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Choosing carefully

V. Srivatsa oversees about Rs 3500 crore assets in equity part of hybrid funds of UTI Mutual Fund. Read our interview with him

V. Srivatsa oversees about Rs 3500 crore assets in equity part of hybrid funds of UTI Mutual Fund, apart from the offshore fund business. A B.Com graduate, C.A., C.W.A. and with a PGDM from IIM, Indore, Srivatsa has been with UTI AMC since 2002. In an interview with Kumar Shankar Roy, he talks about a range of subjects including his investment strategy, his view on the stock market and specific sectors.

Choosing carefully

What is your investment strategy for the equity part of the funds you oversee?
We have a multi-cap kind of strategy. So, 60-70% of money is in large cap stocks, and 30-40% will be in mid and small cap stocks. Most of the investors in these funds are longer-term investors so we have the confidence of taking a higher allocation to mid-caps. This is an ideal mix to have because large caps give the portfolio return stability and lower volatility. Mid and small caps are about alpha generation, but they increase the volatility. We believe this kind of a strategy is good for return and volatility.

If it is so long term, why not go for a much higher share of mid and small caps?
Good question, but the answer lies in volatility. These funds are retail oriented, with a huge number of retail investors in every scheme. Its very imperative that we lower the volatility.

Can you tell us about the stock universe that you track for selecting investments?
On a UTI basis, we have a universe of 350 listed companies. This comprises of all the companies that we can invest in. We can't invest beyond them.

What kind of approach do you take - value or growth or a combination?
I use a Growth At A Reasonable Price (GARP) and Value combination approach. Valuation is something I put a lot of emphasis on. Its not that I buy growth stocks at expensive valuations. Turnaround stories are also something I follow very closely. A cyclical stock that is on the verge of a turnaround can be a very interesting bet.

How do you value such a turnaround stock?
Mind these stocks may not trade cheap based on contemporary metrics. For example, the PE or Price to Earnings multiple may look higher but I may look at the book value, percentage of replacement cost, etc.

On the large-cap side, what is your approach?
It is very top-down driven. The index is largely top-down driven. I do rotation. For instance, last year I had less of pharmaceutical stocks at the beginning of the calendar year but towards the middle of the year I saw good opportunity. I am still bullish on them. The idea is to make changes once a year. These changes are not drastic in nature.

So when you have a benchmark index, do you follow the index closely in terms of your portfolio?
No. I buy stocks based on the merit, not because its in the index. There are some of the stocks which carry big weight in the indices, but you may find they are given little exposure in portfolios or even absent. The focus here is having a sector-driven approach.

You were talking about why you are not overweight on financials space. Why is that?
I am not positive about NBFCs and state-run banks. I am bullish about private-sector banks. I believe that PSU banks are trading expensive. I see stress in that space, and their problems being far from over. PSU banks may look cheap on price/book value but if you adjust the book for non-performing assets, they are expensive.

Why aren't you positive about NBFC stocks? These stocks have had seen a great run...
Yes, they have done well. The major issue is that the cost of funds are getting lower for banks. Credit opportunities across the economy are not many. So, a lot of banks are aggressively focussing on those opportunities. Large banks will try and get more and more market share. They already have the infrastructure and cost of funds is now reducing. Even in rural finance, you will now seen increased competition from banks. NBFCs are also trading at high valuations, comparable to large banks.

Like many others, do you avoid real estate stocks for your portfolio?
No. On the contrary, I think there are some very good opportunities in real estate space. Fortunately or unfortunately, the entire real estate space has been painted with the same brush. That is bad as well as good. There are some outliers, which are trading at good valuations if you can take a longer-term view. In general, we avoid companies with a track record of poor governance. We also stay clear of high leverage companies.

How do you measure corporate governance?
We ensure that only good corporate governance stocks are present. The 350 stock universe comprises of good companies. They give a reasonable assurance that corporate governance level is decent. So, some may be good, some may be relatively bad. Our own research process ensures that analysts are supposed to lay emphasis on this.