Interview: Catching Trend | Value Research Kenneth Andrade has been addicted to stocks markets ever since he was in college. Working in close association with market players, he got to realise his passion and get paid for it too.

Interview: Catching Trend

Kenneth Andrade has been addicted to stocks markets ever since he was in college. Working in close association with market players, he got to realise his passion and get paid for it too.

Kenneth Andrade has been addicted to stocks markets ever since he was in college. Working in close association with market players, he got to realise his passion and get paid for it too.

Andrade started out as a financial journalist in 1991. After his stint in journalism he worked for a couple of brokerage firms before moving to Apple Asset Management in 1994 where he was introduced to equity research and analysis. Subsequently, he moved to portfolio management at LKP, followed by Sharekhan. His last stint was at Kotak Mahindra AMC.

Andrade listens to a lot of music whenever he wants to unwind and to charge himself.

In the context of recent acquisition of stake in Stanchart AMC by UBS, have you been concerned at any point about your continuity and all those things?
No, No. We are not really worried and our team is largely the same. UBS would want to grow the business along with the existing personnel and their partners. People are an integral part of the acquisition. The acquisition is subject to regulatory clearances. We at Standard Chartered AMC have been through the due diligence process and have understood what their strengths are and also what we bring to the table. I think what we, as an AMC, bring to the table is the people. The equity corpus is material but so are the people associated with it. It has been almost 24 months now that we are into equities, with Rs 2,300 crore of equity corpus.

All this money has come in a relatively brief period along with huge expectations. How much does it scare you?
Oh, the asset size of the open-ended funds remains volatile and I am used to it now. If you go back to my Kotak days, I used to manage MNC Fund, whose corpus wasn’t stable. It was a small corpus and the addressable number of stocks was also just about 50. Kotak Midcap was very similar, where we saw 50 per cent of the corpus vanish in about six or seven months. In fact, it’s no different for any other scheme at all. So you kind of get a hang of it. Volatility of the corpus is something that Indian fund managers have got used to.

I think its manageable now. We have seen a lot more maturity coming in and the assets have stabilised. I think the initial one year is always a bit volatile for asset base, after which you generally get a stabilisation of the corpus.

Do you think the recent RBI measures will affect growth rates in the coming quarters?
There are compulsions because of which the measures are taken and I think the entire tightening of the liquidity is affecting the consumption more than the manufacturing or the infrastructure investments. Companies have access to various sources of debt — ECBs, FCCBs. So I don’t think they feel the pressure of the monetary policy as much as the consumption side.

Their profitability gets impacted not by the interest rate on the capital expenditure, but by interest rates on working capital. Therefore, as long as they don’t have piled up inventory or debtors on their books, they are relatively insulated from the interest rates.

Now if you are talking of a slowdown, then there’s a problem, but I don’t think that interest rates are going to be a large part of the P&L accounts for at least the next few years.

Tell us about your equity funds and how you position them?
We’ve got three active equity funds — Standard Chartered Imperial, Standard Chartered Premier and Standard Chartered Classic — of which I manage the first two.

Standard Chartered Imperial is the diversified equity fund with a large-cap bias. We have about 85 per cent of the portfolio invested in stocks which are in the large-cap domain. Its investment mandate requires you to be in the top 100 companies. Standard Chartered Premier is a portfolio built with primary research. It has a portfolio of stocks which are ahead of the curve, or tend to be ahead of the curve. I also manage the Enterprise Equity Fund but it is more of an ‘index plus’ fund. A large part of the portfolio is passively managed, while a small portion is actively managed, which is the IPO part. The idea is to capture the listing gains. You can also call it the arbitrage between the primary market price and the secondary market valuation. So it’s a valuation arbitrage, nothing more than that.

Talking specifically about Standard Chartered Premier isn’t liquidity a challenge while managing a portfolio of such stocks. Is it something at the back of your mind every time you are buying an illiquid stock?
We do assess the risk of buying into something completely illiquid. We do get a sense of how much money is expected to go out and how much money is expected to come in. And if you look at the portfolio, the top end of it largely comprises illiquid names. But till now, I haven't really felt any constraint on the liquidity front.

Once the fund stabilizes, you can keep expanding the portfolio. Moreover, it's an interval fund and therefore, we could close the fund for subscription once we find that we have no incremental ideas to accommodate for new money.

The last three-four months since the start of this year have been exceptionally good for Standard Chartered Premier and the returns during these months have been fantastic. What's the magic spell? Is it just incidental?
Its no magic, I think you go back to the age-old concept of portfolio construction and you need to identify the trend. Once you get the trend right, whatever you build under that doesn't matter.

Let’s say you identify a trend in two-wheeler stocks. Now you build your portfolio with three stocks in that segment, and keep analyzing the data to shift your money from weakest company to the strongest one. That’s how you build the portfolio once you identify a trend.

