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Similar, But Not Identical

The investment mandate & portfolios of IDFC Premier Equity & IDFC Small & Midcap Equity are starkly different…

Though IDFC Premier Equity and IDFC Small & Midcap Equity both fall into the same category and are managed by the same individual, their investment mandates and the corresponding portfolios are starkly different. The fund manager explains why the flows into one of the funds are moderated and why it is crucial given the investment style.

Your fund house has two equity funds that are focused on mid caps - IDFC Premier Equity and IDFC Small & Midcap Equity. Why was the latter launched?

When Premier Equity was launched in September 2005, it was done as an equity diversified fund that could invest across the entire market capitalization spectrum. So it was not launched in the mid-cap space. It is just a diversified equity fund that has taken a mid-cap bias. In actuality, this fund has no market capitalization bias in its mandate. The fund is also benchmarked to the BSE 500. Small & Midcap Equity has a strong market cap directive- 65 per cent of the portfolio in mid caps and 15 per cent in small caps. Its benchmark is the CNX Midcap Index.

According to the April 2011 portfolios of both the funds, 91 per cent of each was invested in mid and small caps. The top sector in each fund was FMCG. What is the stock overlap between the portfolios?
Less than 5 per cent.

Your fund house restricts flows into IDFC Premier Equity. Why the reluctance to increase assets?

You can look at it in two ways - from a business cycle and from an investment cycle.
Let’s first look at it from a business point of view. In this fund, there is just one investor who corners more than 1 per cent of the fund. This keeps the AUM steady since it is has a large investor base. This fund is well invested in from a retail point of view. The amount of SIPs in this fund would be around 30 - 40 crore per month. The average holding is around 2.5 years. Over the last three years, we have probably seen just one month when the flows were negative - I am talking strictly in number of units not assets under management.

From an investment point of view, needless to say I am in no hurry to significantly ramp up the entire portfolio or buy new stocks just because of new inflows. Given its five-year track record, a lot of investors come in because of the rear view mirror effect. Going by the historical performance they enter this fund. That puts a lot of pressure in buying stocks in the wrong cycle.

But I want to make it clear that I am not against increasing assets.
The corpus of Premier Equity is at Rs 2,200 crore in a total equity AUM of Rs 4,700 crore - I am talking of IDFC Mutual Fund. It is the largest equity fund in our basket. It started with an initial corpus of Rs 330 crore. If we had restricted inflows would it be such a large fund?
So it is a misnomer to say that we are reluctant to increase assets. We just want investors to enter this particular fund in the right way.

Does not the same logic hold for IDFC Small & Midcap Equity?

Small & Midcap Equity is a far more liquid fund and a far more diversified offering. It is more benchmarked and we tend to own more stocks across industries. This makes the fund far more scalable as the portfolio manager has to take lesser concentration risk.
But I am in favour of investors getting into Premier Equity systematically simply because of the nature of this fund. If I had to break the entire portfolio, I would have close to 45 per cent of the portfolio in the consumer segment of the economy. I got just 2 per cent in Technology and 0 per cent in Banking and Pharmaceuticals. Capital Goods are virtually nonexistent. So the make-up of the fund is one where there are a lot of gaps to any conventionally benchmarked fund. Given the concentration risk, it may take time to correct the portfolio given it is not well diversified. The best way to approach such an investment is thus by investing systematically.

What sort of stocks do you look for in IDFC Premier Equity?

In a nutshell I would say that we pick up companies in the early stage of investing. The fund’s philosophy revolves around building a portfolio of emerging businesses that are scalable and form and integral part of the Indian economy. The portfolio allocation continuously seeks to capitalize on emerging themes and trends. The companies selected need to have an emerging business model, entrepreneurial vision and the capability to catapult to the next level of growth. They may not have scale at the time of investment but must have the potential to become market leaders.
In Premier Equity, we have always been consistent with the investment style.
The fund will try to anticipate the cycle. If the cycle goes right and it becomes mainstream then Small & Midcap Equity will pick up it and run with it.
So both the funds have different strategies. In IDFC Premier Equity, we anticipate a trend, so it is at a very early stage in the investing stage. Equity investing is participatory with the market -Small & Midcap Equity exercises that option.

In terms of portfolio concentration and mandate, would it be right to say that IDFC Premier Equity is the more aggressive offering?

Yes. The portfolio is constructed in such a way that it is significantly overweight in some sectors and significantly underweight in some. It is spread across only 30 companies.
Small & Midcap Equity is spread across 35-40 companies across various industries and sectors. It is much more diversified.

According to the April 2011 portfolio, the cash allocation of IDFC Premier Equity was around 15 per cent. That would have increased after you opened a window for lumpsum investments in April and May 2011. How much is your cash allocation and how long do you think you will take to invest it?

We have collected around Rs 250 crore in the window between March 31 and May 16, 2011. We would look to deploy that money over the next couple of months.

Is there any ideal target amount that you would like IDFC Premier Equity to be at - in terms of corpus size?

We normally open the fund once a year depending on the state of the market and what the opportunity is to scale up the entire portfolio. When we open the fund to invite lumpsum investments, our target is to raise around 10-15 per cent of the existing corpus in lumpsum applications.

AUM: Assets Under Management / SIP: Systematic Investment Plan