Evolution of a Fund Industry: Sankaran Naren has seen first hand India’s investing transformation

By S Naren
Chief Investment Officer (CIO)
December , 2016
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Sankaran Naren was a child in the 1970s when the Indian government passed the Foreign Exchange Regulation Act, which mandated foreign companies dilute their holdings in India. The result was that multinational corporations such as Colgate, Nestle, and Pfizer had to be listed in India. Naren’s father invested in their underpriced IPOs and earned significant returns. Naren was hooked on investing.

“I realized that equities as an asset class can make sizable gains for any investor, if invested at the right price,” he says. After getting an engineering degree, Naren focused on finance while earning an MBA in 1989 at the Indian Institute of Management in Kolkata. He knew he wanted to make a career in the financial markets.

Three decades later, he has seen the entire cycle of India’s evolution to an economic powerhouse from pre liberalization to now.

Right Place, Right Time

Today, Naren, the chief investment officer and executive director of ICICI Prudential Asset Management in Mumbai, is among the most respected names in the Indian fund industry.

He is known as one of India’s best value investors, and his easygoing demeanor and straight talk, and his ability to communicate simply about investing, have endeared him to retail investors and financial advisors alike across India.

With all his success, Naren says that he was just lucky to be at the right place at the right time. He worked for a brokerage house in the city of Chennai in the 1990s. His desire to become a fund manager then brought him to Mumbai, the financial capital of India. He became chief operating officer of HDFC Securities before joining ICICI Prudential as a fund manager in 2004, a time when awareness of mutual funds in India was low. The fund industry’s assets under management were small, as Indians chose other places to put their savings.

All that changed with a bull market. From 2003 to 2008, India’s S&P BSE Sensex index increased sevenfold.

The timing proved to be very beneficial for both ICICI Prudential and Naren. Naren’s funds performed well, and in 2011, he became the firm’s chief investment officer. He still manages two funds: ICICI Prudential Dynamic Plan and ICICI Prudential Top 100 Fund. In 2016, he added executive director to his title. Meanwhile, ICICI Prudential became the largest asset-management company in India.

Investment Philosophy

Naren is best known for his contrarian and deep-value picks; he avoids chasing hot stocks. As a contrarian over the years, he developed a knack for spotting neglected sectors and stocks before they become vogue. He believes that to pick out-of-favor stocks a fund manager should approach stock-picking with a mixture of top-down and bottom-up thinking.

Naren steadfastly sticks to his convictions. He cites the investing tenets of renowned investor James Montier and believes that if an investor wants to make money, he or she must be a contrarian and believe in value.

Further, he believes that value picks are available in every type of market, but that to spot these gems, an investor must think very differently from the crowd. It can take a long time for the fruits of this type of investing to appear, which he admits can be unnerving at times. He often is alone in his convictions, taking positions in a stock or sector that Wall Street has deserted.

Naren says that the volatile nature of equity markets, coupled with the ability to invest on behalf of ICICI Prudential Mutual Fund, is the most exciting aspect of his job. Often, markets are either in panic or euphoria, both generating opportunities for a patient investor.

“In order to make money over long term, an investor needn’t dump a strategy which hasn’t worked well in the immediate past,” Naren says.

In addition to Montier, Naren says that Howard Marks and Michael Mauboussin are investors who have influenced him the most. He calls them the “3Ms.” Montier’s belief in being a contrarian and insisting on margin of safety are two investing tenets that Naren holds dear. He says that Marks’ practical approach toward investing—that investing is basically common sense backed by right temperament and a good idea—has greatly impressed him. Behavioral finance veteran Mauboussin’s cautionary view of being aware of one’s biases, understanding value (the present value of free cash flow), and properly assessing strategy (how a business makes money) has been key to his success.

Exposure to U.S. Wide Moats

Indian investors historically have a very strong home bias, but with the introduction of several funds that invest in global stocks and funds over the past decade, this is slowly changing. Indian investors are very familiar with the innovative products and services of foreign companies such as Apple, Alphabet, Amazon.com, and Facebook, and they want opportunities to invest in them.

ICICI Prudential and Morningstar have partnered to help make that happen. ICICI Prudential US Bluechip Equity is one avenue for Indian investors to gain access to U.S. markets. The fund launched in 2012 with the help of the Morningstar’s index team. The fund is linked to the Morningstar Wide Moat Focus Index, a benchmark that tracks the performance of 40 U.S. companies that Morningstar’s equity research team believes have a strong long-term competitive advantage within their industry.

From Naren’s perspective, the arrangement was a natural fit; the two firms “share a focus on strong global brands that are less cyclical,” he says. The ICICI fund isn’t exactly passive. Instead, the index serves as guidance for the bulk of the fund’s assets, and Morningstar’s equity research provides research support for the fund’s stock-picking. Naren’s management team makes the fund’s investment decisions.

Naren also says that Morningstar’s fund research in the Indian market brings a level of sophistication. He says the firm’s data analysis and research are helping Indian investors make better fund decisions.

The typical Indian investor today is more informed and cosmopolitan than ever before. India’s economy is strong and becoming more business friendly thanks to recent reforms. As Indians increase their wealth and look to invest more, the country’s growing mutual-fund industry is in position to earn their trust and, thus, their assets. With leaders like Naren at the helm, that trust should come easy.

This article was published in the December issue of Morningstar