Vetri Subramaniam, Chief Investment Officer, Religare Invesco Mutual Fund, has spent over two decades in the Indian equity markets. In this exclusive interaction with Wealth Advisors, he gives us a glimpse into his investment philosophy, portfolio construction strategy and shares with us key defining moments from his career
In all our interviews with India’s leading fund managers, we always throw in a question about their favorite books on the stock market. When I interviewed Subramaniam, he mentioned the names of four books he enjoyed reading. They were – Reminisces of a Stock Operator by Edwin Lefevre, Common Stocks and Uncommon Profits by Philip A. Fisher; Peter Bernstein’s Against the Gods and Winning the Loser’s Game by Charles Ellis.
As Subramaniam rattled out these names, I could see the passion and excitement for the stock market in his tone. He went on to describe how he really loved the narrative in Reminisces of a Stock Operator, where a fictionalized character Jesse Livermore moves from day-trading to Wall Street, picking up several learnings along the way. The excitement shared by Subramaniam got to me, that I ordered the book on the way back from the interview and I am now hooked.
Anyway, this article isn’t about the Religare Invesco CIO’s favorite books. It is, instead, about how this stock market veteran of two decades devised the investment philosophy he follows today, the learnings he had from his earlier stints at Motilal Oswal, Kotak Mahindra Asset Management, ShareKhan and SSKI, key defining moments from his professional life and finally, his views on managing risk.
In short, we wanted to give our readers a peek into the thought process and portfolio construction strategy adopted at Religare Invesco, led by Subramaniam.
“It gave me a chance to think beyond stocks and financials. We were thinking about building teams, figuring out what customers wanted and it helped me appreciate the process of building a business. The ShareKhan experience shaped me both as an investor and as a person significantly.”
Subramaniam joined Religare Invesco in June 2008, after a brief stint at Motilal Oswal, where he was Chief Investment Officer. I requested him to share with us his investment philosophy and how it has evolved over time? More importantly, I wanted to get an answer to a fundamental question – why is an investment philosophy so important to have?
Subramaniam says, “At a very basic level, there is a market out there with 5000 odd listed companies and 1200 or so regularly traded companies. Our job is to filter this universe of 1200 companies and bring it down to 40 or 50.”
He explains further: “As an equity investor, you may be buying shares, but essentially you’re giving money to run a business. Therefore, a key metric to track would be Return on Equity and Return on Capital.” Of course, some businesses maybe cyclical, while there are several other companies that are non-cyclical. In the case of the former, it is crucial to look at RoE over a cycle.
When quizzed about the importance of the right promoters, Subramaniam had a very interesting view. His theory is that, he’ll look at the promoters right at the end, after analyzing key financial metrics. “I have observed that perceptions about promoters change over time and are very subjective. For us, the key focus is to look at RoE and do the relevant research about a company,” he explains.
Additionally, Subramaniam emphasizes on another metric he looks at – potential for mean reversal in valuation. “The RoE metric tells us if a company is good or not. But, is the company attractive at this point of time? Does it give scope for returns? We may see a particular company having a depressed RoE. Is the valuation reflecting this? Can this be reversed?” These are the kind of questions Subramaniam and team ask themselves.
Subramaniam started his career in 1992 selling car loans at Kotak. Within a short duration, he realized this wasn’t his cup of tea. In 1994, he got an opportunity in the proprietary trading desk at Kotak, and quickly jumped ship. He says, “It is important to know two things – what you want to do with your career, and more importantly, what you don’t want to do.” Subramaniam admits that it was luck that ensured he got into this new role at Kotak. SN Rajan, the first CIO of Kotak Mahindra Mutual Fund, was his boss and mentor and Subramaniam learnt the art of “keeping things simple, straight and honest.” It was here that he realized the importance of making decisions with conviction.
After a few years in the equity markets, Subramaniam joined the founding team at ShareKhan, and in his own words, it was a “game changing experience.” Subramaniam says, “It gave me a chance to think beyond stocks and financials. We were thinking about building teams, figuring out what customers wanted and it helped me appreciate the process of building a business. The ShareKhan experience shaped me both as an investor and as a person significantly.”
This stint also made Subramaniam realize that he enjoyed being a part of younger setups and shaping up an organization from ground up.
On managing risk
Classically, there are two kinds of risk – market risk and stock-specific risk. Subramaniam says, the key to tackling stock-specific risk is to get the research done right. “Normally, we look at a 10-year history of the company. We analyze management integrity, the way they have communicated, capital allocation decisions and the financial implications of these decisions. Closely tracking the 10-year history will give you a good understanding of the risk factors and how the management mitigated these,” he explains.
Subramaniam also warns that access to management cannot serve as a shorthand for “knowing” a company. It is crucial to understand (through research) if what the management team is saying makes sense, taking into account, management’s communication and data from the past. He also suggests that putting together a diverse team of analysts will throw up a variety of questions, so the understanding of risk is much better. For example, if agri-input companies are not doing well because of lack of rainfall, it should have been factored in as a risk factor, explains he.
Of course, market risk can result from various unknown factors and is a lot more difficult to manage. One type of market risk, is in terms of valuations and it is crucial to make sure this valuation risk is taken into account at the portfolio level.
On Behavioral Bias
We wanted to ask yet another question we ask all fund managers – the role of behavioral bias. For this, Subramaniam simply says, “Of course, we’re all conditioned by the experiences we’ve had in the past.” Then after some thought he explained this further. “I started my career in 1994 and have been conditioned by the long winter from 1994 to 2003, when the market went down 30% or so in 10 years. It has taught me many valuable lessons,” he said.
One of the key lessons it taught was to build a diverse team, that is allowed to speak up and share views freely. Tongue-in-cheek, he says, “experience does make one cynical.” He adds, “Some of the younger people on our team, spark hope, and have a ‘can do, can happen’ attitude.”
“The important aspect here is to realize that as an investor one has to understand and appreciate the art of thinking probabilistically. A set of events can lead to Outcome A and another set of events can lead to Outcome B. Know this, understand this, yet, make your decisions with conviction,” says Subramaniam, on a parting note.
- Reminisces of a Stock Operator by Edwin Lefevre
- Common Stocks and Uncommon Profits by Philip A. Fisher
- Peter Bernstein’s Against the Gods
- Winning the Loser’s Game by Charles Ellis.