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Within the horizon

"Our investment philosophy is 'growth & quality at a reasonable price'," says Harish Krishnan of Kotak 50 Fund

"Our investment philosophy is 'growth & quality at a reasonable price'," says Harish Krishnan of Kotak 50 Fund.

Within the horizon

What is the investment strategy of your fund? (Including internal rules on investment universe, capitalization orientation and maximum cash allocation)
The investment universe of Kotak50 is Top 200 Indian companies by market capitalization. The fund invests atleast 80% of its portfolio in Top 100 (what we internally term as Large Cap) companies at all points in time. We strive to be reasonably fully invested in the mandate at all points in time, our internal risk management frameworks allows for a maximum of 7.5% in cash.

Our risk management framework allows for limits on sectoral deviation with respect to benchmark (Nifty in the case of Kotak50), while there is no cap of stock level deviations.

What are the essential attributes for the stocks to be in our portfolio?
Our investment philosophy is "Growth & Quality At a Reasonable Price". Within this framework, we like companies that have improving earnings trajectory coupled with improving return ratios, available at a reasonable price. We have focused on investing in sectoral leaders - these are companies that are leaders in their respective sectors/sub-sectors. Within these sectoral leaders, we look at essentially two key attributes - focus on companies that have invested in the downturn (in either capacities/brands/distribution) with a premise that when the economy revives, these companies are well positioned to benefit from the opportunity and secondly, focus on companies that have managed costs well in the downturn, so that they enter the upturn with a potential to move into a higher profit trajectory. These sectoral leaders comprise more than 70% of portfolio - making it the foundation of the fund. Around this core, we seek opportunistic bets (for example in defence sector, home-building sector as a play on GST reforms, interest rate beneficiaries etc).

What kind of stocks never enter your portfolio?
Clearly, companies which are outside the universe of the fund will never make it to the portfolio. While our preference is to buy companies with very strong compounding capabilities, at various inflection points in business (say change in policy, or new management or improvement in industry fundamentals), we are open to evaluating all businesses, within the universe

What will you attribute the relatively consistent performance of your fund in recent years?
Over the last many years, the fund has generated significant alpha over its benchmark. The more salient point is this alpha creation is broad-based and not concentrated in one sector or a few stock picks. (For example in the last 3 years, no sectoral call accounted for more than 20% of the total alpha and no stock call accounted for more than 10% of total alpha). We have a low churn in the portfolio, and have stuck to our sectoral over-weights in auto, cement, capital goods for the last 2+ years. We have also avoided leveraged plays during this period. Given the broad-based nature of out-performance in the past, we shall strive to maintain consistency in our performance.

Any tactical miss you regret (not having, or not having enough or holding something) in your portfolio?
Our approach has been to build a portfolio of formidable businesses that can weather various business cycles and compound wealth for our investors, with limited portfolio churn. Given this, tactical calls are very minimal.
In hindsight, there will always be investment opportunities that we may have missed (due to either previous track-records of management or our own biases) or sold out a bit too early (primarily on valuation concerns). Our endeavor is to continuously improve our decision making abilities and to learn from these misses.

Please click here to read the analysis of this fund.