There are not many funds with a 20 year track record. In that sense, the DSP BlackRock Equity Fund as the first and flagship offering of the fund house is an interesting product to follow especially due to recent changes. The Rs 2400-crore multicap fund since June 2016 has ushered in a bias towards investing largely in growth & quality companies. The value or opportunistic element of the fund has been reduced since then, says Atul Bhole, Vice President & Fund Manager at DSP BlackRock Mutual Fund. In a detailed interview with Kumar Shankar Roy, Bhole takes us through his investment philosophy, big allocation towards financial stocks, fund's relative under-performance in recent years and why he avoids tech, telecom & pharma.
- DSPBR Equity Fund is over 20 years old. You have been managing the fund since June 2016. Can you tell about the fund's current investment philosophy?
DSPBR Equity Fund was the first offering and it is the flagship fund from our fund house. It is managed as a multicap or diversified fund. Since June 2016, we have brought in a bias towards investing largely in growth & quality companies. The value or opportunistic element of the fund has been reduced since then. A large portion, say 70-75% of fund AUM, is invested in companies which have good businesses with moats around brand, distribution, execution, cost, etc. Those companies also should have good management with better capital allocation history and good growth visibility. The fund is maintaining large cap to midcap ratio largely around 65:30 without getting into debate of valuation levels of market or these two buckets. Additionally the fund is now more diversified with basket approach to benefit from multiple themes or sectors.
The focus is on bottom up stock selection. We believe, the internal process we follow in investment decisions is quite robust and aims at yielding better risk-adjusted returns.
- How are you managing the fund differently as compared to your predecessors?
The fund is now managed with more tilt towards growth & quality companies and the component of value or opportunistic investments is now limited. This means the fund now follows more of a 'buy & hold' strategy.
- DSPBR Equity Fund's 5 biggest holdings are HDFC Bank, ITC, SBI, YES Bank and ICICI Bank. Can you take us through what are the reasons behind these allocations?
Private retail (or which are building retail piece) banks are part of the portfolio as they offer consistent growth of 15-25% without much concerns around asset quality. These kind of companies have a history of creating wealth in a consistent manner and we are reasonably confident of them repeating the same over the next 3-5 years. For other banks which are facing NPA issues, we believe the incremental NPA formation can trend down. For the issues they are facing, stock prices are factoring that. These banks also created lot of value through their subsidiaries like life insurance, general insurance, mutual funds, etc. The FMCG companies also went through a challenging period due to tax hikes and resultant impact on growth. We believe this might change going forward as it would dawn on policy makers that high taxation is counter productive. The investments going in building in other businesses would also bear fruit in future.
- If we add banks and finance sectors, over one-third of the money in your fund is invested in these two related sectors. Are you actually diversifying your investments risks as it seems a large part of the money is linked to fortunes to one main space?
Though the proportion of financials is quite high, large part of this is represented by banks/NBFCs which are growing at a CAGR of anywhere between 15-25% for last 5-10 years now. We have reasonable confidence in them repeating a similar feat over the next 3-5 years based on the opportunity and our comfort levels with the managements' capabilities.
Secondly, within the financials group, there is diversification between retail banks, corporate banks, HFC, NBFC, etc. Each of these have different moats, growth drivers or valuation logic to hold on to them.
Also at the broad level, by and large, financials represents and captures the trends in the economy which benefits/impacts all sectors. As financial inclusion gathers pace and movement from physical to financial assets continues, these companies would continue to benefit and create value for stakeholders.
- From a 1-year, 3-year, 5-year and 10-year points of view, DSPBR Equity Fund's performance when compared to multicap fund category average seems uninspiring. The fund returns in 3 and 5 year period have lagged category average. What were the reasons for this?
In the last 1-2 years, the fund has undergone some changes in terms of stocks as well as portfolio construction. The higher proportion of domestic economy or consumption focused stocks were included in the portfolio and they faced challenges during demonetization and GST implementation phases. Simultaneously we missed some value stocks from metal or commodity side as some stocks which did very well as part of relative valuation catch up. This is causing returns to look pale in comparison. However, we are confident about the stock selection the fund is having now and sticking to our investment philosophy.
- How are you approaching stock-picking for the fund in current market scenario?
In-line with the philosophy of investing in growth & quality companies, most of the companies are picked up where we are confident about the business models & managements. Growth visibility is another imperative for choosing an investment in current scenario of high liquidity. We have seen that such companies create more value, that too in a more consistent manner, even though at the starting point valuations appears a bit high. There also, the tilt towards B2C companies is more than B2B companies at these level of valuations and risks of margin compression are limited. We are trying to avoid companies where returns have come only from multiple re-rating without commensurate increase in return ratio.
- Do you largely stick to the index stock picks, or take meaningful deviations? If yes, please cite some examples.
The fund is managed quite actively and not afraid of taking large active deviations. The philosophy is that each and every company can enter the fund only if it satisfies the investment criterion, prudent capital allocation being the most important of them. Because of lesser comfort level around business models of capex heavy companies, we have lesser exposure to commodity or telecom companies. Because of uncomfortable capital allocation, we don't have exposure to the largest oil & gas company and because of lack of growth visibility, we have extremely underweight positions in tech & pharma.
- What kind of stocks never enter your portfolio? Are there any sectors you are avoiding at the current juncture and why?
Corporate governance & bad capital allocation are the two factors we are very wary of. Where we have doubts about these issues, those companies would never enter the portfolio.
- At present we are avoiding sectors like tech, pharma, telecom, power etc for lack of growth and not for above-mentioned issues. Avoiding would be more due to company-specific issues than sector issues.
- Any tactical miss you regret (not having, or not having enough or holding something) in your portfolio in the time you have managed the fund?
There are some misses which are probably causing the fund performance to appear subdued. In last one year or so, some value category stocks have made a comeback after a consolidation of 3-4 years and we missed catching them. During the year, we also saw some of ordinary companies' stock prices doing extraordinarily well just because of relative valuation catch up in the market which is flush with flows coming in. Most of those misses were because of those stocks not fitting in with our investment philosophy. So we are not perturbed due to such misses. Such periods of extraordinary performance not supported by fundamentals come once in a while but don't last for long, or may even reverse.
- There are dozens of multi-cap equity funds in the Indian MF industry. Can you tell investors why they should invest money in your fund?
We have made you and investors aware about the investment philosophy as well as other attributes of the portfolio construction. We follow a robust process of stock selection and aim is to generate better risk-adjusted returns. We have already mentioned that the fund is actively managed, hence there can be periods of variation in performance compared to index. Additionally as different investment styles work or don't work in different market periods, the relative ranking can also vary in near term but over time, we believe this philosophy provides better risk-adjusted returns.
Investors can be better off by not comparing the 6-12 months relative ranking of funds but staying invested in equity funds with 3-5 year horizon.