The Optimist | Value Research Kenneth Andrade, fund manager of 5 IDFC funds, shares his thoughts on the current market scenario

The Optimist

Kenneth Andrade, fund manager of 5 IDFC funds, shares his thoughts on the current market scenario

Even as the markets have fallen back to a level from where the bull run started, the confidence of the mutual fund industry does not seem to be dented much. Optimist to the end, the industry is still floating funds and surprisingly money is still coming in, if not pouring in, as it did in 2007. IDFC Strategic Sector (50-50) Equity Fund is the most recent equity offering from IDFC Mutual Fund.

The fund manager of the scheme Kenneth Andrade is an old hand at managing funds. He already manages four other equity-funds of the fund-house. In an interview with Wealth Insight, he explains the nuisances of the product and shares his opinion on the current market doldrums.

The Strategic Sector (50-50) Fund is being put forward as a diversified fund that would also function like a sector-fund. Aren't you trying to do too many things?
No. Conventionally the way large cap fund function is that it gets you the incremental out-performance. The offer document says that we will be in the core sector of the economy; we won't be in an industry like media, sugar etc. When running 50 per cent diversified fund, the idea is to capture Nifty futures by tracking error and I am running a beta product. We are not trying to pick an upcoming sector in the entire system.

If you breakdown the top 70 stocks that exist in the market today, you will have 30-35 per cent in energy and then 15-20 per cent in financial and then about 20 per cent in capital goods. Now that's core sector according to me, which I would like to define. Now that's a representation between 65-75 per cent of the market itself. Now if I run 50 per cent in diversified, and I technically run energy at about 50 per cent, my incremental concentration is just about 15 per cent or so. Now if I run it with financials then obviously the incremental exposure is about 30 percent. The idea is not to be all over the place. If I go into autos then right now it is about 5 percent of the market and it will bring in considerable size and take me all over the place. Which is why we have mentioned that we will run the core sectors of the economy, and that is why we will not enter into media or sectors like that.

So the Fund called 50-50 is actually not so?
No. 50 per cent will be in the market and other in specific sectors. Its part of strategic sector fund though in the bracket we mentioned 50-50 so that investors can understand the working of the fund.

The structure came out of the thought process of how to have a different diversified fund, which would address the large part of the market.

What percentage of investors do you expect to understand the type of product you are selling?
We have got no advertisement campaign; we have explained to the potential investors that what the product is. It is not an all season product and maybe you do not want your portfolio to be composed of just this product.

To make sure that an investor understands this, otherwise, how will they make the decision to invest?
See the idea is that when you see the volatility of a fund, you will definitely understand what is your risk taking appetite. We have this product, extremely low cost, we need to go out and explain to people what is the underlying investment strategy. But given the market condition we are not expecting too much money right now.

I think it's a game of understanding the portfolio manager, how he puts the portfolio, what are the return expectations and within the entire basket where does he put the majority of investment. From the industry point of view there is a lot of generic product that is already there in the market. We ourselves have a diversified equity fund we have a large cap fund and we have got a Small & Mid-cap fund. And this will always be the bulk of any investor's portfolio at any point of time.

What went wrong with the IDFC Equity Enterprise Fund?
Well conceptually, it's good in terms of where we started off and where we ended. I always conceptualize and do beta taxing and tracking of the entire fund. It is always meant to be at the top end of the second quartile consistently. And I think that is in terms of delivery it has been there. We need to wait through and see how it comes out and when the arbitrage funds go through the cycle we will be able to deliver the numbers you are talking about. From my personal view point as a manager I don't think it's not quite wrong. If you are an equity investor then this is the most neutral product you can have in your portfolio.

We did a little look up at the statistics as to which are the biggest funds in India and we were surprised that most of them were the new funds. Do you think that this trend is significant?
India is very different I guess, as an industry it is just evolving itself. We never had big funds like these before, people are getting used to it. Now when you go out to the entire market segment and talk to people, they do understand that large funds do not make money over a period of time. They also believe that the funds that are in existence for the last ten years, have a defined approach in the investment which is consistent with what you want over the long run. Then we build our entire portfolio around these funds. I guess over a period of time the investors will see the matrix and understand how it is important.

How do you manage the beta of a large cap base?
When you have a universe of 70-80 stocks to choose from, the idea is not to catch up with the market cycle and add beta to the portfolio. It is more intensive than managing the mid-cap kind of a portfolio wherein once you have understood the business model and you like the working of the fund style, your risk is purely in the execution.

The risk in mid-cap is how well the promoter or entrepreneur or the environment is and are they pushing the entire company to grow. The mid-cap emerges from being a company to an organisation. You want to play the mutual player. Which is why mid-cap should never be as high as 80 per cent of one portfolio. The top end of the list are the companies, that have strong organisations but are small. They are not 30,000-40,000 crore companies that you need to cover the entire portfolio. Of course you will get the opportunities in various segments of the market. To some extent there will be some great cash flow businesses but they can have a different approach, they can always ask for a discounting. That is all part and parcel of the whole thing taken forward. There is some liquidity risk which we need to address.

What would you say about the market situation? About the infrastructure segment, L&T and other companies as such?
In terms of buying that business and the significant downturn, I am not too sure. I cannot take a strategic stance on that. I would look at it differently, in a market where valuations catch up with the market fall or the industry fall and these companies stay here for sometime.

Well I say it with a caveat because I don't have that minute view on the entire scenario that is emerging. It is a technical business; you can't return a non-technical value to set the course that is there because you need to understand that the assets part of corporate India's balance sheet and the liabilities, are yet to come.

I am not bearish on the business of the good companies; they will continue to lock in on 30-35 thousand crores. I am not too sure and that does not mean about being absolute but that I am not too sure whether a non-cyclical valuation should be done in a cyclical business at this point. That's not right.

So the problem is that markets have been trading but they have not understood the cyclic nature of the business?
We are one of the few economies that will continue to grow; my belief is that all that tightening we have seen in the last six months is enough on the table to kick back or for the industry to pull back once you start injecting liquidity into the system.

So from the policy level we have done the best thing, we have tightened up the system to an extent we are bringing down the inflation and virtually killing them on the other end.

What about the real estate racket that is going about?
It's a very simple bull market product - the consumer is leveraged, the builder is leveraged and the entire funding is leveraged. For every rupee that he puts in, he probably got a leverage of 10 times, for the bull market at 10 per cent drive you are getting 100 per cent return. You got that affected in stocks. Now you need to believe in which part of the curve are you in. If it inverses itself by 10 per cent it will lower your capital. It's a very leveraged system. It's a brilliant bull market system, if it stays, it will trigger a lot of consolidation.

In your opinion has anything happened at that front yet?
We are going into the Diwali season, it's the peak time for any consumption driven business. And real estate is at the top end of that list, we will have to watch this season how it goes.

But somewhere it will have linkages with your per capita income. You will have moderation in it and you can always go back to the large real estate bull market that you had in the country, I remember the prices in Mumbai as it was 1994-95, prices only came back in 2007. By empirical evidence as an asset class it takes a decade to make money. It takes ten years to payback my loan.

See invariably in the international scenario also the real estate cycle is extended. How the business is structured and the leverage in the entire system, it is not something I would like to live with where the industry is down with liquidity. So asset players are definitely out, it's like back to capital building. We can play it both ways; we are never right as it happens but from portfolio point of view I am devoid of any real estate, I have always been sceptical because of momentum and it is not very transparent.

Other Categories