Equity schemes at Kotak Mutual Fund have faltered recently. In a long and detailed interview with Mutual Fund Insight, Krishna Sanghvi, Head of Equities and Pankaj Tibrewal, Fund Manager, Equities discuss the performance and thinking at the fund house. In the first part of this three part interview the two share some of the funds performance.
Kotak 30 did not have a good run in the past two years when compared to its large-cap peer set. So the mid-cap rally argument does not hold. Why would you limit a large-cap fund to just 39 stocks especially since the corpus has crossed Rs 1,000 crore?
Sanghavi: When the fund was launched in 1998, there were very few large-cap investment opportunities and hence we launched the fund with 30 stocks. We reviewed the mandate and made it 39 in 2007. We continue to review investment mandates for our funds and would consider any changes based on investment environment and opportunities.
In a rapidly growing economy like ours, the outperformance of mid caps over large caps in terms of both business as well as stock performance is normally the case. The same has played out over time in our markets, more so in past 18-24 months. In terms of peer set, what is relevant to observe and consider is the large- and mid-cap composition of various portfolios as well as liquidity of the portfolios. Kotak 30 is a large-cap oriented fund vis-à-vis majority of peer set portfolios.
In fact, we were till six months back, defining large caps as per Value Research's categorisation and that is quite high at around Rs17,000 crore. This to an extent restricted the large-cap universe. We have reviewed this and changed the large-cap cut off to around Rs 10,000 crore in terms of market cap.
It's not just Kotak 30 that had a bad run in the past two years. After 2006 and 2007, Kotak Tax Saver also took a beating. What went wrong?
Sanghavi: Some of our funds were positioned more aggressively towards Infrastructure in early 2008. And in the unpredictable 2008 mayhem of credit markets collapsing, our call did not play out. Another event driven impact on the portfolio was from the May 2009 elections wherein our portfolio was positioned defensively with higher cash levels. That was the past two years. Look at 2010 and things have changed for the better.
Kotak Select Focus has performed better. What worked for this fund?
Sanghavi: Kotak Select Focus is a sector strategy one. The fund chooses select sectors to invest in, based on the fund manager's outlook and then takes positions in specific stocks within the sector. If we look at overall investment universe, AMFI has identified around 16 sectors and the mandate of Select Focus Fund is to narrow down on those sectors to minimum of four and maximum of eight sectors. The idea is to invest in sectors where one is expecting outperformance and avoid those where one is expecting underperformance. In terms of past 12 months, positions in Pharma, Financials, FMCG and Fertilizers have helped the performance.
How do you position Kotak Contra, as a value fund?
Sanghavi: It is a value fund in the sense that the fund invests in stocks that have good business fundamentals but are not properly valued by the market (in terms of a valuation parameter) at that point. At times, the inherent values of a company are ignored in markets especially when focus is more on near term earnings. The stocks offer value at those times. We all know that the financial markets undergo investment cycles and companies with sound business fundamentals do emerge as outperformers as the cycles change.
We understand that it is slightly difficult to define what is contra and hence we have defined certain in-house parameters on what makes it a contra stock. But this factor of underperformance will be relevant only when we like the inherent qualities of the company - business and management.
Tibrewal: Not really, the investment mandates for both funds are reasonably segregated and based on these mandates, one should look at Kotak Mid Cap fund as a mid-cap fund and Kotak Emerging Equities fund as a small- and mid-cap fund. In terms of capitalisation mandates, Kotak Mid Cap fund has at least 65 per cent in mid caps and remaining 35 per cent in any combination of large caps, small caps or cash. Kotak Emerging Equity invests a minimum 20 per cent in small-cap stocks, a maximum 50 per cent in mid caps and the remaining in any combination of small caps, large caps or cash.
You are known as a mid-cap investor, going by your prior experience. Is that why you joined Kotak Mahindra AMC in 2010 - to bring in this mid-cap expertise?
Tibrewal: Yes. I joined as a part of the Kotak Mahindra AMC's plan to add to their existing mid-cap investment capabilities. Looking at the YTD returns, the funds are doing extremely well. A lot of sector and stock calls have proved right.
Read Part 2 of this interview next week