Harshad Patwardhan has been the manager of JP Morgan India Equity since its inception. After two absolutely dismal years, the fund put its best foot forward in 2010. This year too it’s going great guns. Over here he tells us specifically what worked for the fund and what did not.
When you pick stocks for this portfolio, is there any bias towards a market cap?
The portfolio of the JP Morgan India Equity Fund is biased towards mega and large caps. The JP Morgan India Smaller Companies fund is our fund that invests in small and mid caps.
However, if we do have a very compelling idea in the mid-cap space, we will consider that stock for the JP Morgan India Equity Fund as well. So even though the fund has a bias towards bigger stocks, the final portfolio is just the end result. We do not start off by saying let the fund have 80 per cent of its allocation in large-cap stocks. The market cap allocation is just the outcome and not a mandate or internal guideline. It is more of a derivative of the stock picking process.
I would like to point out that the choice of benchmark also plays an important role. The benchmark for JP Morgan India Equity Fund ensures that a large portion of stocks is in mega and large caps. If you look at the top 15-20 stock holdings of the benchmark, they account for a major part of the fund’s assets under management.
Does that mean you follow the benchmark very closely?
We do not follow the benchmark closely at all. If you look at the active bets in our portfolio, which is around 29 per cent, you will realise that the deviation from the benchmark is significant. As active fund managers, I do not think we should be in the business of mimicking the benchmark.
There are many off-benchmark stocks that feature in our portfolio simply because we use the bottom-up method of stock picking and are completely ideas driven. Typically, the number of stocks that we monitor will be in the region of 200-250 but they do not necessarily overlap the BSE 200 universe.
Despite so many stocks, the top 10 holdings are more concentrated than that of your peers. Is this an outcome of your small asset base?
Not at all. This is more to do with the process. Even when the fund size peaked at around Rs1,350 crore, the structure of the fund was similar in terms of percentages. For example, if 8 per cent of my fund is in, say, stock ‘A’, it would be the same whether it is a Rs100 crore fund or Rs1,000 crore fund.
In 2008 and 2009, the fund was a third quartile performer and that too bottom of that quartile.
If you look at calendar year returns of the year 2008, the equity market fell by 52 per cent and the year 2009 saw the market go up by 81 per cent - these were not what you call normal years. What took place in 2008 was hopefully a once-in-a-century phenomenon. These were extreme events caused by external factors.
Secondly, our investment process tends to be bottom-up and fundamentals focused rather than momentum oriented. The way the markets fell in 2008 was momentum driven. Later on, this extreme event impacted fundamentals also because liquidity dried up and companies faced trouble in accessing capital.
The rally in 2009 began in March after market watchers started stating that things have started to look up. In India, the global change in outlook was combined with the election results. The March-May 2009 rally was probably the worst period for our fund’s performance. That was the time when fundamentals did not really matter. Some of the stocks that rallied during that time were companies which most market players were not sure would survive in 2008. We did not own such stocks. But that period did the maximum damage to us in terms of performance. And near-term extreme performance can affect all your numbers in the immediate following quarters. So our underperformance in the March-May 2009 period made our one- and three-year numbers look bad as well.
Another factor that worked against us was our policy of not going too much into cash. I do not remember holding cash in excess of 7-8 per cent. That can make a big difference during a period like 2008. A fund with 20 per cent cash exposure will fall much less than a fund with an 8 per cent cash exposure.
Did you ever think of changing your investment style?
During 2008 and 2009, there were several internal review meetings on the performance of our equity funds. The market at that time was momentum driven while our process was more driven by fundamentals. Even our offshore funds were facing the same problem because the process at J.P. Morgan Asset Management is similar across markets. Had we become more momentum oriented, we would have put up better numbers. But the decision taken by all of us in the fund management team was unanimous - we will stick to our style. This is because we have always communicated to our investors that when they give money to J.P. Morgan Asset Management, they can expect bottom-up stock picking based on fundamentals. Investors diversify across fund houses because they are looking to get exposure to different investment styles. Keeping that in mind, we were consistent to ours.
What resulted in the turnaround in performance in 2010?
We have not changed anything in our process. The market has started responding to fundamentals and that has benefited us. When stock picking began to matter, we got noticed. Ultimately stock prices are driven by earnings growth momentum and de- or re-rating, which is fundamentals driven. Our good 2010 performance has made numbers for one- and even three-years reasonably good.
What has been your biggest learning over 2008 and 2009?
We are bottom up stock pickers. That will never change. But what we did learn during that time was that one cannot ignore the top-down view, especially at inflection points.