Secrets of successful Fund Manager :

Kenneth Andrade is clearly a numbers guy.

As chief investment officer (CIO) at IDFC Mutual Fund, the key to Andrade's success has lain in being able to reduce financial data to its essentials, which then tell him what he needs to know: Is the company worth investing in or not?

"The ease (with) which Kenneth manages to break down the critical financial aspects of any company under his radar had taken me by sheer surprise when I first met him... back in 1999," said Vetri Subramaniam, CIO at Religare Invesco Asset Management, who's worked with him at Sharekhan and Kotak Asset Management. "The secret to his immaculate stock-picking is his ability to identify the nuts and bolts that drive profitability and growth of a company."

Andrade, 41, is a soft-spoken man with a calm demeanour. Those who know him well say clarity of purpose and an infectious zeal for statistics allow Andrade to cut through the maze of confusing noises on the Street.

By focusing on information rather than cacophony, he's also able to apply his metrics elsewhere and see if other companies have the same characteristics that he's looking for. His worldview reflects the investment philosophy of the IDFC fund house, which is known for its mid-cap offerings.

When it comes to mutual funds that invest in mid-cap stocks and have a consistent record, most experts recommend IDFC Premier Equity, a fund Andrade has been associated with since 2006. It's also the second equity offering from the erstwhile Standard Chartered Mutual Fund, with a net asset size of Rs 3,209 crore.

IDFC took over Standard Chartered's mutual fund portfolio in 2008. "When I came on board in September 2005, the Premier Equity Fund already had its mandate in its place. Its agenda was clear: Focus on companies which have positive cash flows, almost negligible or no debts on the books and which are dominant players in their industries," Andrade said. "We had a free hand in terms of picking companies without the constraints related to preferences to a particular sector."

These were the factors that persuaded IDFC to invest, for instance, in garment maker Page Industries, a licensee for Jockey and Speedo. "We met the promoters of Page Industries before the company's IPO (in 2007)," Andrade said. "We fathomed through our interaction with the company that here is a single-product company with a very strong franchise and never sold a product but basically sold a lifestyle."

This rang a bell for Andrade as it mirrored the characteristics of GlaxoSmith-Kline Consumer Healthcare, which has been in his portfolio since 2005 and has worked wonders for the fund. Page Industries has been part of the IDFC Premier Equity Fund since 2008. How to apply one viable idea to another industry is one of the key lessons Andrade has learnt in his eight-year association with the fund.

Apart from GlaxoSmithKline Consumer and Page, Andrade was quick to identify Kaveri Seeds, Bata India, Asian Paints and Blue Dart Express as desirable stocks using the same template. In the past three years, Page has delivered a95 per cent return, far in excess of the BSE 500's 22 per cent.

Bata India, which wouldn't have struck anyone as an attractive stock at one time, has returned 171 per cent in the past three years. So what does Andrade look for? "It is very important to focus on industries which are expected to do well and then focus on companies which best represent the factors that contribute to the success of the industry," he said.

Andrade has mastered the art of identifying quality businesses early on and knowing which stocks to ignore. For example, the fund has benefited from Andrade's deliberate decision to avoid infrastructure companies. "While we were completely focused on good balance sheet and businesses, we saw the infrastructure space was completely collapsing by itself. By collapsing, we mean any business which does not have pricing power would also not have profitability. If a company does not have pricing power, it means there is too much of competition," Andrade said. "In the infrastructure space, order book became a metric for securing attractive valuations. This took a toll on the profitability of companies which, in turn, destroyed investors' wealth."

Andrade's track record over the past few years is exemplary, with his funds having outperformed peers. IDFC Premier Equity has returned a compounded annual growth rate (CAGR) of 3.4 per cent and 25.4 per cent, respectively, over three and fiveyear periods against -1.9 per cent and 19.8 per cent average gains made by other midcap and small-cap funds during this period. That makes it one of the top 10 best-performing midcap and small-cap schemes in the past three and five-year periods.

In the past year, it has generated a 5 per cent gain against the category average of 0.29 per cent, finding a place in the top 15 best performing midcap- and small-cap schemes and bearing out Vetri Subramaniam's assertion about Andrade's skill, which has been honed over a 21-year career. Before this, he headed portfolio advisory at Sharekhan (1999-2002) and was a fund manager at Kotak Asset Management (2002-2005).

To be sure, not all his bets have hit the mark. An investment call taken on state-run banks such as State Bank of India and Punjab National Bank in late 2012 was a mistake, admitted Andrade. Once this was realised though, the asset manager made rapid exits to avoid doing major damage to the fund's performance. Another key trait is that Andrade only invests if he knows the company and its management, besides understanding the business model and having a sense of its growth prospects.

That's why he's been wary about buying into the healthcare sector, while other fund managers have been much more enthusiastic. "I don't much understand the sector and the way the stock reacts," he said. "As such there are plenty of investment opportunities even outside healthcare in other sectors that I completely understand and am comfortable with."

While IDFC Premier Equity Fund has done consistently well, it's always compared with another mid-cap offering from the same house — IDFC Sterling Equity Fund, which has a similar portfolio. There has been no significant change in the portfolios of both funds for a long time. Andrade defines the difference thus: "Sterling Equity Fund mirrors the midcap index, while Premier Equity reflects the fund's philosophy of identifying companies which are good businesses and balance sheet."

The fund house has 70 interesting investment ideas at work across its products. Of these, Andrade's team is trying to unearth scalable business models in scalable industries. In coming months, the fund's focus will also be on companies that have easy access to capital at a time when banks have been reluctant to lend, those that have a dominant presence in their markets and have the ability to grow their share each year. Companies such as Gas Authority of India (GAIL) and Gujarat State Petroleum Corporation (GSPC) fit the bill at the moment, he said.