And the interesting fact about IDFC Premier equity is, though they accept SIP's through out the year, they donot accept lumpsum investment always. Curious to know why ?
Following is an interview with the CIO of IDFC MF by Wealth Forum. Read on to know more about IDFC MF and its strategies.
The IDFC Premier Equity Fund recently re-opened its lumpsum subscription window - for a brief while until the AMC collects around Rs. 300 crores. While long term SIPs are always encouraged, the fund house is careful in monitoring lumpsum flows. What is the investment strategy that calls for this caliberated approach to sales? Kenneth takes us through the portfolio strategy of the IDFC Premier Equity Fund - which is truly a "portfolio manager's fund" as Kenneth describes it……
Q: The lumpsum investments window in your IDFC Premier Equity Fund seems to be open again after a long hiatus. What is the business rationale for opening and closing this window from time to time and how long will this window remain open and why now?
Kenneth: Let me answer this in two parts, from a business rationale and from the underlying investment rationale. First, the business rationale. This is a product that we positioned based on a long-term structure of how India will emerge from a developing nation to a developed nation. We are happy taking small amounts of money and if you look at the underlying portfolio and the AUM, there is just one investor who has got more than 1% of the entire fund. It's a fairly broad-based diversified equity fund at this point in time withno underlying volatility risk and has been so for the last five years that we have managed this product. We have the window always open for the SIPs though we have controlled the number and the amount of SIPs to about 10 lakhs per SIP and STP is also part of this structure. It has been a steady growth in terms of AUM with no pressure on the portfolio manager or the organization.
From the investment angle, we positioned this product to be a long-term structure. We buy businesses and hold. The turnover ratio ofthe fund is less than 30% per annum. Most of the top ten stocks are the same as the top ten stocks of the last year and alarge part of the portfolio is similar to that in 2006. So it is a lowchurn portfolio and we like to ride with the investment cycles. HDFC, Hero Honda, Bharati and Infosys are all good examples of businesses that we like to buy and hold - businesses that are well positioned to ride the country's growth from a developing to a developed nation.So we try to pick such companies that will grow in scale and establish leadership. All these things take time but if you enter early and ride through the cycle, you can create a lot of wealth.
Q: Interestingly all the examples you gave are large-cap oriented ones, yet there seems to be a perception that Premier Equity is very sharply oriented towards small and mid caps. Is this a correct perception?
Kenneth: Our tag line for the fund is that it is an unrestricted go anywhere equity fund. We buy into a cycle early. If it so happens that an entire part of the portfolio goes on to becomea large part of the market, you get a different classification. You hold on to the long-term cycle and the market capitalization moves upwards, they move into the large-cap bracket. I don't want to really put barriers around saying that we look at the capitalisation first and then build a portfolio.
Q: How has the experience been in recent times? What is the percentage of your portfolio in large caps and mid and small caps?
Kenneth: The way we classify it, the smallest stock of NIFTY is defined asa large-cap base. We have about 20% in the large-cap category but the remaining 70% plus is in emerging businesses. This proportion has been consistent over the last five years. Just to clarify on the mid cap buys, each and every one of the top ten companies which account for close to about 43% of the portfolio is a leader in the business that they operate and hence the largest companyin thatcategory.
Q: Given that from an investment perspective you can buy into liquid counters and closing a subscription window is somewhat synonymous with small-cap oriented funds, why would you not want to keep it as a genuine open-ended fund?
Kenneth: The IDFC Premier Equity fund is a portfolio manager's fund. We strive to identify businesses ahead of the entire curve. I do not have banking, technology, pharmaceuticals, capital goods, real estate in my current portfolio. I only have a sprinkling of oil and gas. Thus it is not a diversified equity fund. The portfolio manager has therefore got the discretion to orient the portfolio around a particular theme, or a particular part of the market that he likes. I have 40% of the portfolio in a consumer/consumer facing business and that's significant polarization. We like this because this is the part of the market where we can practice a buy and hold strategy and not trade on the portfolio. When you have a product offering of this kind available to investors we really do not want investors to look at the historical track record and come in with lump sum amounts. We give them an opportunity to build up their portfolio in a systematic way. It is all about discipline in terms of participating with the growth of the opportunity.
Q: What are some of the other sectors and themes that have attracted your attention in Premier Equity?You mentioned consumer facing stocks being about 40%. What broadly would constitute the balance 60%?
Kenneth: In the last five years the growth in the GDP was driven by the investment economy. The next decade we believe will be driven by the consumer economy and here's where I come from. If you map the current per capita income of India, currently it would be about Rs.46,000 or just over $ 1000. If the GDP doubles and with a growth rate of 1.2% in population, in practice you will effectively double your per capita income. If I am running a business or in this casea portfolio, the best play on that portfolio is to identify how I can capture the growth in that incremental 46,000rupees that is coming into the consumer's pocket. It's fairly a big macro data point, and if you can get 30% or 40% of a portfolio into that number, it will help drive fund performance over a long period of time which is why we oriented a large chunk of this portfolio to the consumer and the consumer-facing economy/companies.
We have about 10% of the portfolio in the agricultural sector and ancillary businesses. There again we come from a very similar thought process. We have about 35-40% of the world population between all the emerging markets with an increased ability to spend. The dynamics there are that a lot of people in the rural economy are going to get rich and demand agricultural mechanization, implements and inputs which are of far better quality than ever before. You can therefore buildan entire chain:from soft commodities which are the inflationary products to the derivatives of higher incomes which because of high food prices will transition to the implements part of the market and to the agricultural inputs.
The third part is infrastructure. In a high inflationary economy, infrastructure assets will be a very significant part of the entire inflation chain. As you go higher there will be demand for the same asset at a higher price. So these are the three parts of the market that we are concentrating on inthe next year or two.
Q: A word on the markets Kenneth : we saw a big sell off due to events in Middle East, Europe and Japan and just as we were being told that risk aversion to emerging markets is increasing, we saw this sharp rally led by FII money. Can we say that a healthy correction is over and the bull market has resumed or should we brace ourselves for more volatility ahead?
Kenneth: This market has no valuation support and the growth is slightly a question mark. In the absence of valuation support I think liquidity is the only support that you would get. So rather than calling for a bull market or bear market if we can call for more liquidity or less liquidity, it would be more relevant!
Similar to last year, I think we will play the guessing game this year too with no clue as to where the markets are going. So I don't want to put a number or a duration to it. It willall depend on the underlying liquidity but don't brace yourselves for significantly new highs or new lows.
Q: Finally, you mentioned that the market lacks valuation support. Would that be true for small and mid caps as well because we saw some 30% correction in small and mid caps? Are they now attractively valued or are they also at the top end of their range?
Kenneth: The underlying constituent mid caps can never be traded, because the moment you grow a fund over 1,000 cores, you get hit by liquidity of that stock. We believe that if the underlying company or entrepreneur has built the DNA of the company to move from number 9 in the industry to number 1, you can grow and be in multiple expansion. And if both the markets and the economy are supportive, that will deliver all the momentum that your portfolio requires. If you can build a portfolio around this in the corrective phase, which is what we started, you will have a portfolio that will last forever and be relevant in all cycles. So valuation wise I would rather be safer with a more expensive company than with an extremely cheap oneeven if the entire market is doing so. I would very rarely trade down on a stock to find cheap multiples.
As far as overall valuations for mid caps go, the last time I looked at the NSE mid cap index, it was trading at about 12.5 times earnings which is at the traditional 30% discount from the large caps.
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