Beyond Conventional investing- Alternative investments with SBI Funds: What factors drive success?

Mr. Kamal Manocha, Founder and CEO of PMS AIF World held an engaging webinar in conversation with D P Singh, Chief Business Officer, SBI Funds Management; Gaurav Mehta, CIO – Alternatives, SBI Funds Management; and Mahesh A. Chhabria, Debt Strategies, SBI Funds Management.

About PMS AIF World 

Founded & Lead by  Kamal Manocha, PMS AIF World is a knowledge driven, New Age Investment Services Company, providing analytics-backed quality investing service with an endeavor and promise for wealth creation and prosperity. Over 5+ years, we have been managing 500+ UHNI & NRI families, across 750 Cr+ assets. At, PMS AIF World, we are very selective in our approach, and analyze products across 5 Ps – People, Philosophy, Performance, Portfolio, and Price with an endeavor to ascertain the Quality, Risk, and Consistency (QRC) attributes before suggesting the same to investors.

We’re responsible, long term investment service. Invest with us in the best quality products and make informed investment decisions.

Speaker Profiles

D P Singh has over 30 years of rich experience in Banking and Financial services industry and has been associated with SBIFM since 1998. As the Chief Business Officer, he is responsible for all business verticals and segments of the organization.

Gaurav Mehta has 15 years of experience in the market and has worked with Ambit Asset Management and Edelweiss Asset Management Co.

Mahesh A. Chhabria is a CFA charter holder and a CA who has over 23 years of experience in the market.

Webinar Overview

SBI Funds has an investment universe of $200 bn, where the mutual fund space takes up about $85-$90 bn and the remaining is taken up by alternates. The mutual fund side of SBI Funds Management has an AUM of ₹6.5Lcr, making it the industry leader. Alongside, the base of the alternative investments journey was being formed slowly and gradually over the last few years.

SBI Funds continue to invest in the alternatives category as the leading institutional player, as they want to chance upon the fact that India is following the footsteps of the developed economies across the globe. At SBI funds, several alternative investment products have already been approved by SEBI and plans are to enter the GIFT City as well to get the most competitive edge in the rising space of alternatives.

SBI Funds should be a force to reckon with in the following 3 years as it is believed to have understood the market and investor’s profile pretty well.

Moreover, the PMS & AIF products being offered by the AMC are gaining traction & as all investors know it, performance & returns speak for itself. Starting with the PMSs, SBI Funds’ ESG Portfolio is a multi-cap strategy that looks for businesses that are conducive to take the advantage of size of opportunities. The Porter’s 5 forces model guide the basic evaluation process for businesses to be included in the portfolio. SBI Funds ESG Portfolio invests in companies that comply with 3 characteristics: Energy Conservation, Social Impact, and Good Governance. The portfolio has delivered a stellar performance of a 15.1% CAGR since its inception (July 2016).

While this PMS has been running since a few years now, SBI Funds recently also launched another PMS which is the SBI Aeon Alpha Portfolio. The difference between the two PMSs is in the asset allocation. SBI Aeon Alpha portfolio will be built aiming to have 15 – 20 stocks which will be a combination of long-term structural ideas, medium-term tactical opportunities and active cash calls. This combination would ensure a lower drawdown during volatile times. The investment philosophy followed for this portfolio would be based on the business story, the management team, and the valuations at stake. The SBI Aeon Alpha Portfolio is all set to make its mark in the PMS space.

Moving on to AIFs, the SBI Optimal Equity Fund is a Long-Short Category III AIF is a portfolio of 20-30 stocks that are aimed at maximising returns & minimising drawdowns. The long only strategy of the equity will be a concentrated portfolio, investing in high conviction ideas. Derivatives strategy will predominantly be used for downside protection, however, the strategy may also be tactically used for return enhancement. This AIF is set to launch in April 2022.

The SBI Aeon Fund- a Long-Short Category III AIF is essentially the same as the SBI Optimal Equity Fund, but this fund will only accept investments in dollars. This fund will be managed by SBI Investment Opportunities Fund (IFSC) and is still awaiting certain regulatory approvals and will launch soon in 2022.

The debt side of forthcoming AIFs at SBI Funds are to include bonds in the listed space, especially the foreign currency bonds that act as a natural hedge in the portfolio. Tactical calls would include convertible bonds that help to maximize dollar returns for investors.

The CAT III AIF open-ended fund will be devoid of sectoral limits as well as tax at the hands of investors. Interest rate swaps will help the fund to take calls on the interest rate risk along with convertible bonds that are also attractive.

