little bit, you said your interest in equity started with you reading macro trends and stuff. So let me try my luck, given the current economic environment, what sectors or themes are you particularly bullish about or cautious, bullish and cautious in the medium to long-term? So how do you — how are you reading the tea leaves per se?
Shridatta Bhandwaldar: So, in frankly in India, the medium-term trends are very, very simple to identify, you don’t need even a fund manager to actually identify them, okay? But before that, we don’t actually as a house or as a fund manager, we are far more bottom up. Yes, we understand macro, we understand the themes, but we don’t start investing based on those themes because on bottom up basis those initial parameters that we said those need to fit in, that theme needs to be reflecting on bottom up, at least the starting points. For example, say, let us say two years back, we were constructive on hospitals. But when I say on a top down basis, insurance penetration is growing, the out of pocket expenses are growing less and less, the sector is getting organized, the corporatization of sector is happening, it is more top down. But is it reflecting in the ARPOB of the companies? Is it reflecting in the margins of the companies? Is it reflecting in the occupancies of the companies? Are these promoters going to share the bounty with us, are the balance sheets are in place? That’s where we typically tend to start.
So while we understand these themes and we actually do look at lot of these themes, with most of the time we tend to go back and say, meet the 10 managements in the sector and is it reflecting there? If it is reflecting, then which is the management where you want to align with? Which are the geographies in this particular area which you want to align within so and on and so forth — so forth and so on. So that’s how we typically tend to do.
When you think about the broader themes in India, I think the broader themes in India, actually if you step back and think about it, last 20, 30 years, there are various profit pools which have grown, okay? And now I’m talking from a investor perspective, I’m not talking as just economy. In economy, there could be a infra theme, okay, but infra as a sector has not created lot of wealth, okay? China as a economy has disproportionately grown over a period of time, but China as a investor has not made lot of money, okay? If you have stayed there, put, okay, you could have made trading gains, but if you had stayed there for 20 years, your returns are really poor, okay? I don’t want to get into those reasons why it doesn’t happen, but I’m speaking more from investor’s perspective, which have been those themes.
Typically, you should align if when you think about macro themes in terms of the segments where the profit pools are either getting expanded because of certain reasons or getting consolidated because of certain reasons, okay, or there are certain sectors which are getting into exporting part of the world because there the scale is disproportionately high, the opportunity size is disproportionately high. So when you think about last 30 years, you had IT theme where the profit pools expanded at 20% CAGR for almost 20 years, 15, 20 years. Then you had pharma theme, particularly generalization, where again the profit pools expanded. Then finally we crossed that whatever 500, 700, 800 per capita and you started seeing the private banks, insurance, consumption, initially you had only FMCG as a consumption, then you went into consumer discretionary, then you went into consumer durables and then into auto.
So all these themes have played out. So which are the sustainable themes? From a inward looking perspective, from a domestic perspective, clearly consumption irrespective of whether it is working or not today and which has not worked for last two years except probably auto. I think consumption is a theme which is here to stay. If you have 140 crore people and if your prosperity is growing even at a pace which is far lower than what you and me would like to see, okay, the discretionary savings that would be available for lot of this consumption are only going to grow. The aspiration is there, the financialization is happening or the financing is available in each of these category. So while there will be a little bit of a cyclicality, the profit, the discretionary savings pool that is available to consume various kind of consumer categories is only going to grow over a period of time.
Of course within them, what people consume more, what people consume less will be a function of stage of economy and stage of that cohort of economy, okay? For example, you and me have crossed that stage where we think that Dove is a premium soap, correct? You have moved to a niche soap, you have moved to experience consumption, you have moved to probably five star hotels, you have moved to aviation and so on and so forth. But there will be lot of people, 20, 30, 40 crore people who have not even consumed the basic soap in India. So it is core based but that one theme I think is here to stay. The profit pools are of course shifting and there is a book called as Value Migration on this, I forget who is the author but I read it way back and in consumption also value migration is happening. Initially it was only in FMC, then it moved to consumer retail and then it has moved to now lot many other experiences, hotels, hospitals and aviation and probably casinos at some point in time. So it is of course moving, but thankfully we are such a large country that there will always be 20 crore people in each of these buckets, so they will take turn. So this is one theme I think is here to stay for a long time.
