"Our philosophy is to invest in shares of wealth generating companies which in our assessment are undervalued."
KP Pension Fund from Kothari Pioneer AMC belongs to a rare species of mutual fund sponsored pension funds in the country. For, apart from KP pension, Retirement Benefit Unit Plan from UTI is the only other choice for investors. Launched in 1997, KP Pension took to equities only in May 2000 and is currently managed as a conservative balanced fund. Since inception, the fund has generated an impressive return of 13.32%. The fund provides a 20% tax rebate under section 88. Unlike equity-linked tax savers, which give this tax concession only up to Rs 10,000, investors can allocate the entire limit of Rs 60,000 in KP Pension. Thus, the tax break apart, the fund offers an attractive avenue for higher inflation adjusted returns with equity investments.
R Sukumar, who manages both KP Infotech and Internet Opportunities, is also the fund manager for KP Pension. He aims at providing good long-term appreciation potential from the portfolio with a lower risk profile.
Q.How would describe the fund strategy in the context of the debt equity allocation?
Sukumar: Our objective is to have a 40:60 mix of equity and debt. By and large, we have been maintaining a ratio close to this.
Q. What other tax breaks you think can enhance the attractiveness of this fund?
Sukumar: The fund is already very attractive with sec 88 tax benefits and also other benefits that are applicable to other funds.
Q.What is the investment approach for the debt component? Is there an internal limit on portfolio maturity?
Sukumar: The strategy is to invest in high quality corporate bonds (typically AAA and AA+ ratings) with average duration of about 3 years or so. Our objective is to have fairly longer dated bonds when the yield curve is upward sloping. This is because all investors are for the long term and hence, interest rate risk is not very important.
Q. You have so far not taken any exposure to Gilts. What is your stance vis-a-vis these instruments? Further, the fund had a 12-15% exposure in lower rated bonds. Does the lower liquidity attached with these instruments affect the fund?
Sukumar: Our idea is to maximize the yield of the portfolio. Liquidity and trading are not very important for this fund. So, we have preferred to invest in high quality corporate bonds, which offer better yields. As I had mentioned earlier, liquidity is not very important, as there are practically no redemption from this fund. We also do not plan to alter the asset allocation drastically and hence we will rarely sell any bond out of this fund.
Q.Going further, what is you outlook on interest rates?
Sukumar: We expect interest rates to be soft considering the government's intent of bringing down administered interest rates like PF, PPF, NSC etc., and increased liquidity in general.
Q.What is the stock picking strategy and risk containment measures given the longer holding period of investors? Further, What is the portfolio turnover of the equity component?
Sukumar: In a normal year, portfolio turnover would be about 50% or so. The philosophy is to invest in shares of wealth generating companies, which in our assessment are undervalued. Our painstaking research and active management style enables us to invest in these companies early. While the underlying investment philosophy may sound simple, successful implementation requires tremendous effort in understanding all these businesses and the critical factors, that would influence their prospects. We look for companies that will show strength through ups and downs. All these companies have produced excellent results in spite of a sluggish economic environment. We believe that the hallmark of a good company is how well it performs when the environment is unfavorable.
Overall, the risk profile of wealth creating stocks is lower. This is generally reflected in terms of lower volatility (low beta and standard deviation). By constructing a portfolio of these stocks, we will be providing a fund with good long-term appreciation potential with lower risk profile translating into superior risk adjusted returns.
Q.While you have had an average 13% exposure to infotech, do you hold a ceiling on the exposure to this volatile sector?
Sukumar: We have no specified ceiling but our objective is to maintain a diversified portfolio, which means that not more than 25% of the portfolio will be invested in a sector.