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Opportunity from volatility

Sonam Udasi, fund manager, Tata Mutual Fund takes our questions on Tata Value Fund Series-1, a closed-end fund whose NFO is currently open

Opportunity from volatility

India at the margin is getting rich. Economic growth prospects are stable. Yet, many investors worry about risks like politics, inflation, etc. at a time when they should be focussed and disciplined about long-term investments. This makes some investors sell stocks and get out, thus creating volatility. "Such episodes of volatility are good for value-conscious investors wanting to build quality portfolios," says Sonam Udasi, fund manager, Tata Mutual Fund. The fund house has launched a closed-end NFO in the form of Tata Value Fund Series-1. The NFO ends on July 6. A volatile phase of the market is the best time to scout for value stocks, as stocks generally tend to fall below their intrinsic value, believes the fund house. We caught up with Udasi to understand the reason, objective, strategy, and outlook of this fund with a tenure of 3 years.

The AMC has Tata Equity P/E Fund. Why are you launching a value fund now?
The Tata Equity P/E Fund is based on low P/E and looks at one metric. However, we realized that there is scope for looking at different metrics. We want to own the valuable at an undervalued price. As per Sebi norms, there is one product per category. We have been thinking about this fund for some time now. The Tata Value Fund Series-1 scheme's starting point would be to see the intrinsic value of a company, but it's more important for an investment to be able to create wealth for the investors.

From a timing perspective, now is a good time. There has been a lot of volatility in equity markets and market value of companies may go below their intrinsic price in such volatile times. A lot of carnage has happened in the midcap and smallcap but everything is getting painted with the same brush. Even, in largecaps, there is a lot of pressure from two risks - oil and where it is headed, and political risk. But I have seen companies compound wealth despite such things over the two decades. On the political risk front, beyond a point, markets follow the colour of money and not the colour of politics. So, this allows us to take advantage of mispricing opportunities in the market and volatility that might persist over the next 6-9 months.

But why have you chosen a closed-end strategy for a value fund?
The volatility gives us an opportunity to create a solid portfolio from a 3-year time horizon. The money collected from the new fund offer will be there. Investors have taken a call to give us money and are giving us three years to do something decent with it. In that context, the more volatility happens over the next three months, the fund's risk-reward will become more favourable.

So, will you be keeping a lot of cash at your disposal to capitalize on opportunities?
No. The fund offer closes on July 6. As a fund manager, I will get access to the fund by mid of July. We have given an auto switch facility to investors where on maturity, the redemption proceeds of the investor from Tata Value Fund Series-1 will get invested in the Tata Equity P/E Fund on the redemption payout date. From a fund manager perspective, we will have to find out how much percentage of investors have opted for the switch. That will play a part in determining how long a vision I can carry in this fund. If 90% of investors want to exit at the end of 1103 days i.e. the tenure, then the logic I would use is that as per Sebi norms I have 30 days to fully deploy the money. We will keep taking nibbles at the companies we like. Do remember it is impossible to time the top or the bottom. This is why stock selection is very important.

Will the fund be sector- and market cap-agnostic?
Yes. The fund will be a multicap fund with a value bias. It will have a mix of emerging companies that are getting mispriced, and some contra pick like pockets who are suddenly getting deflated. There will be largecaps, midcaps and smallcaps.

Not all stocks that are correcting are of value. Isn't there a higher risk of buying poor quality stocks during a downturn?
The good thing as a portfolio manager about coming in with an offer when markets are very slippery is that the manager does not need to go very down in the quality curve to create a good portfolio. Normally, when you come at a peak, you either buy something expensive and make it more expensive or you have to go a lot of deeper to figure out what is the next alpha generator. In this kind of environment like we are experiencing now, even if you create a modestly quality intrinsic portfolio then the return profile of the fund would be good without taking too much risk.

What criteria do you apply to pick stocks for the portfolio?
Investments will be based on a good return ratio profile of the company, good quality management, clear growth trajectory, capital discipline track record of the investee companies, basic fundamentals like Price-to-Book (P/B), Price-to-Earning (P/E) and Dividend Yields, quantitative parameters like Return on Equity (ROE) and Return on Capital Employed (ROCE). The focus will be on wealth compounders and to avoid value traps.

We will take high conviction bets. The plan is to keep a relatively tight portfolio, and not have a long tail. We have a starting list of stocks but we will keep on adding to them as we go along.

What kind of stocks will you avoid totally?
Any company with a bad or poor business will be avoided. Companies which are working for banks, rather than their shareholders, will be overlooked. We do not want to own unnecessarily capex-heavy businesses. As a fund manager, I represent the interest of minority shareholders. Minority shareholders should get a chunk of the earnings. You may get value from the most valuable bank, most valuable life insurance company or most valuable consumer company! Do remember that optical valuation is not something that will drive the portfolio. There are stocks which are 60-70 times forward earnings multiple and may seem expensive. From a value investor perspective, we need to understand what will we get from such businesses.