Madhusudan Kela earned a formidable reputation as a stock-picker and built Reliance into India’s biggest mutual fund. And then he had a rethink
On a warm Delhi evening in 2006, star fund manager Madhusudan Kela and his trusted lieutenant Sunil Singhania were at a dinner with the promoter of food processing company REI Agro. The firebrand duo from Reliance Mutual Fund was considering an investment in the up and coming firm. The company had also arranged their visit to the factory the following morning. But as the dinner progressed and the chat kept coming back to REI Agro’s future plans, Kela became more and more excited. He asked the promoter if they could visit the plant immediately after dinner instead of the next day. Taken aback, the entrepreneur nevertheless said yes. So it was around midnight that Reliance Mutual Fund decided to make one of its most daring bets.
Passionate. Impatient. Instinctive. Crafty. These are some of the adjectives that the mutual fund industry knows Madhu Kela by. He is the man who built the equity funds of Reliance MF from Rs. 13 crore in 2001 to a record-breaking Rs. 40,000 crore in 2010, helping the fund house become India’s largest in the process.
For awestruck rivals and happy investors, he was the Enduring Atlas, the titan who held up the heavens for all. A man who had the nose for multibaggers much before anybody else did.
Like the time when he had a chat with a Kingfisher airhostess on a flight from Delhi to Mumbai. That led him to do more research on the sector, and he decided to invest in SpiceJet. Or when he took a close look at Adani Enterprises in 2006 when it was just a trading firm and bet on its future. Or even the investment he made in Jindal Steel & Power in 2003 and saw its market capitalisation zoom by 40 times within six years.
Over time, Madhu Kela became the embodiment of smart stock picking and hundreds of thousands of investors trusted him with their money. He became the icon of ‘bottoms-up’ investing, picking scalable long-term opportunities with the help of rigorous balance sheet scrutiny and intense research of corporate plans. Under his watch, Reliance MF beat ICICI Prudential in a neck-and-neck race to the top spot in asset size.
But then, why has Kela suddenly changed his investment style? Why has he left the mutual fund to work at Reliance Capital, its sponsor? And why is he furiously hiring industry experts from across multiple fields, employing one even to study inflation exclusively?
Clearly, there is something fundamental that is changing at Reliance Mutual Fund, the lone trillion-rupee fund house in the country.
Four months ago, in an extremely silent move, Kela moved out of the mutual fund to Reliance Capital as chief investment strategist. It took a while for outsiders to notice this change, but when they did, speculation flew thick and fast. It came at a time when the Anil Ambani group, which owns the mutual fund, was negotiating a settlement with the market regulator over charges of misusing funds raised abroad. It also came at a time when its flagship equity fund, the midcap-focussed Reliance Growth, had begun to underperform the stock market.
Only when Kela began work at his new role, the contours of the change became clearer. Kela is turning his own investment philosophy on its head and is chiseling a ‘top-down’ approach as against a ‘bottoms-up’ one. This means studying the macro swings in the economy and industry and spotting multi-year trends that will yield investment opportunities. It is what the best international fund houses do. But this also requires casting the net wide and hiring domain experts. Exactly what Kela has set out to do.
“I have always looked at a company’s individual financial parameters and never really bothered about what is happening in the outside world,” Kela recalls in an interview with Forbes India. “But the 2008 crisis affected our portfolios and that is the time we decided to concentrate on the macro factors as well.”
A Salesman Par Excellence
Early in his career, Kela clearly showed his ability to see the big picture. A commerce graduate who also studied management at Mumbai University, he spent several years in the ‘sell side’ of the markets before defecting to the ‘buy side’ mutual funds.
Kela was instrumental in setting up the institutional desk at brokerage Motilal Oswal in the Nineties. “Madhu Kela managed to earn himself a reputation as a sales person because he used to put himself in the shoes of the fund managers and work closely with the research team,” says Ramdeo Agarwal, director and co-founder of Motilal. “There was an excellent relationship between the sales and the research team and Madhu was passionate about the business.”
His success at Reliance largely comes from the team he built in the early 2000s. With a ten-minute talk, he convinced Sunil Singhania, then of Advani Share Brokers, to join him. They often hunted in a pair, mainly through the vehicle of Reliance Growth.
One of their biggest bets was Jindal Steel & Power. In 2003, the doyen of the group, O.P. Jindal, had not yet got the market recognition that his companies later earned. The fund managers saw a gap between reality and the perception of the management by the market. They picked Jindal Steel & Power when its market capitalisation was a mere Rs. 300 crore. Their view was that profits will grow by four or five times in the following years. But they were in for a pleasant surprise. Profits went up by 40 times and market capitalisation rose 200 times in the next seven years. The P/E multiple moved up from 3 times to 15 times.
