With 17 years of experience, Kothari's stock picking strategy is driven by fundamentals with a focus on risk-adjustment returns. After putting up an average show in 2007, his performance in the last two years proves that he can ride a bull market on his terms.
Have you ever invested in a company where the management has refused to meet you?
Yes, but it is certainly the exception not the norm. There would be just one or two companies where the management has not met us. Normally, they are open to meeting up. If I go ahead with an investment in such a case, it is because the balance sheet is extremely strong, the business is very high return and the story is very clear in my mind. In such a situation the track record usually speaks for itself. We do insist on meeting the management.
Do you use a lot of sell side reports?
Yes. We use everything at our disposal. Our own research team. Our global resources. End of the day, the buy or sell call is pretty much ours. If there is a good report on the sell side, or a very smart analyst there who has come up with a great idea, of course we will explore it. We are not closed to any avenue.
In 2007, your funds gave the impression of not riding bull runs. Yet in 2009 the performance rocked. So can you tell us about your investment approach? What are the drivers you look for when selecting a stock?
We follow a simple approach. Do we understand the business? How does it make money? What is the opportunity? Is it scalable? Does it have any competitive advantage? What is its franchise value? Is it the lowest cost producer? Does it have a high growth potential? What is the upside? How much do we trust the management? Is there an execution track record?
Ultimately, taking into account all the above factors, we see what we are willing to pay for that stock. This is all done with a long-term view. My goal is to generate consistent performance over longer periods of time. So in short bursts where the market may go crazy or may crash, the volatility will come into play. But we look at the long term. So what I am saying is that the performance is simply a matter of the outcome of the process I follow.
What do you do for your sell discipline? Do you set sell targets for your stocks?
We keep reviewing all our holdings. If the investment thesis is broken, we exit the stock. If the stock has achieved our price and is getting very overvalued we move out of it. If there is a change in the industry or sector, we always factor that into our thesis and see if it still holds and how we should move forward.
Just because we have a low portfolio turnover, does not mean that we just buy a stock and then leave it and review it two years down the road. If there is something better available in the market we may switch our holdings. If it is overvalued we will exit. Or there is a fundamental change since when we purchased it, we move out.
Let’s say you narrow down on a stock you really like. But it would take around a year for the market to realise it value and the stock to show some appreciation. Would you still buy the stock? Whirlpool, for example, saw a significant price rise from August 2007 to August 2010.
To answer the first part of your question, yes, I would buy the stock but would not put 10 per cent of my portfolio behind it. Maybe a smaller per cent of the portfolio would be allocated to it.
We just follow a process through information given from our research teams and when we believe in a story, we hold on to it. That is why it is good to have a diversified portfolio because if one or two of your contrarian bets are lying low for a while, the rest of the portfolio, if performing, will make up for those individual stocks.
Fidelity always talks about bottom up stock picking - surely the top down approach will play a role? They can never be exclusive. Going by the fact that you favour Financial Services, does that not indicate a top-down approach?
I agree. There is a very strong bottom-up approach but it is aided by a top-down view. We have to take a macro view and a global view. Some sectors are very top-down such as cyclical like petrochemicals and steel. For financials, there is a macro view that has to be taken into account such as the view on interest rates.
So the two approaches are married. Our strong preference towards a bottom-up approach guides our stock picks. Then we ask ourselves at this stage in the cycle, what is the price we are paying for it and is it justified.
What’s happening in the business cycle? How will it play out? What is happening in the economy? What’s happening globally? How will all these affect multiples? But all these questions are a second derivative, the first being bottom-up stock picking. So the top down view does not drive the sector allocation. It’s not that we pick a sector and say let’s buy a few stocks in it. So the sector allocation is just a result of the stocks we have invested in, not vice versa.
I own many banking stocks because I like the corporate governance and the growth prospects. It is a proxy for the growth of the economy. This is why Financial Services corners a dominant portion of the portfolio. It is not that I decided to pick on Financial Services and then hunt for the relevant stocks.
Are there any sectors you will never touch? Real estate for instance.
I would not say never because things change. We must understand how that sector makes money and how it must be valued.
Real estate at one time had a very minute allocation to the portfolio simply because of the steep correction. We do not understand the cash flow cycle of the business and how investors are paying for 20+ years cash flows. That is why 2007 was a tough year because we kept away from such stocks. In hindsight it was the right thing to do.
Are there any sectors you are focussing on right now?
Some sectors have fallen a lot. So we are looking to see whether any of them have bottomed out. This could be oil marketing companies, the industrial space or even the real estate sector.
Fidelity Mutual Fund has no sector funds in India. Is that a philosophy of the fund house?
Fidelity is continuously evaluating investor needs and opportunities but we need to be absolutely certain before we launch any new product.
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