Kothari’s philosophy is simple. Rather than attempt to predict market fluctuations and economic trends, his stock selection process is entirely based on understanding the fundamental strengths of individual companies. In other words, he calls himself a bottom-up stock picker and refuses to get swayed by market fluctuations.
Looking at his track record and how he stuck to his guns during the market mania of 2007, no one doubts this for a moment. Our issue here is with regards to two of his funds which appear very similar at first blush. And if one takes a look at the annual returns of 2010, the question does arise if there is any differentiating factor between the two or are they just clones of each other.
The fact that both funds fall within the same category indicates that they have a similar market-cap bent, which is rather surprising in the case of Fidelity Equity. This fund house likes to position this offering as one with a “go-anywhere” philosophy. So intrinsically, there is no bias in terms of market cap or sectors or type of stocks (growth or value). Having said that, it’s quite possible that Kothari tends to downplay the market cap issue when he hunts for good stocks because his investment process does not start with a market cap parameter; it’s liquidity that takes predominance. “While I do not bucket investments into mid cap or large cap, if I get a 30 per cent return without taking liquidity risk and a mid cap offers a 40 per cent return, I would opt for the larger cap company. But that is not a rigid rule. If the long-term prospects of the mid-cap company are very good and I can see a much larger upside, I would invest in it,” says Kothari. Nevertheless, both portfolios have a rather similar market cap exposures.
Having the same fund manager at the helm would naturally result in some sort of similarity, unless the funds had completely different mandates, which we don’t see clearly here. So it’s not surprising to note that over the past three years Financials, as a sector, has dominated both portfolios. While Kothari continues to play the bottom-up card and points out that his stock selection reflects his conviction in the management capability and track record and all have scalable business models, it’s obviously his faith in this sector that has led him to narrow down on such stocks. “At a broader level, I am of the belief that the financial services sector is a good proxy to the overall growth in the economy. India still has a low penetration of financial services and the potential to grow and compound returns over the long-term are quite good,” he says.
With his convictions being reflected across the portfolios of both funds, returns are almost identical. Last year, Fidelity India Growth topped the chart in its category in terms of performance. With a return of 27.21 per cent, it bagged the No. 1 slot (amongst 65 funds). Fidelity Equity followed closely to bag the second slot with a return of 26.91 per cent. From an investor’s perspective, it’s extremely difficult to stack up one against the other.
Fidelity India Growth, the newer entrant, has made its mark in a relatively short time. Launched in September 2007, it got 5-star rating in the very first month of being rated. It rallied beautifully in the latest market upturn. Being almost fully invested early 2009, it was in an enviable position to instantly benefit from the rally that began in March that year. It continued on its winning streak in 2010. In the current market correction too it has not dipped abysmally. Yet again, barring 2009, there is not much of a difference in the performance numbers of the two funds. However, Fidelity India Growth gives the appearance of a much more focussed portfolio. Ever since November 2009, Kothari begun to lower the number of stocks from 61 to 48 while Fidelity Equity has continued to average at 61. However, this has to be also viewed in context with its size — Fidelity Equity is a much larger offering. Barring Reliance Industries, Infosys Technologies and ICICI Bank, no single stock allocation in Fidelity India Growth’s portfolio has exceeded 6 per cent. So it’s safe to say that both are very well diversified holdings.
By and large, we do not see much of a difference between the two funds — be it in returns, the market-cap positioning, the sector weightages or stock preferences. However, both score high in their category and make for good investments.
Fidelity Equity has the flexibility to invest across growth and value stocks as well as across stock market capitalisations. On the other hand, Fidelity India Growth Fund has a bias towards growth stocks in its portfolio. I define growth companies as those that have a scalable business opportunity and the ability to deploy capital at attractive returns back into the business. Given that India is a growth economy with good long-term growth prospects, a number of businesses and sectors fit the bill.
In Fidelity India Growth Fund, I tend to take more concentrated bets. This fund has a more concentrated portfolio than Fidelity Equity, in terms of lesser number of stocks and higher concentration in its top 10 holdings. The weightage of the top 10 active bets (overweight with respect to the benchmark) is higher than in Fidelity Equity.
Fidelity India Growth Fund has a more large-cap bias as compared to Fidelity Equity. This is also due to the fact that it has a more concentrated portfolio. In terms of performance attribution over the 3-year period ended December 2010, the list of top 10 contributors (see table) looks very different for the two funds.
Criteria for ‘Large & Mid Cap’ Category Funds
• From the entire universe of equity funds, funds with a global exposure and equity linked savings schemes (ELSS) are excluded along with thematic and sector funds (Infrastructure, Banking, FMCG, Pharma, Infotech, Power, Auto and Media & Entertainment).
• The balance equity funds are categorised on the basis of their market capitalisation exposure. Based on the complete March and September portfolios of funds over a 3-year time frame, funds that fall in this category are those that have around 60% to 80% of their exposure to large-cap stocks.
• As per our definition, stocks accounting for the top 70% of the market capitalisation of the BSE are classified as large cap. The next 20% are mid cap and the remaining 10% belong to the small cap.