Within global themes, I think we have seen the IT and pharma. What I think is basically the non-IT services is another theme which has started reflecting in the basically trading account of country. That number has actually astonishingly grown in last two, three years. Of course it is not very well represented in listed space as of now because lot of them are just captives of the global IT firms or global consulting firms or global R&D firms. But I think that if there are opportunities, I think that it could be one theme where the in market is global and you have cost arbitrage just like IT or technology arbitrage. So that can grow significantly.
The third theme clearly is manufacturing. I think eventually manufacturing will happen, of course I think we have almost lost 20 years to catch up on that theme because I distinctly remember when and I was capital goods infrastructure analyst in the previous cycle 2005 to 2010. The almost 70%, 80% of AC used to get manufactured locally by 2014, 2015, 2016 we had outsourced everything to China and we were just assembling. Now thankfully with PLI, corporate tax reduction, some tariff barriers by government, there is clear focus from the establishment in one, supply side reforms so that the inflation structurally comes down and second, providing a ecosystem or enabling a ecosystem for corporate work and discouraging import so that first the import substitution happens then the export ecosystem gets created.
So I think that’s clearly manufacturing as a theme is here to stay. Unfortunately, I think it’s going to be far more specific in terms of how it scales up. So you have to again be very cautious about which part of that theme you play out. For example, if you look at last three, four years, it’s only electronics gadgets and mobiles which is one EMS which is — which are basically two small themes which have really scaled up, rest of them are still taking time. For example, PLI has been done in almost 12, 14 categories, but if you look at all the top 12, 14 categories, probably 2, 3, 4 categories have shown the promise as of now as a investor, I’m again talking as a investor, probably as a business it’s already started doing with, but not yet scaled up. So I think that clearly is an opportunity and that is again is here to stay with the kind of demographics we have, with the kind of unskilled, semi-skilled people we have. I think there will be consistent pressure on whoever is the political establishment to actually create a ecosystem which first substitutes the imports which we are doing like right, left, centre, everything, particularly from China and then create a ecosystem which allows you to export at least to start with probably to underdeveloped developing countries and then probably eventually to developed country depending on how they gradually scale up. And I think this process has started almost probably 10 years back when this government came in picture because I think the two problems they started addressing is, how do I ensure that the microeconomic stability comes in and actually creation of manufacturing in domestic manufacturing in a way help you to solve that problem because if you look at India’s basically macro, okay, external front has always been challenged because on one hand you import 85% of energy and on the other side you actually import everything else also and you have 140 crore people. So that’s not a sustainable situation, actually both of them are getting resolved, one by design the other because there is a basically transition in energy that is happening on towards the renewable side. So I hope 10 year down the line you will need far lesser energy imports as compared to today. So, that external balance is getting kind of I think in my personal humble view the starting point was that, that you want to solve that problem and manufacturing is a by-product of actually doing it which in a way also ends up helping job creation.
How fast it happens need to be seen, but these are the I think consumption and manufacturing, these are the two themes. There are a lot of smaller themes, but I think they are far more as a investor they can be very, very heterogeneous. So two years they will do well then five years if they go out of growth phase, then investors will have probably sub-par or sub-optimal experiences.
Radhakrishnan Chonat: Very interesting, so from a saving society to a consumerist society and from importers to eventually exporters these are the things that and of course the second theme you mentioned about GCC is creating more jobs and thereby increasing personal consumption and stuff, interesting. Anything that you are little bearish about any themes that you have seen, its end of its cyclical thing and probably not going to take over at least for next few years.
