Maintaining Fidelity | Value Research Sandeep Kothari is a chartered accountant but never pursued it as a discipline. After completing his CA in late 1993, he worked with several broking houses like B&K James Capel, before moving to Fidelity in 2002.
Interview

Maintaining Fidelity

Sandeep Kothari is a chartered accountant but never pursued it as a discipline. After completing his CA in late 1993, he worked with several broking houses like B&K James Capel, before moving to Fidelity in 2002.

Sandeep Kothari is a chartered accountant but never pursued it as a discipline. After completing his CA in late 1993, he worked with several broking houses like B&K James Capel, before moving to Fidelity in 2002. Since 1994 he has spent time in stock markets, keenly observing and analysing various industries. He has been managing money since 2005. What was your initial role at Fidelity? My role, when I joined Fidelity, was that of a regional analyst. The focus was India plus other regions. The philosophy of Fidelity is to put an analyst into various sectors and I was fortunate to go through 4-5 of them on a regional basis. So I have done regional steel, metals and mining and healthcare. It had been a good experience. While being a regional analyst, you are also given the responsibility to run a pilot fund, which is Fidelity's own money. It's a small sum of money, which grooms you up to structure a portfolio and manage it before you get bigger amounts of money. I was also managing a pilot fund. Subsequently, I managed some of the offshore funds investing into India. And as of July last year, I took over two domestic funds - Fidelity Equity Fund and Fidelity Tax Advantage Fund. In your career in stock markets, which one has been the difficult phase? In 2002 when I joined Fidelity, we had seen the worst of the bear markets. I remember we had a large investment in Infosys and it fell 25-30 per cent. At that point in time, we had to take a step back, think about what the fundamentals are and what the long-term holds for the company. Fortunately for us we held on and invested more, and that paid off extremely well. Those were great learning experiences. Apart from that, my experience with the steel industry was a great learning. I was initially given the responsibility of the steel sector on the regional basis and it was a sector which had gone through a slump for a decade. There was no hope for it, and the mindsets were “how can you invest in the steel industry?” But if you look in the hindsight of the last 4-5 years now, that was the start of a bull run in the steel industry. It was a very good learning, just to see how the cycle for the entire industry changed. You just can't write anything off. There have been huge expectations from your fund and you have met them reasonably well. What's your sense about all of this? To be honest, I don't really think about the outcomes. It is a variable which will happen if the process is right. I just try to keep it simple and focus on what needs to be done. If you start worrying too much about the outcomes - what happens tomorrow, what happens next month, then you miss on the basic process which you have to follow. I believe that if the process is right and if you follow the basic principles right, your convictions are right, and if you have done your homework well, hopefully the outcomes should be there. Brief us about the things that you emphasize upon and on things which you don't? For the fund, the philosophy is to try and keep it as simple as possible. You have a valuation framework for each industry. We work within those frameworks, while keeping the markets and the economic cycle in mind. We look for risk-adjusted returns and try to achieve consistency in performance. We take a reasonable, calculated risk and back it up with lot of good systems, processes and research. We try to know as much about an investment as possible to build convictions. This conviction bit, how do you do that with hundreds of them? There have been hundred stocks in your portfolio on occasions. Since the time that I have taken over the portfolio, it will be between 60 and 75 stocks. I would like to keep it that way. But again, I don't get guided by how many of stocks are there. What I believe is that if you don't take reasonable position in a stock, then it doesn't make too much of a difference to the portfolio. So if a stock is falling and I can't buy it, I usually tend to get out of that stock, because that means I don't have enough conviction in it. 'Reasonable position' means? You need to have at least 50 basis point of your portfolio invested in a stock. But again, this cannot be a rule. Sometimes you are trying to build conviction, trying to learn about a company you like. Or sometimes you just don't get stocks at the price you want to buy. So there are a lot of factors which can drive your allocations. As a principle, 60 to 75 stocks give you enough diversification. Then the trick is which area to focus on of 5,000-odd companies. That's where our research process and our research team come in handy. We tend to focus on high-quality businesses, like the ones which have higher ROEs, huge scalability and which can become long-term value creators. It's a mix of both, the bottom-up and top-down, but a large focus is on bottom-up stock selection. How much input do you get from the people closely tracking these companies? We tend to meet every company we invest in. Meeting the managements is very important. We have modeled 280-300 companies. We have six research analysts. We have support from the Delhi facility, which helps us with model building, initial company facts, etc. Portfolio managers do the company meetings, and like this, it is a library which gets created. Being in the markets since 1993, you have been through a period where we had these great companies which suddenly became illiquid. How much does that scare you today? We talk about companies which one didn't hear of. We seem to be back in the old times. A lot of it may be scary….things like cooked books, and cooked stock prices as well. Definitely, that's a big challenge. But you have to emphasise upon what the management's track record is, and probably the association since 1993 gives that much more insights into what the management track records are. A business does not operate in a vacuum. It relates, transacts and deals with lot of external parties. When we are taking a reasonable position in a company, we conduct an absolute 360 degree analysis - what's the track record of this person, what's the execution capability etc. I understand