'2023 will perhaps be a year where some growth challenges come to the fore'

Roshi Jain, who is at the helm of managing a few of the prominent schemes at HDFC AMC, shares her tenets of managing the schemes. Jain, who is a Senior Fund Manager at the fund house, says that Indian markets are trading at a premium to global markets and investors should brace for volatility.

About six months back, you mentioned that rising rates, elevated commodity prices and geopolitics were some of the key risks to markets in the near term. Since then, how has your perception evolved with regard to the risks to Indian equities?
At the beginning of CY22, already-snarled supply chains in the post-pandemic world were further strained owing to the geopolitical fallout of the Russia-Ukraine conflict. This resulted in a spike in prices of energy and agri commodities in the first half of CY2022. Inflation surged across geographies, driving interest rates higher and culminating in monetary tightening. The transmission of rate hikes through the economy and the tightening of liquidity will impact economic activity in different sectors to different degrees and with differing time lags. Pent-up demand post-COVID reopening has also in large measure been catered to in 2022, which means that 2023 will have neither the benefit of pent-up demand nor benign financial conditions. Hence, 2023 will perhaps be a year where some growth challenges come to the fore. Rising interest rates are likely to increase the opportunity cost (discounting rate) for equity markets. In the context of Indian markets, trading at a premium on near-term earnings compared to their long-term averages and also trading at a significant premium to global markets, we should brace ourselves for volatility.

China, which has been the engine of growth for the world in this century, has seen its growth slow down for the first time since the mid-1970s bar the COVID-hit 2020. What impact do you think it will have on the Indian economy?
Geopolitical concerns, COVID-driven disruption in supply chains, and rising labour and regulatory costs in China have driven the need for global companies to shift supply chains outside China as they look to diversify their single-country risk. At such a time when MNCs are looking to diversify supply chains, the Indian government's favourable policies to boost manufacturing in India, along with our favourable demographics and low labour cost, stand us in good stead to capture some of this shift. This supply-chain shift has the potential to not only positively impact the companies in the sectors where the shift happens but is likely to have positive cascading benefits to the broader economy and to the overall corporate sector by aiding private capex, improving our terms of trade, attracting global capital, creating job opportunities and contributing to income growth.

Could you elaborate on your investment philosophy and how it aligns with the institutionalised investment framework of HDFC AMC established during Prashant Jain's long tenure? What changes did you have to make to your investment style and processes to adapt since joining?
At a broad level, my investment philosophy revolves around adopting a bottom-up approach to stock selection, which focuses on quality companies at reasonable valuations. The idea is to select strong companies with growth drivers in the medium to long term. After a considered evaluation of the industry and business cycle and the positioning of a company within that sector, we take a risk-adjusted position in the portfolio. In terms of valuation, we take a holistic approach to capture longer-term earnings and cash-flow trajectory. The approach to stock selection as outlined above is driven by fundamentals and is research-oriented, which aligns well with the institutionalised investment approach at HDFC AMC. Hence, the transition has been smooth, not necessitating any material change or realignment in the process or style.

Over the last six months, the cash levels in your focused and flexi-cap funds have more than doubled (the former has even gone up to 13.4 per cent). This is slightly unusual considering their past trends wherein cash used to be in low single digit figures. What has been the reason for this trend?
At a broad level, equity valuations appear to be somewhat stretched, especially in certain segments of the market. In a concentrated portfolio like a focused fund, where the relative weightage of most stocks is relatively high, valuation discipline is paramount, especially against the backdrop of noteworthy headwinds on the global macroeconomic front. This could result in a relatively higher cash holding from time to time. With the flexicap fund, apart from some of the factors mentioned above, certain changes in the portfolio post change in the fund manager have also resulted in relatively higher cash exposure in recent times.

We see that in your focused fund, the allocation to the energy and construction segments has dropped considerably, while it has increased significantly in auto, healthcare and technology over the last one year. Can you walk us through the process that has resulted in this shift?
In the stated fund, portfolio construction is largely bottom-up with a mindful consideration of macroeconomic factors. While we were underweight IT for most of the last calendar year owing to concerns around global economic slowdown and expensive valuations, the subsequent correction in IT got us interested in the sector and we increased our weight in a calibrated manner, looking at longer-term growth opportunities. We are overweight autos, as the sector offers a potentially long runway for growth, albeit with some uncertainty around technology shifts. As far as healthcare is concerned, a growing domestic market, specific opportunities in the US and emerging markets with relatively reasonable valuations provide potential stock-specific opportunities. We have reduced exposure to globally linked sectors with cyclical characteristics and our energy underweight is part of that strategy.

We see the number of holdings in your tax-saver fund has reduced over the last one year from more than 55 stocks to 35. A similar trend seems to be arising in the flexi-cap portfolio as well. What factors have driven the decision to make the shift in these portfolios and make them more focused?
Considering the prevailing market conditions and valuation excesses in certain segments, a large-cap tilt is seen in the portfolios of the stated funds and owing to our strategy of running the portfolios actively, the number of stocks has come down. This does not have to be the case at all points in time and wherever there is an opportunity, we may add more stocks to the portfolios of the stated funds.

Since joining the AMC, you have taken over three diversified equity funds at HDFC AMC which make up more than 30 per cent of its actively managed AUM in the equity space. However, we see that the allocation to the stocks that have an overlap among these funds has increased significantly over the last one year. Has there been a conscious decision behind this change?
While there is no conscious attempt to have or not have a portfolio overlap, the portfolio construction of all these funds is managed with a common investment approach of focusing on companies with growth drivers in the medium to long term; which are competitively placed in an industry with good growth prospects, with a strong management and an ability to capitalise on opportunities while managing risks; which are reasonably valued with a good margin of safety. Considering these broad tenets, there could be an overlap between portfolios at times, depending on market conditions. I would also like to highlight that all the funds that I manage have the same benchmark, i.e., the NSE 500 Index in line with the funds' mandate (i.e., investment objective, allocation pattern, etc.) and don't have any regulatory or other restrictions with respect to market cap or sector orientation. Hence, some overlap is natural.

Would you help us understand the construct of the research and fund-management team at HDFC and how their roles are aligned? Are there any changes that you have observed in alignment of the fund-management teams, their structure and research processes that are in place since your joining?
Given the bottom-up nature of stock selection for the portfolio construction at HDFC AMC, research is an extremely critical part of the process and is well integrated with portfolio management. The universe of buy ideas is generated by the analysts and then fund managers choose from within that basis the mandate of the fund with an overlay of the fund manager's style and approach to managing portfolios. The structure and process are robust, rigorous and consistent, yet flexible enough to ensure continuous improvement; and portfolio performance is an outcome of the high quality, rigour and long-term orientation of the research process.

This interview was conducted in February 2023