Shridatta Bhandwaldar: Those — I can’t actually recall it in terms of any sub-segment, but of course there are sub-segment like there is part of media or the way we consume content in media, I think it is changing significantly. Then there is a — there is this entire energy basket where there is lot of listed space, okay? I think while people keep having noise and debate around it, it’s a live risk, I mean the pace at which the solar is getting put the pace at which the cost of storage is coming down, it would not be far when we might not need lot of these businesses in the same shape or they will at least not be growing, they will be stagnant. So I think these two actually clearly come to my mind from a thematic perspective, one is basically the energy basket, fossil energy basket and second is basically the traditional way to consume the media and content. I think these are clearly something which is at risk. From a structural perspective, there are of course cyclical things which keep happening. The other thing that we keep thinking and I don’t have answer for that and we have sizable position in that segment, but we keep some time worrying is that how the financial systemic changing with technology, how it is changing with the consumption patterns, how it is changing with digitalization because the traditional way of banking whereby banks had a huge leverage against the consumer is gradually falling. And in that if the banks don’t keep the pace then the consumer might actually go away or use them just as a transacting entity whereby the profit pools don’t remain where they are as they are today because what banks face is twofold challenges on one hand in a way because of the structure of economy government uses them as a captive basically guys who fund the government balance sheet through SLRs and other requirements. So there is a friction cost and on top of that delivery cost is very high, so will they remain competitive say five year down the line versus a lot of new guys. As of now it’s just a debate, but that’s one thing which I think is a large segment of economy, large segment of market, very large profit pool and both from how consumer is actually changing versus how they are changing at the pace at which they are changing there — there is a sometimes looks like a risk of actually profit pool shrinking or growth shrinking at least if not the profit pools. So — but I don’t have a very, very kind of clear cut view on that as of now.
Radhakrishnan Chonat: Okay. But it’s due for disruption, know?
Shridatta Bhandwaldar: Yeah.
Radhakrishnan Chonat: And you’re still figuring out where the disruption is going to come from?
Shridatta Bhandwaldar: Who are going to be the most impacted parties, you don’t want to be there as a investor.
Radhakrishnan Chonat: Right, right. Yeah, already we are hearing about CASA pressures and stuffs, excellent. Again shifting gears a little bit, give us some insights about the performance, as well as the strategies that I know you have at two funds, let’s — let’s start with the Blue Chip Fund, as well as the Flexi Cap fund, two of your flagship funds. And if I were to ask you, what differentiates these two funds in their respective categories versus competition?
Shridatta Bhandwaldar: Sure. So I think both these funds fundamentally sit on the same basic principles that as, while as a public money managers, we can’t be purist, but we want to ensure that best of our abilities. We don’t align ourselves with the balance sheets or promoters or businesses where we will not invest our own money, okay? So that’s, that’s, that’s a very, very fundamental guardrail or philosophy that we have not only in these two products, but all our products. Second is, within these two products again the strategy for these two products have been fairly similar of course the market capitalization is different, the mix is different, but always the thought process has been markets go through cycle, there are bullish phases and there are bearish phases. There are two ways to outperform market and different fund managers have different take on it and nobody is right or wrong. Our take is basically to have sustainable rolling return gives a good investor experience, which means if you underperform little bit in the most bullish year, it’s fine, but if you could protect and your drawdowns are less than averages significantly less than averages during the worst phases, then the rolling experience of any investor who comes at any point in time is not significantly different from somebody else. And how do you create that experience? You create that experience by actually having a combination of businesses in portfolio in a proportion whereby there are stable businesses there are or kind of compounding businesses to an extent of 60%, 70%. And then there are 30% of the businesses where you play value migration, you play the balance sheet repairs, where you play the cyclicals where you play the value plays where you play the turnarounds where you play the incremental capital efficiency changes where you play the incremental promoter basically thought process changes, okay, to create additional alpha which compensate for the fees that as a mutual fund we charge and over our above to create a additional alpha. So you have a set of businesses which protects you on downside, but participates in almost virtually the market returns as a bucket not everything will participate every cycle, but that 70% generates you 12%, 13% return which is the best return of the market and then 30% you try to get basically additional alpha of 2%, 3%, of course it looks very small correct in today’s context those numbers, but that’s, that’s what you will get over a period of time, if you get that 15%, 16%, you should be very happy through five, seven, ten years last two years have been unusual, so people — expectations have gone through them, but that’s — that’s the core thought process again there.
