The funds that you manage have a mid-cap tilt. Is there not a lot of overlap amongst the various schemes?
Yes, there would be an overlap between schemes to some extent. The long term series funds had greater focus on small cap stocks. These funds were launched as closed-end funds. One has already turned open ended and the other would soon become one.
Principal Emerging Bluechip is more focused on mid-cap stocks with good growth potential and with a strong presence in their respective sectors. Over a period, these three schemes would probably converge towards similar portfolios.
How closely do you monitor the benchmark in your schemes?
The portfolio has defined limits in terms of being overweight or underweight in sectors compared to that in the benchmark index, depending on our view on the sector. Portfolio stocks, however, need not be confined to those in the benchmark index and the choice is driven by our research efforts. We also have parameters whereby the small- and large-cap exposure cannot exceed a particular weight in the portfolio, so that the portfolios retain the mid-cap flavour.
You are a mid-cap investor. What do you look for when you invest in such stocks, vis-à-vis large caps?
Large-cap companies have the benefit of size, scale and proven, well-known managements. In the case of smaller companies, it is the management team and its track record that takes on even greater importance. The people driving the company matter.
Since these are smaller companies, the scalability of their business model is what we would look at. So if one takes a 3-year view, the endeavour is to find companies that would graduate to a significantly higher scale of operation than currently. We prefer companies that have a significant presence in their respective sectors. We develop a view on the outlook for the sector and the companies over a 2-3 year period and look to buy them at reasonable valuations relative to peers, market and in relation to their growth prospects.
What is your sell decision based on?
The sell decision could be driven by an unfavourable outlook for sectors or companies over the next year or two. It could also be driven by attainment of target prices with no commensurate change in fundamentals of the underlying sector or company. At the time of investment, we generally define our earnings expectations and hence potential price target. These are periodically updated to capture the impact of significant developments that influence earnings positively or negatively.
The portfolios' decisions are based upon fundamentals with a 2-3 year view and thus we do not have a churning or trading strategy. We do not look to churn our portfolios continuously.
What are the threats you see?
High inflation pressure leading to more hikes in interest rates in India. The markets have upside based upon FY12 earnings, but we probably need to navigate through some volatility and turbulence that could arise if inflation remains high and interest rates rise significantly.
The outlook for global commodity prices would also have a bearing on inflationary expectations. Of late we have seen that inflation is becoming more generalised and that remains clearly a worrisome trend.