The objective in this portfolio is to concentrate on aggressive trends and build portfolio based upon that. If you look at the portfolio, we have all three aviation stocks. My take on aviation is that you will only make money in the J-curve, i.e., in that bottom end. The next round of market cap growth will only come with the dilution of equity, nothing else. Just get the mindset of the promoter-after losing Rs 600-700 crore a year the first thing he will try after turning into profitability is to keep cash balance and then move. That can cause a huge drop in returns on capital employed. Therefore, I believe that if you want to take a call on this industry, this is the only time you can take that call, when they don’t get the money and there is a liquidity crunch. The kind of money you can make on a turnaround is brilliant.

But it also proves to be too much of a test of patience.
Of course, that is the mandate of the fund. See, I wouldn't run a mid-cap fund the way I run Standard Chartered Premier. If I were running a mid-cap fund, it will be a much more diversified fund and probably won't have so many companies which are so small in size. Typically, if you look at any of the mid-cap funds, you normally have stocks with a market cap of Rs 350 crore and upwards. But we have also taken calls on stocks which have a market cap of Rs 60-100 crore, because they are a part of the bigger trend that is happening in the verticals that they operate in. And certain parts of the portfolio have done extremely well. Moreover, there are also pockets of conservation that have been built into the portfolio like the businesses which are consumption driven, which are likely to be completely stable.

What are your views on the Jet-Sahara deal which has attracted very strong opinions? Do you feel it is a blunder?
I tend to look at it a little differently. Look at what happened in cement. We had consolidation that drove price rationalization, and that drove profitability. And then, we had a scenario where the demand grew faster than the supply and all the companies made super-normal profits.

We are going through a phase where the aviation industry has started consolidating. The industry operates at 70 per cent capacity utilization. No one makes money at this level. We need to push that 70 to 80. Now how does that happen- either demand grows faster than supply, or one of these guys goes out of business. Now if you remove any of these companies from the system, it obviously has a corresponding benefit to everybody else. And the crunch time is more now than ever. Their debt-equities are like 3:1, and no-one has got space to expand balance sheet. So its crunch time for an industry and it is my conviction that if you can’t make money now, you will probably never make money in this industry ever.

If they don’t rationalize now, it won't happen ever. See, it’s a business where there is no small player with 1 per cent market share breaking the price. People have understood that you can’t burn Rs 1,000 crore that will keep coming in. That's the constraint of the new capacity. Now the existing capacity needs to survive. And I don't mind if one of my portfolio components actually goes bust, because it will translate into benefits for the other two. So if you want to be in aviation, you have to be in all the three companies available. That is how you manage the entire trend.

From the risk point of view, it's a small part of the entire portfolio, about 4-4.5 per cent of the portfolio.

What will be your orientation with the just-launched tax-planning fund?
We're just getting started with it. It will be a diversified fund. Basically we plan to take the index components, but the stocks can be completely different. So for example, the banking and technology comprise a certain per cent of the index, we may maintain that but not necessarily the stocks as well. We can have a mid-cap or a large-cap orientation. So the idea is that over the three years, the worst that we should do is to give the index returns, and alpha generation would come from the stock picking.

How do you manage risk? Do you have any defensive strategies which you would use if the market tanks from here on?
We are an equity-oriented fund and therefore we don't use cash. We keep only a normal amount of cash keeping in mind the redemptions. But in terms of managing risk, we have controls over the maximum weightage given to one stock, which is 8 per cent per stock and to a particular sector, which is 20 per cent. Therefore, we run a pretty diversified fund. At no point of time would the number of stocks in any portfolio be less than 30. Today, we have about 37 stocks in Premier, about 35 stocks in Imperial.

Is there anything mandated by the UBS? Will there be a significant change of track in the way you approach investments?
They have a lot of processes built into their investment decisions. They manage, I think, close to $700 billion worldwide. We have looked at their systems. They work on a DCF model while we work on a different relative valuation model. I think what they bring to the table is a lot from the regional and global perspective, and we bring a lot from the local perspective.

It is unlikely to impact the investment approach. See, the investment mandate of the funds will not change; while the investment process will become a lot more robust. They've got investment management skills lasting for decades now. They are fifth largest in terms of actively managed funds worldwide. And investors will benefit from the longer term approach that they have in their investment culture. They believe in creating wealth over a long-term period, they believe in riding through the investment cycle.

Over this relatively short time period over which Stanchart has been managing equity funds, the performance has not been great and the funds never emerged at the top of the performance charts. Is there anything that you have identified that needs a change?
I don't know, you should be telling me. Premier has not been doing too badly. If you look at the Imperial, out of the funds that were launched last year, I don't think we have done too badly. At the same time we are very aggressive on the amortization, we've written the expenses off in 18 months. So if you consider that impact as well, I don't think we have done too badly.

What sort of an investor are you? What is you investment style?
I like to buy cheap. I like to buy ahead of the trend and ride the entire cycle, more intuitively into the mid-cap space of the market. But it has not been too much of a value market in the last couple of years. But there have been some large trends that have emerged, and we have been on top of most of them.

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