Coming to blue chip first, the performance, see all portfolios go through — I’ve been managing money for 12 years and I think this is third I’ve seen at least the three up and down cycles as a portfolio manager. So all portfolios will go through up and down as long as you are consistent in terms of what you are doing, I think you are through, okay? It’s almost impossible to not have down here and it is almost impossible to not have up here unless, until you change your strategy at wrong point in time every time, okay? So our thought process has been very simple that in blue chip that investors are coming with the expectation that they want a good risk adjusted return with fast far lower risk and that’s how we run that product, okay? If you actually look at that product, it has outperformed on the benchmark on one, three, five ten in years and it has happened and you can get your numbers check, but it has happened with at least 15% lower standard deviation and beta than the index itself which means you are creating an experience which is far superior to or at least superior to index without actually taking the risk or not or the volatility more than risk the volatility which is accompanied for lot of products and that’s, that’s where the experience of this product has been extremely good for us, this has been one of the most successful product, in fact 2016 when I joined here, it was a INR90 crore product, okay? Today it is 15.5 thousand crore product and that has happened because through every two, three year rolling, one year, three year, five year rolling period investors have experienced, okay, this is a less volatile product clearly in terms of and still beats the index which is very, very, very difficult in a compress, a compress index like BSE 100.
So that’s how we run the blue chip and differentiation of course is key. You don’t want the volatility; you want a decent outperformance over period with good rolling returns. As far as flexi is concerned and that’s — that’s where we actually in this product we have struggled little bit as a thought process of course the PSU’s and mid-caps small caps and all did really well and we did not participate in part of that, so which hurt us across the board, but most of the portfolios have come back over last one year and so is basically blue chip and flexi and other portfolios, but in flexi predominantly when the recategorization happened, we consciously chose to keep this product in a category where which is flexi which at that point in time was typically running 25%, 30% of basically mid cap, small cap, rest 70% large cap. While the category allows it, category name is Flexi Cam and it allows you to actually go to 100% small cap also. Typically, the investors have come with the experience that came have come with in the product with the expectation that they want to have a product which is more stable not a very, very risky product because if they want 50% mid cap small cap, they can go to multi cap or large plus mid category or they can go to mid-cap, correct? So that product positioning in our mind is very simple that it is large cap plus product, okay? It is a 25%, 30% mid cap, small cap product, we have not changed that positioning throughout the period which did hurt us last year calendar year 2023 — calendar year 2023 and part of calendar year 2024, but rest of the eight, nine years it has generally done a reasonably good job still on a rolling basis it does a reasonably good job.
