Our Q & A session with Harsha Upadhyaya, fund manager, Kotak Select Focus Fund
What is the Investment strategy for the fund? (Including internal rules investment universe, capitalization orientation and on maximum cash allocation)
The investment philosophy of Kotak Select Focus is built on the premise that different sectors of the economy perform varyingly over different periods of economic cycle. The investment focus in the fund is to invest in select sectors that are likely to outperform broader market at various points of time. Once the sectors are selected through top-down analysis, the individual investment ideas within those sectors are picked up through bottom-up approach.
The fund generally maintains 4-9 sectors in its portfolio. So, while it is a concentrated strategy at the sector level (maximum exposure to a single sector can be 33 per cent of the fund) we keep it diversified at stock level (generally around 50 stocks in the portfolio). Its investment mandate also provides flexibility to move across market capitalisation. Investments in mid/ small cap stocks can go up to 50 percent of the portfolio. Generally, the mid/small cap allocation in the fund has remained between 20 and 35 per cent. The maximum cash level in the fund is restricted to 7.5 per cent of the corpus.
What are the essential attributes for the stocks to be in our portfolio?
We try to look for businesses that have proven business models, which are scalable in nature, where capital efficiency is high and that have reasonable competitive edge in their respective areas of business. We also very keenly look at the management track record and its quality. The final filter is valuation in every case. Typically, we look for compounding characteristics of earnings growth at reasonable valuations, and build portfolio around that strategy.
What kind of stocks never enters your portfolio?
We do not like sectors and stocks that require capital on regular basis and those with high degree of leverage. We also tend to avoid companies that have high level of policy/ regulatory risk. We avoid betting on event based plays.
What will you attribute the relative consistent performance of your fund in recent years?
Over the years, we have stuck to investment philosophy and investment mandate of the fund irrespective of market phases. The investment focus has always remained long term, with relatively low portfolio turnover. These simple rules have enabled us to register outperformance through both sector allocation as well as stock selection.
Any tactical miss you regret (not having, or not having enough or holding something) in your portfolio?
Our investment approach has always been long term in nature, and therefore, tactical investments, if any, are never a significant portion of our portfolio. Annual portfolio turnover of Kotak Select Focus is below 25% (as on June 30, 2016), which signifies our long term approach to investing.