your concerns. We did see in 1995 that lot of these names become very illiquid when the business cycle turned. But see, even some of the good companies will get caught in the business cycle. So you have to stick to your basic principle and analyse what drives the profit growth, what is the opportunity, where the business is positioned, what's the execution capability of the management. An opportunity could be great but can the management execute that? Then you weigh the kind of liquidity risk that you want to take, because if the business cycle turns, obviously liquidity is going to be a huge problem. Based upon this, you take a call where there are probable gains and make your investment decisions. See, there will be cycles. We saw one in 1995. But hopefully, this time around it won't be that bad if it occurs. This is because there is more institutional participation now. Moreover, in this bull-run, you haven't seen one pied piper or just one sector carrying the entire market. You don't see those kind of excesses visible here? Right now, no. In hindsight, maybe three years on, we may realise that indeed there were excesses. But the fact is that we have been in a global business cycle, which is extremely strong. I mean, just look at the growth opportunities, the demographic dividends, the investments which are happening. See, you have to take a view on the risk-adjusted returns. For example, there's a company, say X, which is large and liquid, which gives you a 25 per cent return. But a Y company, which is less liquid, gives you a 100 per cent return. Now you have to take a call on the risk-adjusted returns. If you have confidence on the 100 per cent-return company, after doing your homework, that the opportunity as well as the execution capability are there, then you may go for it. There is no one right answer to this, but I won't be scared by thinking that what happened in 1995 will happen now. If you are worried that the business cycle is turning, then you look at execution capabilities much more intensely. You should not be in those businesses that can be hurt by the downturn, and that is how you try to balance the risk-reward. But running away from the market altogether is not a luxury that I have. I get money to invest in the equity market and I have to remain invested. I don't take cash call, except for the fact that if something is really over-valued, I sell it and am happy to wait till I find an idea. With the combined capability or scale of your offshore allocation to India, as well as your domestic funds, does it give you any advantage in terms of access to management, a quasi-insider kind of privilege? No, no, it does not. And I don't think we can make money by getting insider information on a long-term basis. Ultimately, you need to have your valuation framework right because the market is much smarter. Moreover, at Fidelity we are very-very strict about these aspects. What helps is the Fidelity brand name. People and companies like Fidelity as an investor. So it is easy if I am calling up a corporate. But that doesn't mean the corporate will go out of the way to give me something, or I will seek something. I tell you what gives us advantage. If you have a reasonable understanding of somebody's business and go and meet a management after you have done your homework, you develop a good rapport. The Fidelity name gives you that acceptability that these people would have done enough homework. And then if you demonstrate this in a meeting and you interact at a good intellectual level with them, then the discussion leads you to better conclusions, not necessarily information which won't be given to public. And then it is up to us to do the hard number-crunching, because you just can't build castles on air. But if you have had a good understanding of the businesses, it is easier to take a call on those numbers. So you have to do your hard work, whether you are Fidelity, or anybody else. Were you comfortable with most of your portfolio when you took charge? Were you uncomfortable with the number of stocks? See, every portfolio manager has his or her own style. There were about 85 stocks in the portfolio at the time I took it over, and it went down to 60. It was to do with the fact that some of the positions were small and there were some of the businesses I would have taken time to understand. So what I did was that I gravitated to what I understood well. Subsequently, the positions did go up. You don't buy or sell because you want 'x' number of stocks in your portfolio. It is not about the number of stocks, but what percentage of your portfolio you are comfortable to risk in that stock. What is the most alarming thing that you see in the market today? India has become a mainstream market and the expectations from India are high. Therefore, if it doesn't deliver on the expectations, the volatility could be much higher. Volatility would be something which one should be most wary of. What are the excesses that you see in sectors? Is there any sector which you will not touch right now? I won't call it untouchable, but we did stay away from property in this entire period. I am not saying property as a sector does not have any future; it is not a dotcom which will go bust. We all need housing. Go to Mumbai. The shortage of good office space is immense. Earlier, it was a very unorganised sector but now it is becoming an organised one. But things like the valuations, how good an understanding you have of what you are buying, are what kept us away and that fortunately has worked well for us. Any sector for which you are developing a favourable bias? The capex and infrastructure investment cycle, I believe, has long legs to run. So that is something which we are overweight on. Any Peter Lynch principle which you followed and which led to investment idea in India? Oh, I've been a big fan of Peter Lynch and I've read whatever he has written. If you look at the Fidelity philosophy, it's pretty much engrained in that bottom-up stock-picking approach. We try to think of ideas that are scalable… that are simple. That philosophy runs through the research process. Apart from managing funds, how you balance your personal life? There is not much time left. I try to get to office early and leave early. That is a luxury which this job gives because I can go back home and work if I have to. But yes, I do spend time with my family. I've got two kids, and I try to spend as much time as possible with them. This interview appeared in April 2007 Issue of Mutual Fund Insight


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