We don’t intend to change that positioning because in our mind the products are very simple, there’s a large cap, then there is a flexi, then there is a large plus mid, then there is a multi-cap, then there is a mid-cap and then there is a small cap in terms of risk as far as core categories are concerned and each product has its customer base and each product stands for something. And for us this product stands for basically creating little bit more alpha through mid-cap select mid cap and small cap rather than actually having a very, very large basket of mid cap and small cap and that’s where we have contained that mid cap, small cap proportionate 25%, we don’t intend to change it, we didn’t change it when we were — it was helping us we didn’t change it when it was hurting us. We have been very consistent that we if there are enough products which are available on the risk curve at the point where investors really want higher risk and higher volatility there are enough product that I can provide or anybody can provide. So I don’t want to change the positioning, so that’s where that product sat. So I think that’s roughly that’s broadly how these two products are — blue chip has a probably from a near-term perspective better performance as compared to flexi, but these are just — I have seen these are just basically phases. So most of the products go up and down as long as they don’t go down too much and in bullish phases they don’t outperform too much because that outperformance also actually come backs to hurt you if you are okay and as long as your drawdowns — the most important thing is drawdowns, like for example what people have experienced in last three months four months which we have been telling. So by the way we — last product that we launched was Balanced Advantage Fund when everybody was launching Thematic because our core thought process was, this is not the time to take risk. The earnings have peaked; the earnings are looking like deceleration from where they were in financial year 2024. If that is the case, while it is contextual and we don’t think that it is structural, but still the kind of up fronting of valuation that had happened it is not the time to take risk. We largely continue to actually kind of go along these thought processes that we should do basically products and we should have proposition which helps the investor rather than actually just helping the asset manager or the product portfolio manager. So that’s how largely actually we think about these things.
Radhakrishnan Chonat: Very interesting. You mentioned know, investors expectation has no change from the typical 12% to 15% that you can you know expect to know because of the recent bull run you know all the way 20%, 25% and stuff. So what has been the experience with the — the small cap fund and you have one more fund emerging equities fund. So what are the unique challenges of managing such funds and how do you address the expectation of a typical investor in terms of…
Shridatta Bhandwaldar: No, see, in our mind it is very clear on risk curve and return expectation where these products fall, so from that perspective managing investor expectation is not a challenge. Of course within those categories also we always are very clear in terms of our communication is to what you should expect from Can Robeco small cap versus what you can expect from somebody else’s small cap because that’s their strategy that’s what they do. This is what we understand, this is what you should expect. So when the fund so that fund had done fabulously well, again we launched in 2019 at almost rock bottom evaluations of small cap when nobody wanted to buy small caps.
Radhakrishnan Chonat: Correct.
Shridatta Bhandwaldar: In fact, when we launched the product, we just got barely INR180 crore. We actually told everybody that you should invest in small cap, but there was no money, nobody was willing to put in money okay and now that product is almost INR13,000 crore. But the moment in calendar year 2023, it started going to about seven, eight, INR9,000 crore. We started reducing the risk. Even before actually SEBI nudging the asset managers, we actually started adding large caps plus cash. So if you actually look at the monthly disclosures over last 12 months, our product is actually up at the top in terms of the liquidity profile despite being a sizeable product. So we’re very cognizant that in, as you go into mid cap and small cap, your liquidation value of the portfolio should be as close as possible to the NAV that you represent, otherwise if you have sizeable proportion of businesses which are very low market cap, low liquid companies, the moment earning cycle changes they become so illiquid and they can just correct 50% and there is no buyer after that. And there is no ability to change that portfolio also if it is a sizeable portfolio. So in those categories clearly we again stand out as a little more conservative guys. So in bullish phases, we’re very clear about that in the most bullish phases we are okay to underperform by 400, 500 basis point, okay, in years like calendar year 2023, part of 2024 where people just go berserk because the portfolios created during those phases actually come back to hurt you in the next two years and the problem is not that it comes back to hurt you. The problem is, you can’t change those portfolios because when the moment earnings turn in lot of these illiquid securities, there’s — the market just dries up for institutional investors, you can’t actually liquidate those portfolios and change your portfolio again to large caps or some other names, it’s easier said than done of course you can do it over a period of time, but it is a long drawn process, which creates drawdown your portfolio and that we want to avoid. So — but again when you look at Can Robeco emerging and Can Robeco small cap, I think again in terms of the rolling experience consistently has been above average, of course, emerging is almost like iconic product in market, but small cap again just five years but again has done a fairly good job. As a portfolio manager, we always actually keep telling this to investors that our job is not to only manage returns, our job is to actually — actually manage risk first and then create returns. But of course last one and a half year, people had forgotten that and my sense is this year most of the people will realize that again.
