Co-head of equities explains the underperformance in DSP Dynamic Asset Allocation Fund

A commerce graduate with an MBA in finance, Rohit Singhania was drawn to the financial markets early in life. He saw promising opportunities in investment banking and the stock market when the markets opened up post-1993-94.. Starting his career as a research analyst with several renowned organisations like HDFC Securities, IL&FS, and Quantum Securities, he delved into sectors such as cement, metals, and autos.

Now, as the co-head of equities at DSP Mutual Fund, Singhania manages assets worth Rs 35,837 crore across five schemes in hybrid, equity, and thematic categories.

In this interview, Singhania shares his investment philosophy, stock selection strategies, and plans to improve the performance of his equity funds. Below is an edited excerpt of our conversation.

After completing your MBA, you worked as an analyst with several organisations, including HDFC Securities, IL&FS, and Quantum Securities. What were your key learnings from these experiences on the sell side?

When I started my career, I was very raw. My first job involved covering sectors like cement, metals, and auto. I was lucky to have a good bunch of senior members who helped me understand every sector. One key learning was that every sector's dynamics are different. If you're a sector analyst, you need a thorough understanding of each sector, the moats of every business, and the factors that drive the business.

On the sell side, the task is somewhat easier because you're primarily required to provide buy or sell recommendations. The learning process involved understanding various sectors deeply, carrying out tasks independently, developing models, and making decisions. Today, new analysts joining our team will receive all the necessary support and guidance. As an analyst, you must undertake all tasks from the beginning until the report's publication. This important experience comes only from being a sell-side analyst.

Can you describe your investment philosophy?

In the world of investments, nothing is good or bad. If a stock is good, there might be some reasons behind it, such as a strong balance sheet, good return ratios, and solid cash flows. However, when I buy a company, I buy it for the future. So, I need to analyse whether the company will continue doing well. Even if a company is bad, I need to understand why-whether it is due to poor cash flows, low return on equity (ROE), cyclical challenges, or balance sheet issues. For me, the starting point is not very binary; I'm open to analysing everything, whether good or bad.

Additionally, I don't like overpaying. There should be a margin of safety when buying a stock. In summary, my approach involves investing in growth-oriented companies that offer a margin of safety in their valuations.

What criteria make a stock a compelling buy for you?

Like all other fund managers, we consider the business outlook, return ratios, cash flow generation, and other fundamentals to determine if a business is good or bad. Once we have that confidence, we see if it can continue over the next few years.

Second is the purchase price. Since we aim for the stock price to appreciate over the next two or three years, buying at the right price is crucial.

Next is valuation, where every sector has its own nuances. For example, in financials, we look at price-to-book multiples; in consumer staples and IT, we look at PE ratios; and for some engineering goods and pharma companies, we look at EV/EBITA.

Finally, we assess the investment's risk. These four factors—business fundamentals, purchase price, valuation, and risk—determine our decision to buy or sell a stock.

You've been with DSP for around two decades. What has kept you loyal to one fund house? How have you seen your career grow at DSP over the years?

I still remember when I came to DSP for my interview. I knew all the fund managers well from my time as a sell-side analyst, and they were familiar with my work. However, when I met with HR, they pointed out that I had joined four organisations in the past four years and questioned my ability to stay committed. I replied that perhaps I wasn't in the right organisation. So, the organisation plays a crucial role, along with the opportunities it provides.

In 2005, I began my career in portfolio management services (PMS), but the division subsequently closed. At that time, Vinit (the head of equities at DSP) was also in PMS with me. The organisation recognised our talent and integrated us into the mutual fund side. DSP has valued our contributions and provided us with opportunities. We have opportunities to develop and grow within the company. Simply put, this is my fifth job in 24 years, but I've been with DSP for the last 20 years.

The returns for the DSP Dynamic Asset Allocation Fund have been quite low. Since you started co-managing this scheme in the last six months, what are your plans to improve its performance?

In my opinion, this category of funds is suitable for investors seeking the least risk while earning some extra returns over traditional products like bank fixed deposits (FDs). My understanding as a fund manager is that stock selection and sizing must be stable. If I have a strong preference for stock A, meeting all the necessary criteria, I would allocate more weight to it in my tax saver and equity opportunity funds but keep a lower allocation in my dynamic asset allocation fund (DAF). The reason is that there is a possibility of risk and potential negative outcomes, so I aim to minimise the risk by reducing the size of my investments.

The best names will be there, but the weights will be significantly lower than what they are for equity opportunities and tax savings funds. Additionally, you have to balance the portfolio differently than you would in your regular funds. For instance, during periods of euphoria, you should aim to lower the fund's beta. The fund's concept is to protect the downside and avoid extremes in either value or growth investment styles. I believe this approach will enhance our experience and that of our investors.

You've been managing the DSP TIGER Fund for over a decade. Despite the infrastructure index rising by 115 per cent in a year, the infrastructure funds seem to underperform against the index. What causes this underperformance, and do you believe investing in cyclical thematic funds still makes sense for investors?

I would differ from your statement and would like to provide some data to support my argument. Since its inception, the fund has given a slightly higher compound annual growth rate (CAGR) return of 18 per cent. Over the last 15 years, it has been up by around 15 per cent, beating the NSE 500 handsomely. Now, if you look at the benchmark, you have stocks with weights of 15 or 20 per cent in the index. However, as a fund manager, I am limited to a maximum of 10 per cent allocation per stock in the portfolio. So, you have to look at a broader index, such as the NSE 500, for its return comparison. If we compare the returns of the TIGER fund to the NSE 500, it has done pretty well over time.

Regarding your second question, I have made three pitches for the TIGER fund since taking over in 2010. During the first two pitches, I suggested investing in this fund for 15-18 months would likely yield positive returns. However, around 2021, I advised investors to consider a five-year investment horizon for the infrastructure theme. Even today, I recommend a five-year investment period to my investors. Basically, investors should stay in this theme for a longer duration. This confidence stems from the fact that when I took over the fund 14 years ago, we closely monitored the order book and sales of insurance companies. So, the higher the order book-to-sales ratio, the better the company. We used to also look at the balance sheet and profit and loss statements. But today, I am looking at return on investments (ROIs), cash flows, and what dividends the companies will pay. Therefore, the entire scope of the business has transformed.

The infrastructure theme includes several sub-segments, such as abrasives, building materials, and manufacturing. Therefore, I am highly optimistic about this sector and encourage investors to commit to a three to five-year investment period.

Also read: "Not too concerned about valuations in Indian markets" DSP's Rohit Singhania