What's your investment strategy with this fund?
At any point in time, 95% of the fund will be invested in 25 stocks and 75% will be large-caps. I have the option of having 25% in midcaps but so far, large caps have dominated the fund. I have taken a call that large caps are likely to do well and hence we continue to have a relatively high proportion of large caps. The only midcaps I have are a couple of stocks which cumulatively constitute about 3-3.5% of the portfolio.
Is there any specific investment universe that you use?
No not really. I can even buy microcap stocks. In the past, I have also invested in mid and small caps. My sense is that large caps will do better at this point in time.
Are there any upper limits to the cash allocation that the fund can have?
No. Frankly I've never taken a cash call. If you look at the fund in the past 3 years, 99-99.5% of the fund has been invested. I've participated in most of the growth in the Nifty to 7600, 8200, 9600 and now to 10,000. The decision to not take cash calls has helped us in this regard.
It also allowed me not to worry about a correction and taking money off the table. I've consistently stayed on with some fundamentally strong stocks whose performance in quarter vindicated my conviction. Because I've held on to them for over three years, the decision has helped the scheme. From Jan to June 2017, the fund has underperformed in relative terms but this is because the type of stocks that were running up at the time were not of the best quality.
What would be attributes of the stocks that can get into your portfolio?
Just two - cash flow and ROE. The companies that sit in the portfolio have generated consistent cash flows and ROE. They have not diluted their equity unless they needed to satisfy capital adequacy norms. The dilutions happen only when growth capital was needed, not otherwise.
What type of stocks have never entered portfolios.
I would avoid certain business groups completely. Quality and integrity of management really matters. You don't want keep worrying about what's happening in the company. Businesses don't run that way. They typically are a lot more consistent, and you would want to own consistent businesses.
Do you find it challenging to meet the high level of conviction that a concentrated portfolio requires?
Quite the opposite. The top 10 stocks would be 55% of the portfolio. If the top 5 do well, the fund does well. If the top 10 do well, you're home. Even if you look at the other fund I run (DSP Blackrock Top 100), I do it in the same style. In that fund there is no limitation on the stocks I can own. Even that portfolio is not more than 30 stocks. If you own a stock you might as well do the work behind it and be sure of what you are into.
Any tactical misses?
There are lots of them. You will be amazed at the number of stocks I have missed. When demonetization happened I became concerned about its impact on certain finance companies that we held. After I exited, the very same went up by another 50%.
This article was originally published on October 11, 2017.
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