Anoop Bhaskar, Head of Equity at IDFC Mutual Fund, chats with Larissa Fernand, Editor at Morningstar India, on his investing style.
You have completed two years at IDFC. Name a significant change you brought about during this time frame.
When I joined IDFC Mutual Fund, our equity assets under management were Rs 9,500 crores. Out of which IDFC Premier Equity was Rs 6,000 crores.
This was way too lopsided and we consciously worked on this. We took a decision on two fronts; no single fund will be more than 40% of the AUM and there will be no star fund managers. We don’t want to be identified with just one strategy or one single fund or one fund manager.
Our ELSS offering is an example in point here. It has always been a good product with sustained performance, but never on the radar of investors. Now the fund has around Rs 1,500 crores, which is great since it never exceeded Rs 450 crore in the past.
Today, our equity AUM stands at 19,000 crores, of which IDFC Premier Equity corners just Rs 6,000 crores. So it is a much more balanced situation now.
In a portfolio, does the number of stocks bother you?
No.
So you would rather bet on, say, one tyre stock or three?
I would bet on three.
Very unlike Buffett’s view on diversification.
Warren Buffett made that statement based on the context of him buying substantial stakes in cash flow businesses.
Naturally, a private equity investor cannot invest in 90 stocks; it is completely impractical considering the attention it would deserve. A private equity investor would have to attend board meetings, be part of the management, look at quarterly reviews and so on and so forth.
But as a regular investor, all portfolio managers have identical access to management by way of the periodical analyst meets or calls. So the level of information/knowledge available to all is the same. But one fund manager may allocate 10% of the portfolio to a stock, while another may allocate just 5%. This would be not because additional information is available but because perceptions of risk and growth prospects differ.
Do you have a core investment philosophy?
I don’t have a core investment philosophy that remains stagnant across different market phases.
Instead, I would rather say that my core philosophy is based on a few principles; the importance given to each individual principle varies across different market phases.
Since the market keeps changing its character, the focus is to remain relevant to investors.
And how do you do that?
Last October, how many money managers were interested in a fair allocation to Infotech? Many of them had 0% exposure to that sector. Those doing well today are the ones who had a substantial exposure to Infotech then, when it was ignored.
Last year, people were more willing to throw caution to the wind and believed in stocks that had higher potential of earnings growth. Today, the focus is on stable earnings growth potential. So now that uncertainty is higher and people are less certain of the trend of the market, high quality Infotech will do well.
So today, when fresh inflows come in, it would not be wise of me to buy what is doing well right now. I should be able to look ahead and buy what I think will do well down the road.
But if I restrict myself to a mantra, such as, I am a high-quality investor, then I will only invest in those, say, 40 to 50 select stocks with high ROCs.
I would rather be relevant in an upward phase of the market. Be prudent in bearish markets and more risk oriented in bullish markets.
Can you explain the last line in terms of how that plays out as far as fund management goes?
In fund management, most money comes during a bull market. If you are a second quartile player in a bull market, then you are an ‘also ran’. The ability of a fund manager to outperform in a rising market gives the fund greater visibility than outperformance in a flat or negative market. As long as you manage a second quartile performance in a falling market, the fund will still be first quartile over a 2- or 3-year period due to the outsized gain in a rising market.
Money comes in spurts and if you are not prominent at that time, you are consigned to the back burner. In fund management in India, it’s better to be Virendra Sehwag than Rahul Dravid.
The strategy that you mention works well in a market like the U.S. where there are institutional investors pouring money into equity and the flow is predictable and uniform, be it a bear or bull market.
In India, inflows into equity are a reflection of the general confidence of investors and confidence has its ebbs and flows. So in such a retail focused market, it is not consistency than matters but the ability to outperform during a bull market. And that is when you have to hit an outsized sixer.
So how do you make those outsized returns in a bull market?
One has to decide what percentage of the portfolio they want to take a higher risk on. And depending on the 6-12 month view on the market, that percentage can change up or down.
In a bull run, many illiquid and unknown stocks turn into multibaggers. How do you sift the wheat from the chaff?
We have done an extensive study of the Indian market over the last 10 years. An interesting highlight of that study is that beyond a 100% rise in the stock price / beyond a 3-year rise in the stock price, the increases in almost all instances are usually backed by earnings growth.
Unlike the 1990s, the stock market cannot be manipulated without any underlying EPS growth. Beyond a 2 to 3 year increase in stock price, beyond a 100% to 200% increase in stock price, prices cannot go up without an underlying EPS. You will not find situations where the company has the same profit but the stock price is going up 10x based on rumours of a sale or new discovery or......
Vakrangee?
There will be exceptions to the rule. And while I do not want to comment on individual stocks, the company you mentioned did have earnings per share growth!
The point I am making is that we have found that in 92% of the companies that have moved up more than 5x, there has been earnings growth.
Proportionate growth?
No. I am not saying earnings have grown as the same proportion as the stock price. I am just stating that there has been significant amount of earnings growth which has been accompanied by a PE re-rating. There has been no PE re-rating with no earnings growth.
And that is where you focus?
I try to buy companies where the growth is higher than what the market is forecasting and where valuations on a relative basis are comparable. In India, I believe the single biggest factor that matters is the earnings trajectory over time, especially the next 6 to 8 quarters. And if that is at a pace faster than what the market is predicting, then the stock has a chance to get re-rated. That is where the real outperformance comes from.
The market will reward good performance. Winners have continued to win. Losers have not figured out how to rebound.
Anoop Bhaskar is Head - Equity, IDFC Mutual Fund. Prior to joining in February 2016, he worked at UTI Mutual Fund and Sundaram Mutual Fund.
