How did you contain the downside in the last one year?
A number of factors helped us in controlling the downside, viz., large-cap orientation, higher exposure to IT and FMCG and an underweight position in sectors like pharma and cement. Within sectors also, stock selection helped us. For example, in the pharma sector, we were zero weight in export-focused generic pharma companies for a long time. Now with steep correction in the prices of some of these stocks, we have added a small weight in these stocks.
How do you pick stocks for this fund?
In Kotak India EQ Contra Fund, the fund manager first prepares a portfolio based on his view on the economy, stocks and sectors. Then he runs a quantitative model which also gives a portfolio as an output - a complete portfolio with sector and stocks weights. The fund manager then compares the two portfolios. He takes a high conviction bet on those sectors or stocks where the two portfolios are in sync.
In case of the sectors or stocks where both the portfolios are not in sync, the fund manager does more analysis and then decides whether to go with the fundamental view or the quantitative model. We call this approach 'IQ+EQ'. It is also known as the quantamental approach globally but is not as popular in India. So, it is contrarian to the generally followed portfolio-construction process in India.
When do you sell a stock?
A stock is sold in two cases: (1) when the fundamental view and the quantitative model both turn negative on the stock or (2) where there is a conflict between the fundamental view and the quantitative model, and we believe that the valuations don't justify the growth prospects of the company.
How do you allocate capital across large, mid and small caps?
We follow a predominantly large-cap approach. On an average, mid caps plus small caps would find less than 20 per cent weight in the fund.
How do you allocate funds across sectors? Which are the most promising sectors currently?
The fund manager decides sector weights based on his views on the global and Indian economy and the fundamental view on each sector. The quantitative model also suggests weights for each sector. For sectors where both the fundamental view and the output of the quantitative model match, we take high-conviction overweight or underweight bets, as the case may be. For sectors where the fundamental view and the output of the quantitative model do not match, the fund manager does more analysis and then decides whether to go with the fundamental view or the quantitative model.
Currently, we are positive on consumption and IT sectors. We believe that the consumption habits of the Indian population are changing. Given that 2019 is an election year, consumption-oriented sectors should continue to fare well. Though the IT industry was slowing in adapting to the newer areas like cloud, digital, IoT, etc., it is quickly catching up now. Margins could be under pressure due to more on-shore hiring but growth shouldn't be a concern.
What can investors expect from your fund going ahead?
The investors should expect the portfolio to be dominated by large caps. There will also be growth stocks in the portfolio where we believe that the market is under-pricing the growth potential irrespective of whether they have outperformed or underperformed the broader markets in the short term. Value stocks will find a way into the portfolio when we believe that the risk-reward ratio is favourable; growth prospects and pricing power may return to the company; and the management quality is good or improving.