The leadership at IDFC Sterling Equity has witnessed multiple changes in the past. Kenneth Andrade helmed this fund from March 2008 till it was taken over by Aniruddha Naha in June 2013. Naha relinquished his management responsibility when he quit the fund house in March 2016 and subsequently its reins were taken over by Anoop Bhaskar. Andrade was an accomplished manager and the fund had built an impeccable track record under him. He quit the fund house in September 2015. In our opinion, Bhaskar is an apt replacement for Andrade.
Despite the leadership change, there is a continuity in the process. Like his predecessors, Bhaskar too pays heed to the IISL Nifty Free Float Midcap 100 Index, loosely aligning the portfolio’s sector weights with those of the index. Having said that, he does not mind being significantly overweight or underweight in sectors either from a bottom-up basis or macro perspective. Yet, Bhaskar has a distinctive style of investing which he brings to the fore while executing the strategy. Consequently, the portfolio went through a makeover after he took over the fund to ensure that it is in line with his investment approach. While investing, he looks for companies which have decent amount of promoter holdings, good cash generation, low leverage, and profitability over a cycle. He avoids businesses that show profitability in spurts. Given the fund’s small/mid-cap bias, it gives Bhaskar an opportunity to play to his strength.
However, the investment team has witnessed significant turnover in the last few years which is a cause for concern. Except for Bhaskar, the other team members currently lack long-term portfolio management track record, though they have good research experience. Hence there is a key-man risk in Bhaskar.
Nevertheless, this fund is well placed under Bhaskar’s leadership and we draw conviction from his presence at the helm of the investment function. He is a proven small/mid-cap specialist and under him the fund has the means to outperform the competition over a longer time frame.
Hence, we assign this fund a Morningstar Analyst Rating of Silver.
Investing Process
In line with the fund’s investment mandate, Anoop Bhaskar plies a predominantly small/mid-cap strategy here, with exposure to large caps usually below 30% of assets. Additionally, the manager cannot invest in stocks that are a part of IISL Nifty 50 and S&P BSE Sensex Index.
While the bottom-up stock-picking is evident, the top-down approach isn’t ignored either. The manager considers sector valuations and the house view on the macroeconomic environment while investing.
Bhaskar is mindful of the sector weight in the benchmark index when constructing the portfolio.
However, he does not shy away from having an overweight or underweight position either from a bottom up basis or macro perspective. Currently, he has aligned the portfolio to benefit from the recovery in India’s economic cycle. Hence, the fund has a significant exposure to consumer cyclical and financial services sectors. Bhaskar constructs a diversified portfolio of 60-70 stocks with the top 10 stocks accounting for 30%-35% of assets.
Unlike his predecessor, Bhaskar does not believe in taking cash calls and caps the same at 10%.
The fund will underperform peers when low-quality and leveraged stocks are in favour and if the economic cycle doesn’t pick up. On the other hand, the manager’s benchmark aware approach should help the fund in down markets compared with peers who take big sectoral bets.
Performance
Under Anoop Bhaskar (May 2016 to June 2017), the fund has delivered a commendable performance. It has clocked a return of 36%, outperforming its category average (29%) and the benchmark index IISL Nifty Free Float Midcap 100 (29%) by a significant margin. Though it’s a short time frame, we believe that under Bhaskar the fund has the means to deliver superior return compared with a typical category peer and benchmark index over a longer time frame.
The fund struggled in the 2014 and 2015 under Aniruddha Naha largely due to relatively high large-cap and cash exposure in the portfolios.
In both years the small/mid-cap segment performed better than large-cap stocks. After taking over, Bhaskar realigned the portfolio by increasing exposure to small/mid-cap stocks and reducing cash exposure significantly. He also increased exposure to consumer cyclicals and financial services to benefit from a turnaround in the economic cycle. These changes have worked well for the fund, as shown in its recent performance.
It had an impeccable track record under Kenneth Andrade (March 2008 to May 2013), returning an annualised 15% vis-à-vis the category average of 7% and a return of 4% by its benchmark index. During his tenure, the fund was a top quartile performer and outperformed all funds from the small/mid-cap category on both returns and risk-adjusted returns.
