What has resulted in outperformance by your fund over the last one year?
The fund's outperformance largely stems from an exposure to the right sectors. We have made a conscious attempt to focus on the financial sector, within which a deliberately higher weightage (40-45 per cent) has been accorded to banking. This higher concentration of high-performing holdings has contributed to our stellar performance. Names like HDFC Bank, Bajaj Finance and Muthoot have consistently figured in our portfolio. Our ability to do a strong bottom-up research and identify pockets of value has stood us in good stead.
How do you select stocks for this fund?
Our fund holdings can be divided into secular, cyclical and defensive bets. Secular stocks are those that have consistently delivered an ROE of 15 per cent and are expected to maintain a growth rate of 15 per cent or above over a period of time. Cyclical bets are those where ROE above 15 per cent may not be consistent but earnings growth is higher in certain periods. We take positional bets in cyclicals where earnings are likely to surge due to an uptick in cycle. Defensive stocks are those that have consistently delivered strong ROEs and are thus well positioned to cushion portfolio volatility.
We have a relatively large exposure to secular stocks as they provide better visibility in terms of earnings growth and performance. Overall, there is a strong interplay between weightages that helps us optimise returns.
When you do sell a stock?
We only include those companies in our portfolio where we find the risk-return trade-off to be compelling. Similarly, we exit a stock when the risk-return trade-off is no longer favourable.
What this essentially means is that we sell a stock when we believe that the risk attached to its performance is not commensurate with the potential returns that it offers. Additionally, every investment is tethered to a well-researched investment hypothesis. We constantly evaluate this hypothesis and choose to sell the stock in the event that there has been a change in the hypothesis that warrants an exit.
What kind of stocks never enter your portfolio?
We steer clear of stocks that have corporate-governance issues. We also avoid valuation traps, where stocks are trading at cheap valuations due to inherent issue with the management or the business. Basically, we prefer stocks where we are comfortable with the management and the industry and believe that the valuation and future earnings visibility justify buying the stock.
How do you allocate funds across companies of various sizes?
The fund is fairly flexible in terms of allocation across companies of various sizes. Rather than purely focusing on size, the fund focuses on an interplay between valuations and weightages. While a large part of the portfolio comprises large-cap companies, we also have exposure to mid and small caps. We tend to have a longer term view on mid-cap companies that are available at compelling valuations and are relatively more liquid. The fund allocation is also strongly influenced by the valuation difference between large and mid caps and the subsequent opportunities that emerge when this gaps narrows or widens.