In the second part of this three part interview the two share some of the funds performance
Can you give us some examples about your sector calls which have gone right?
Tibrewal: At the beginning of the year, we took a call that the government’s priority would be reforms and that necessary steps will be taken to improve the fiscal position by targeting the two biggest subsidies — Oil and Fertilizers. Hence, we expected companies in these spaces to be impacted positively by policy reforms. Also our investment calls were reinforced on the valuation front.
Valuations in these two sectors were at rock bottom, stocks were trading almost at the same valuations for the last several years and a valuation re-rating was a strong probability with any action by government on the reforms front. On hindsight, we can say that our call on oil marketing companies and fertiliser companies was bang on.
The second call we took was on Banking, especially mid-tier stocks. The valuation discrepancy between large banks and mid-cap banks was huge. We were getting some of the mid-tier banking stocks from both public and private sector banks at attractive PB multiples and a healthy ROEs. Also, within the mid-tier banking pack, our overweight was more towards PSU Banks as the RoEs on a 10-year basis were as good as those of private sector banks.
Another call was on Auto Ancillaries. Auto, the sector, is growing at a fast pace and in our view India will become the auto hub of the world. This will result in local auto ancillary firms being in demand. Look at the sector and how it has evolved over the last few years. Most of the companies in this sector have been re-rated by the market because of the growth they are offering in the future.
What do you look for when you pick a mid cap?
Tibrewal: The overall philosophy has been consistent. Today India is a $1.2-$1.3 trillion economy. Over the next few years, India would become a $2 trillion plus economy and our endeavour is to identify the best themes and sectors which will contribute the most in this journey. We believe in building the portfolio around five verticals — Consumption, Infrastructure, Financial Services, Outsourcing and Agriculture. Metals and Oil & Gas are tactical positions.
The earlier surge in growth of the economy which brought us to $1.2 trillion was primarily led by sectors such as Telecom, IT and Banking. Can these sectors, which have been well identified by the markets earlier, create exponential growth in the future too? In our view they will be in line with the overall wealth creation. However, a lot of new sectors like Media, Retailing, Pharma and Agrochemicals will emerge. We are positioning our portfolios to include the stocks and sectors that will take India to the $2 trillion mark and revisit them from a valuation perspective.
How closely do you monitor the benchmark when constructing your portfolio? Do the portfolios of the peer set also play an important role?
Tibrewal: We monitor the benchmark very closely. India never did appreciate the concept of benchmarking till the crisis of 2008. Fund managers now realise the relevance of benchmarking in portfolio construction. There are two aspects to fund management, stock selection and portfolio construction. The real test of a fund manager is to be invested in a falling market and yet outperform the benchmark. That would be the mark of a rightly constructed portfolio. The portfolio must be a combination of Sehwags and Dravids, it cannot be dependent on any one type.
In October 2010, the CNX 500 benchmark opted for a free float. The result is that entire weightages of the stocks have changed. So I need to accordingly rejig my portfolio. To answer the second question, since no fund functions in isolation, peer set is a relevant benchmark.
Kotak Mutual Fund has the concept of two fund managers for all the funds. How does it work? Does it not lead to a lot of finger pointing?
Sanghavi: One fund manager will be the primary one, the other is the joint fund manager. The responsibilities and duties are in place. The primary fund manager takes the final call but there is a lot of debate and discussion and interaction. This ensures objectivity since one always has a sounding board, there is also a back-up in place as well as continuity is ensured. The idea is that the fund house as a whole delivers a performance to the investors and is not solely dependant on individual fund managers.
Tibrewal: It’s a brilliant concept and an established international practice. What if the fund manager is travelling, or ill or has resigned, or for whatever reason is unavailable? The idea is that fund should not suffer in any case. With a joint fund manager available the objective is met. The co-fund managers take joint calls on stocks and sectors, both are part of every decision. In a team there is never a case of finger pointing, views are aired, issues are discussed and decisions taken. Needless to add, both are responsible for the final call.
To read the first part of this interview click on