In an extensive interview with Value Research, S Nagnath, President and Chief Investment Officer, DSP Merrill Lynch Mutual Fund discussed his investment strategy, his team of fund managers and why some of his company's funds have a huge portfolio of 50 to 60 stocks.

"We are very bullish on basic engineering and capital goods as a sector," despite not being particularly bullish about the construction sector, he says.

Contrary to the popular market feeling that the technology sector is heading for a bad phase S Nagnath says that there is nothing wrong with the sector and he remains bullish on the Indian IT sector in the long run.

Here's the first part of the interview with S Nagnath:

What gives your organisation a competitive edge in the market? 

We have not had just one fund doing well, but many. Our funds have done well across themes, sectors and market capitalisation. That itself gives our funds a better profile in the market place. 

Your funds have done very well. What's the secret?

Our funds have done well across themes, sectors and market cap. It boils down to skillful stock picking and sectoral allocation. I have to give my team full credit.  

How big is your investment team? 

We currently have three fund managers, three analysts, and one dealer.  

We have a risk management team of four headed by a risk manager. They monitor the fund's portfolios and run the portfolio matrix through various parameters. 

Anup Maheshwari, head of equities and corporate strategy, has been in the business for almost 12 years and has a great track record. Soumendra Lahiri - Co Head of Equities, a talented stock picker, has around 12 years of experience. Apoorva Shah, another fund manager has around 16 years of experience. 

It's a talented team, having years of experience across market cycles and understands different sectors very well. This contributes to our large talent pool in terms of intellectual capital.  

Do your fund managers team up as analysts? 

Yes. Each of these fund managers has an analyst to help him out. But if you are a fund manger, you are also effectively analysing companies.  

Like all other fund house, we talk to a variety of brokers in the market place and we get research inputs from these brokerage houses. Our team of fund managers and analysts refer to that but also do their own research alongside before arriving at a buy, sell or hold decision.  

How involved are you in the investment process? 

Since I have the oversight of the investment process -- fixed income and equity -- my job is to largely provide the macro inputs. I look at the broad macro trends, market direction of trends, global liquidity trends, currency, inflation, interest rates and some sectoral trends.  

We do have periodic review meetings where we discuss all these issues. I provide my inputs and hear what the team has to say.  

Even our stock picking ideas are debated and discussed when we meet. But I leave the final decision to the concerned fund manager. There is no single person who takes that decision.  

My team has a great deal of autonomy and flexibility. 

You are the President and CIO. Is there any conflict of interest in your roles? 

One is the business oversight responsibility and the other is the investment oversight. Having a talented team helps do justice to both the roles.

Does your AMC have a particular investment style?

We are essentially bottom-up stock pickers with a degree of top-down macro analysis. Not pure bottom-up or top-down. Around 60 per cent of our effort is bottom-up stock picking and the remaining 40 is top-down analysis, sectoral trends, macro analysis, etc. 

In India, we have not as yet gotten into that growth-value select focus verticals that you find in other global markets. But broadly I would say that we are growth investors. But within that, there is a segment called Growth At a Reasonable Price which is a nomenclature used in the West - GARP. We are in that category.     

Some of your large-cap funds have huge portfolios of around 60 stocks. Why such diversification?

There could be some positions that are in the process of being sold out or some miniscule IPO allotments. But, for a large-cap, diversified equity fund with a largish corpus, 50 to 60 stocks is a ballpark number.  

So your mid-cap and micro-cap funds will have as many, if not more?

Possible, given the level of liquidity and turnover etc. Let's say you have a Rs 1,500 crore fund and you want to put 3 per cent in one stock. That would amount to Rs 45 crore. For that kind of a position size in a mid cap stock, you have to have a reasonably high degree of market turnover on a daily basis. So the number of stocks may be a little more. 

What are your views on the tech sector?

People are taking a pessimistic view given the rupee appreciation. And we believe that some of that may be borne out in the quarters' results -- so we will wait and see. In the long term, we are bullish on the sector. If you look at the hiring plans of the large tech companies, it is stupendous compared to what we saw three years ago. So that tells us that there is a high degree of confidence on part of the companies about their pipeline of business. So while the rupee appreciation is a near-term negative, over the medium- to long-term we see no major problem in terms of revenue growth.    

Why don't you have aviation stocks in your currently portfolios?

I think we have to increase our understanding of the sector a little more. At the moment, the listed opportunities are few. And in the context of extremely high competition and high fuel prices, it is better to wait and watch.  

Construction is not your favourite sector but exists in your portfolios. How bullish are you on it?

We are very bullish on basic engineering and capital goods as a sector. So construction as a sector by itself may not have a huge weightage, but we classify it as part of engineering and capital goods. Anything to do with capex spending by the corporate sector, infrastructure development by the government or private sector, we are very bullish on. We are also very bullish on energy and oil & gas.

Part II: Is investing in a micro-cap mutual fund risky?