Radhakrishnan Chonat: Managing risks first and then return second, so managing in AUM of what 1 lakh plus crores is no small feat right and you know throughout this conversation I’ve heard the processes and principles you have that help you have that consistency and performance across diverse range of funds that you guys have. Shifting little bit, we talked about you know the consumerism, we are also seeing retail participation in financials you know pick up a number of, I mean, of course, thanks to the bull market, but number of Demat accounts, number of SIPs that have generated. Over the years you have seen many cycles. So what — I won’t say advice, what guidance would you like to give to listeners of this podcast who probably have you know started their SIPs or started their journey you know at the peak of a you know a bull market and what generally should be their ideal SIP split across categories, according to you?
Shridatta Bhandwaldar: Sure, sure. So I think as far as indirect investment or SIPs or mutual funds is concerned and if it is based on your targets of allocation over a period of time asset allocation over a period of time, I think it should be fine, even if you start today because even if you are started at the peak of the last cycle and if you have been very disciplined in terms of how you actually think about it and how you keep allocating out of your savings, your expectation, your experience has been fairly above average through longer period. So I think that’s okay in terms of what investors should be doing. In terms of split I think and we keep saying this is, there’s no basically standard answer to it because the outcome of the mix of mid cap, small cap, large cap thematic in anything real estate hold other asset classes is a function of clearly the first and most important is what kind of person you are okay? There are people who are perfectly okay to see their portfolio down 20%, there are people who are absolutely not okay to see their portfolio down even 10%, okay? So the first thing is, you should know yourself what kind of person I am because that’s what should define what kind of asset allocation you want to have. Second is and which is in a way risk appetite or volatility appetite. Second is your horizon, clearly, what is the horizon that you have because typically as far as equity is concerned on a rolling three, five-year basis there’s almost zero percent probability of you ever losing money or not making at least above fixed income returns unless until you have done lump sum at like exactly wrong point in time, okay? So again the second is basically your — the return expectation, sorry horizon and third is basically return expectation, return expectation should define how you want to allocate between various asset classes for example while real estate if you do it up as an entrepreneurial way in a particular location can generate your superior return, but generally for what retail guys do is probably the least return asset plus most maintenance heavy asset class. So these are the three things basically your horizon, your volatility appetite and your return expectation should define your mix, but typically anybody who is younger and then don’t hold me for this should at least have 30%, 40% of their allocation into equities where they want to do is, is, is, is there to get you, but gently at least that kind of bare minimum should be there because otherwise you would not be able to beat the inflation over a period of time you know in a — in a meaningful way then you then your hard work in your jobs or basically businesses doesn’t help you because you’re not actually out doing the inflation, so your purchasing power is remaining where it is or where it was, so it’s very critical to have at least some sizable allocation to equity unless you are really conservative. If you — if you are really conservative you don’t want to see your returns going into negative, you should just invest in fixed income and be happy that’s okay. So that’s one side.