The Kela-Singhania team hit another home run when it invested in liquor company Radico Khaitan at a time when the business was a loss-making proposition and investors typically avoided the sector. They made 15 rupees for every rupee they put in. Similarly, with Pantaloon, they earned five times their investment.
The Soul Searching
With such investments, Reliance Growth grew to be a very successful fund and also a high alpha one. That is, its movement was more volatile than the general market. This proved to be a handicap for Kela during and after the financial crisis. The smaller stocks which had so far given hefty returns proved difficult to sell in an environment where investors began putting a premium on size and quality. “This fund has a long- term track record and has emerged as the second best performing open-end equity fund globally over a 15-year period and the fifth best performing equity fund globally over a 10-year period. However, the fund’s performance has dipped over the past few years and it dropped to the third quartile within its peer group,” says Dhruva Raj Chatterji, senior research analyst, Morningstar India.
Almost at once, Kela and Singhania went in for introspection. Even much before the crisis, they had pushed Reliance Growth to invest in large cap stocks (up to 30 percent of funds) because its growing size needed the cushion. But now, they started taking a complete relook at the way they invested. Maybe, they realised, just a rigorous look at cash flows, margins and P/E was not enough because something that happens in some corner of the world could destroy the fund’s net asset value overnight.
There was another problem. About a fifth of Reliance Growth’s Rs. 8,000 crore assets was parked in small companies. The fund had invested less than 1 percent of its assets in each of these companies and was not required to detail them in its portfolio declarations. At a time when investors shunned companies with even a minor problem, many of these lesser known stocks went out of favour.
Thus, the turning fortunes of a mid-cap-led ‘bottoms-up’ strategy made Kela change his views. He began leaning on what he calls ‘blue-sky thinking’ more and more. It was clearly time for him to move beyond the mutual fund and take on a larger advisory role. (As if to signal the shift of stance, Kela has even moved to a different tower in One Indiabulls Centre in Mumbai’s Parel area where Reliance Capital and the asset management company are headquartered.)
The new approach is bringing insights that would have been missed by Reliance fund managers earlier. For instance, in December 2010, Kela saw that the average inflation expectation from brokerages was in the region of 5 percent. Kela had already started paying attention to inflation in a much bigger way and had hired a person in Delhi whose job was to follow the data and how the government changes and includes items in the official inflation basket. That leg work showed that the number could be much higher, at around 7.5 percent. Based on this, Reliance went underweight on the banking sector. By the time the banking index lost 10 percent due to the impact of inflation, Reliance mutual funds had already gotten out of the key bank stocks. The hit on the NAV was avoided.
The ‘bottoms-up’ approach has not lost its merit, though. Sunil Singhania, the new head of equities at the fund house, will continue to be a stock-picker looking for tomorrow’s winners. “The basic characteristic of the Reliance Growth fund has not changed. It is focussed on delivering long-term alpha for the investors,” Singhania says.
Meanwhile, Kela is on a hiring spree. Wanted: Blue-sky thinkers. As part of his plan to infuse a fresh lease of life to Reliance Capital, he wants to hire 15-20 strategic thinkers to guide the team of 32 people at Reliance Capital and the fund house. A new employee is Biplab Majumder, the just-retired vice president and managing director at ABB India. Majumder will guide Reliance Capital in its investments into power and other infrastructure projects. Kela had to do eight trips to Bangalore to convince Majumder to take up the assignment. In that sense, he is back on the ‘sell side’!
Among the other plans of Kela is a focus on Monthly Income Plans (MIPs), the debt-focussed avenue for the risk-averse investor. In the last two years, the MIP portfolio of Reliance has grown from Rs. 200 crore to Rs. 8,000 crore. Kela believes he would be able to wean away a portion of the money going into bank deposits, given the superior tax benefits of MIPs. Kela also wants to take his mutual fund business into the hinterland. As much as 90 percent of mutual fund assets come from the country’s top 50 cities and the growth from now on will come from the next 50. He is already busy beefing up his teams in such places.
Between Kela and Singhania, the midcourse correction at Reliance Mutual Fund is truly under way. The only sword hanging over their head is the market talk about Anil Ambani’s settlement with the regulator, under which he and three other top group officials have been kept out of secondary markets for a year. Questions have been raised about any role the mutual fund may have played in the activities of the group. But Kela is unruffled. “These are just market rumours started by our competitors who don’t like the fact that we are the Number One mutual fund in the business for so long. Let them say what they want. We are only doing our job and want to maintain our Number One position,” he says.
“We have got a job to perform.”