The accommodation of credit and duration in a single product is quite a skill and SBI Funds plans to bring in a fine balance.  With the debt side already coming up with disruptive products, the equity side is not far behind in the ladder. Mr. Gaurav Mehta revealed two important points that over the last 15 years passive management has been winning the battle at the expense of active and secondly, the alternates industry is growing by leaps and bounds.

The thought process behind the points noted is quite counter-intuitive as investors are happy with index-like returns, managed completely on their personal level while on the other hand, they are also eager to pay higher fees to manage their funds in the alternate space to generate alpha.

SBI Funds plans to enter the small-caps with concentrated positions and a small investable corpus in the beginning. Alternate products seem interesting as far as small-caps are concerned due to the downside protection offered by them. The amalgamation of investing in publicly listed stocks and private equity will drive results for the asset management company.

Long-term alpha generating alternative products are quite different from the plain vanilla mutual funds that are devoid of downside protection. Meeting specific client requirements combined with placing tactical bets boost the prospects of the alternate category.

The ability to express the asset allocation skills of the manager is much clearer in the alternate space. SBI Funds have recently launched a PMS scheme that charges investors only a performance on the alpha generated when compared to the NIFTY50 TRI. An in-house ESG team helps the businesses with sustainability and development goals. It ensures that investors continue to reap rewards from their investments.

The investment products at SBI Funds are differentiated based on the risk appetite of investors. It is true that small-cap players have an in-grain quality of witnessing price volatility, but it does not ensure that the business process has also taken a toll. Investors with a high-risk appetite are offered a scheme that follows a PIPE like strategy (private and public equity investing).

On the other hand, investors with a lower risk profile are offered long-only products. Suffice to say that fund managers need to cut back on risks when investors are euphoric as an objective investment framework has helped SBI gauge market sentiments clearly.

An ideal product has an innovative outlook over valuations and easily quantifies investor sentiments. Valuations, sentiments, and earnings is a three-pronged approach followed by fund managers at SBI Funds. The net exposure for a long-short fund is calculated in such a way that it starts from 0 and ranges to 130. It is the surplus fund in the portfolio that helps managers take on additional risk via futures and derivative products.

The GIFT City investment experience is not only limited to HNIs and foreign nationals, but domestic investors can also enter the market by following the prescribed guidelines. Taxes in GIFT City are at the fund level and the investment in government bonds, here, are taxed at exciting rates.

The bonds listed here are denominated in Dollars which ensures natural protection from devaluing of currency. Taxes, depreciation, capital gains and the interest rates will be kept in mind while investing in the debt side of the PMS. It will be a mix of strategy and tactical call that will be taken here. It is not necessary that a higher gross yield will ensure a higher net yield as the factors mentioned above will play a critical role.

Moving on, Mr. Kamal Manocha mentioned that the fact that the product being offered by SBI Funds generates superior risk-adjusted returns as compared to conventional investments raises a question in the minds of the investors- What risks will an investor have to undertake for this? The speakers answered that with these funds, volatility is a given but at the same time not letting their guards down with respective to the quality of businesses in the portfolio, helps ensuring a higher probability of correct due diligence. The focus is not only on maximising returns but also minimising drawdowns.

With respect to the products being offered, Mr. Gaurav Mehta summed up the following:

The PMS offers a higher return than a Long Only Product.

The local AIF gives the investor an experience of Equity like return with lower risks.

The GIFT City investment gives an Equity Plus in terms of return & an Equity minus in terms of risks.

While a lot of AMCs that did well in the Mutual Fund space & hence entered the Alternates, couldn’t survive for long; SBI Funds (having grown from the MF Space & expanded) has stayed and is performing well in the space of Alternates. They have a very strong team on the PMS side & the thought process and the investment philosophy is such that they might have a subsidiary for the Alternates business very soon. And given the reach that SBI has, along with returns, SBI Funds is very well set to grow in the Wealth Management Space & emerge as leaders here as well, just like they have in the MF Space.

PMS AIF World is here to help investors build wealth by making them aware of the industry leaders & help them invest in funds that maximises alpha for them.

RISK DISCLAIMER: Investments are subject to market-related risks. This write up is meant for general information purposes and not to be construed as any recommendation or advice. The investor must make their own analysis and decision depending upon risk appetite. Only those investors who have an aptitude and attitude to risk should consider the space of Alternates (PMS & AIFs). Past Performance may or may not be sustained in the future and should not be used as a basis for comparison with other investments. Please read the disclosure documents carefully before investing. PMS & AIF products are market-linked and do not offer any guaranteed/assured returns. These are riskier investments, with a risk to principal amount as well. Thus, investors must make informed decisions. It is necessary to deep dive not only into the performance, but also into people, philosophy, portfolio, and price, before investing. We, at PMS AIF World do such a detailed 5 P analysis.