Second is basically like what you said, there’s a financialization, everybody is opening Demat Account I think and there I worry a lot. It’s like I don’t know how to drive a truck, I don’t go and start driving a truck, okay? Yes, if I have energy, time, effort and money to learn how to drive truck, then by all means at some point in time, I can drive a truck, but if you don’t have all those things, don’t look at somebody else’s return, okay, don’t generalize somebody else’s experiences what somebody invested two years back and what returns you got to yourself, the normalized return expectation from equities as an asset class should be nominal GDP plus, right, because that’s where the corporate profits will grow, we are no more under undiscovered market, at aggregate there will be spaces which are. So at a portfolio, it’s very unreasonable to expect unless — so I’ll come to the second part, but very unreasonable to expect for a — for a retail guy on his own to actually beat that kind of returns in fact most likely he’ll end up actually doing accidents and actually suffering from them because he’ll come, go into futures and options, he’ll go into risky basically securities at wrong point in time because you’re not doing research. So that one should be very, very careful about unless until you have resources, time energy to actually do fundamental research or do trading whatever I mean if you you’re good at technical cement to trading. So but unless until you’re doing that then please refrain from this because 18 variably averages out, except for the period when you have the guts like what I said in 2019 when we launched small cap we got just INR180 crores. We went 30 cities in India, we marketed like anything, we did everything that we could do, told people that this is the cheapest that you’re getting small caps in 15 years, but nobody invested. So that is the case then you know the base case correct? So then you should be very happy with 12%, 13% return and focus on your job whatever or profession that you do because your ability to actually generate the maximum amount of cash flow is what your skill set is whether you’re a doctor or IT professional whatever that is rather than actually trying to do something where after 20 years also I think that we struggle at all point in time like there’s never a single day where we don’t feel like we have not done lot of mistakes. So I think that’s, that’s, that’s a long advice to a short question that you asked.
Radhakrishnan Chonat: No, brilliantly, brilliantly put, brilliantly put. F&O, it’s been proven with data like 95% of people lose money, but you know I think it’s the adrenaline rush of youngsters, I’m sure people who are listening to it will understand the sage advice that you gave them. With that you know let me ask this question that I ask you know every fund manager or no on my series, my audience I’m sure they love reading that’s why they would have listened to this entire episode as well, please give us book recommendations or the top three books that you have ever read across not necessarily related to investing, but it’s okay that probably influenced you a lot. You did mention one book you forgot the other in between one of the answers right about…
Shridatta Bhandwaldar: Value Migration
Radhakrishnan Chonat: Yeah. So other than, maybe you can include that and you know why you felt that plus two more.
Shridatta Bhandwaldar: I think; I think I’ll keep the context on investment. The first book anybody who is serious about actually doing any serious investment over a period of time should actually start with Damodaran, the Valuation Damodaran, because that fundamentally grounds you to the fact that the stock price is not in isolation, it’s a function of what the market consensus is projecting what or what you can project about the cash flow of companies, so that’s one book which anybody who understands a little bit of finance I think can read. It’s a little technical, but I think that’s a — that’s a must for anybody who is serious. The second set of books that I would suggest is, of course again if you’re a little serious about it, the starting books could be Peter Lynch, by Peter Lynch one up on Wall Street or all those three four books, because all of them teach you small, small things about how the research happens or how the portfolio managers go about finding companies, basic facts that they look at and stuff like that. If you graduate little bit more then, you should read at least one or two books if not books the mental modeled article by Charlie Munger or books by Charlie Munger on Charlie Munger or by Charlie Munger, any of those sets, but you — it will get boring if you don’t have interest in that. That’s I think the second. Third would be, there’s this book which I think was again you always look at ROI correct, so I thought it was the best return on investment is a book, book called as, which is little theoretical, but it explains the concepts very nicely, is book by Pat Dorsey on The Little Book That Creates Wealth.
Radhakrishnan Chonat: Okay.
Shridatta Bhandwaldar: It talks about why looking at the quality of businesses, quality of management is so critical, don’t go by what 100% he’s saying, but it gives you a good framework about thinking about that. I think this is — these are a few of the things that I would recommend.
Radhakrishnan Chonat: Nice.
Shridatta Bhandwaldar: If you do the first very well, then I don’t think anybody needs to read anything else.
Radhakrishnan Chonat: Excellent, excellent. Excellent set of recommendations and the last one, The Little Book, I’m definitely going to take it personally, I have not come across that. So Mr. Shridatta that’s been an absolute pleasure to catch up with you, to pick your brains and to understand the investment philosophy and know what you guys do uniquely at Canara Robeco. Thanks for taking the time out and speaking with us.
Shridatta Bhandwaldar: Thank you so much for having us on the interaction. Thank you.
Radhakrishnan Chonat: Thank you.