We increase cash levels when stock prices don't justify the valuations, which typically happens at the peak of bull markets, says Atul Kumar, Fund Manager, Quantum Long Term Equity.
The fund is among the top performers in the multi-cap category over one year. What has led to this outperformance?
Quantum's proprietary research and disciplined investment process gives us an edge. We buy stocks of companies that have good corporate governance, are run by managements with sound track record and have reasonable debt levels. Stocks are bought only when they are below the buy limit set internally and they are sold once they cross the sell limit set. Sticking to the process has been the key to our performance.
What are the measures that you take to contain the downside in the fund?
We increase cash levels when stock prices don't justify the valuations, which typically happens at the peak of bull markets. We buy stocks with good corporate governance and clean accounting practices. We have thus avoided stocks such as Satyam and real-estate stocks since the inception of the fund ten years ago.
What kind of stocks enter your portfolio? What kind of stocks never do?
We only buy stocks which have average daily volume (BSE + NSE) of at least $1 million. That apart, we are sector agnostic.
Companies which are unfair to minority shareholders, have opaque and unclear accounting and disclosures and high level of leverage won't ever become part of the portfolio.
When do you decide to sell a stock?
Mostly stocks are sold when they cross the valuation level set internally. Also, if we have changed view of the management or the business, we sell. For instance, we had bought a stock and later found that it was not aligned to minority shareholders' interest, so we sold it.
How do you determine allocation to large, mid, and small caps? Does it vary or stay constant?
While the portfolio has more large caps than mid/small caps, we are agnostic to any of them as long as they meet our trading volume criteria. The allocation can differ across time periods based on what valuations they trade at. So, if mid-cap valuations are quite reasonable relative to others, they can have a higher composition.
How successful have cash calls been for your fund?
We have always used cash as a hedge. When markets run up ahead of fundamentals and we don't get buy ideas to counter the sell orders, our process mandates us to go in cash. In 2014, cash levels went up post election results as the markets were going up but earnings were not. Therefore, we believe cash is always residual for us.
How have you positioned your portfolio for the future?
We are long-term investors and buy stocks with usually two years' plus horizon. As such, we don't have any tactical allocations for the near term. However, we remain a research-based fund house that will invest only in stocks that fit into the criteria.
This interview appeared in the June 2016 Issue of Mutual Fund Insight.
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