Sizing up DSP Top 100 Equity

By Morningstar Analysts |  04-06-19 | 
 
  • Fund Manager: Gopal Agrawal
  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Downgrade: From Bronze to Neutral
  • Category: Large Cap
  • Date of Analysis: March 2019
  • Brief analyst note can be viewed here

4 reasons why the fund got downgraded  

1. Significant turnover within the investment team.

Since 2017, there have been some notable exits: S Naganath (President and CIO), Anup Maheshwari (CIO – Equities), Apoorva Shah (Senior Fund Manager), Harish Zaveri (Fund Manager and Head of Equity Research Desk), Pankaj Sharma (Head of Fixed Income). Before this turnover, the team displayed strong stability.

We would like to see the same level of consistency in the investment team over the long term.

2. Fund manager changes.

There have been a fair number of manager changes over the past few years: Apoorva Shah (April 3, 2006 - July 15, 2015), Harish Zaveri Harish Zaveri (July 16, 2015 - September 30, 2018) and Gopal Agrawal (October 1, 2018).

The fund’s investment mandate has stayed consistent despite manager changes, however, investing styles differ.

Apoorva Shah combined his in-depth understanding of companies with factors like market sentiment, news flow, and momentum while making investments, resulting in high portfolio turnover.

Harish Zaveri plied a typical growth-oriented investment style and preferred a buy-and-hold approach to investing.

Zaveri preferred a concentrated portfolio, Agrawal emphasizes a diversified portfolio. Unlike Zaveri, he is valuation conscious, which is one of the primary criteria for stock selection.

3. Performance issues.

Performance has been downhill over the past few years.

The fund had a good track record under Apoorva Shah, clocking an annualized return of 11.6% (April 2006-June 2015), outperforming the benchmark index (9.8%) and category average (10.1%), and beat 72% of peers on the Morningstar Risk-Adjusted Returns front.

The fund then underperformed the benchmark index and category average to feature in the category’s third performance quartile.

Agrawal has been at its helm since October 2018. These are yet early days for him at the helm of this fund, and it is too short a time frame to draw meaningful conclusion.

We would like to see the fund come back on track before we can regain conviction in it.

4. Fund manager to prove himself.

Agrawal is a seasoned manager and a known name in the Indian mutual fund industry.

He has led the equity investment teams at other fund houses - Mirae Asset and Tata Mutual Fund, before joining DSP. His portfolio management and research experience make him an apt fit to lead this fund.

However, these are yet early days for him at the fund’s helm, which has witnessed a rather prolonged rough patch. He has a huge task in hand of bringing the fund back on track.

The stability within the investment team, manager, and portfolio would be the key to the fund’s revival. Therefore, until there is more evidence to suggest that the fund is on a recovery path, we would like to adopt a cautious stance.

4 questions for fund manager Gopal Agrawal

How did you view the exposures when you took over?

When I looked at the portfolio I inherited, I did so with the mindset that every single company has value and a price. I made my calls based on that.

Which overweight exposures did you inherit that you were not happy about?

Pharma.

Auto. I reduced the weightage a bit. But the sector will recover. It is just a cyclical downturn. I don’t think the sector has lost the plot, so to speak. These companies generate a good cash flow.

Which exposures have you not tampered with?

I did not tamper with my Infotech exposure. I stayed underweight, just like my predecessor. Though Infotech was in favour when I took over, I did not sell any position to up that exposure.

I believed that rupee depreciation was at its worst, due to global issues. I was sure it would normalize. It did. From 74/dollar we are now at 69/dollar. Also, interest rates in the U.S. have peaked. This would impact Financial Services in the U.S., a major source of revenue for our IT firms.

I inherited an underweight position in Consumer Staples that worked out well.

The portfolio was also overweight Financials, which was fine by me.

The bad loans environment doesn’t frighten you?

I believe that the NPA cycle is bottoming out in corporate banks.

Look at FY18 and FY19. There has been a reduction in fresh slippage. I mean, whatever is there is there; I don’t see incremental NPA formation. The bulk of the NPAs have been recognised in sectors such as Metals and Mining, Power, Construction and Infrastructure. It is out and known; I don’t see many hidden NPAs in the banking system.

Also, these NPAs must be looked at relatively with the entire sector in mind. It forms a small portion of the overall NPAs in the banking system.

The stress is mainly in the real estate space and the concentration is amongst NBFCs. I am bullish on corporate banks, not NBFCs.

Banks have started lending. I believe that the worst of the NPAs is behind us.  IL&FS was a jolt – a quasi-government firm failing was a psychological hit.

India is a consuming nation. It is a consumer economy. If consumption is core, lending to consumer is important. From a long-term perspective, my sense is that India’s fiscal won’t be as ugly. GST collections will improve. Energy prices will remain low in the years to come. This will augur well for India.

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