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In the short term markets can be volatile: Harsha Upadhyaya
Thu, Mar 21, 2013
Source : Shoaib Zaman, Citrus Interactive

In a candid interview with Citrus Interactive, Harsha Upadhyaya, Senior Vice President & Head of Equities at Kotak Asset Management Company, shares his views on the equity market and fiscal deficit. He also describes the investment philosophy of the Kotak AMC.

  1. What is the investment philosophy of the fund house?

As a fund house our investment philosophy is to consistently provide superior risk-adjusted returns to our investors. For this we follow a combination of top-down and bottom-up approach. The top-down approach is used to assess the macro environment in order to understand the opportunities, and then you supplement that with bottom-up research.

Our aim is to produce consistent out-performance against the benchmark. We believe that if this result is achieved vis-à-vis the peer group, then over a period of time the fund will be among the top quartile performer within its peer set. Therefore, to sum it up, consistency and low volatility is the target that we strive to achieve.

  1. How do you pick your stocks? How many stocks is part of your universe?

The stocks are selected based on bottom-up research; we look at criteria such as business, management and valuation.  We look at business of the company, its industry, sustainability of the profit margins, profitability trajectory, growth, etc. We also try and understand the strength of the management and the quality of the management. Whether it is a sector call or a stock call, the final filter is valuation.

There are approximately 300 stocks in our universe.

  1. How many equity research analysts do you have in your team?

We have an eight member research team and they form the core of the research team. The minimum experience of an analyst in the team is eight years.

  1. Does your eight analysts include fund managers?

We don’t have dual role in the organization. The Fund Management team is separate, and their task is to actively manage the funds. 

  1. Sebi has been trying to improve corporate governance, and is asking MFs to actively participate in AGMs. What is your take on this measure?

We have our own corporate governance policy. We have been active and vote as per the corporate governance policy.

  1. How would you classify the equity products that are being offered by the Kotak Mahindra AMC?

Over the years, we have rationalized the product portfolio. We have three strategies: Large-cap, mid-cap and blended (also referred to as equity diversified or a multi-cap). In each category, we have two products.

Large-cap: Kotak 50 and Kotak Classic Equity -- here we ensure that large-cap companies have exposure levels of above 80 per cent.

Mid-cap: Kotak Mid-cap is benchmarked to CNX MidCap and Kotak Emerging Equity is benchmarked to BSE Midcap. The market cap of the top most company in the relevant benchmark index is used to define the investment universe.

Diversified: Kotak Opportunities and Kotak Select Focus Fund -- both the funds will typically have above 60 per cent exposure to large-caps.

Then there is a Kotak Tax Saver, which is an ELSS product and it is managed like a diversified equity fund.

  1. What is your take on churning of portfolio?

We tend to take a call on a company from 9-12 month basis.

  1. What is it that you consider more important when evaluating the performance of the fund – benchmark or peer group?

We compare the funds to their respective benchmarks. We do look at the peer group as well but the actual performance is judged by how the fund has performed against the benchmark.

Our understanding is that if the fund can consistently outperform its benchmark, then the fund will remain in the top two quartiles of the peer set across time horizon. It is difficult to compare with something that is always in a flux, you need to have a fixed benchmark because there is a possibility that the best performing fund will keep changing over different time horizon.

  1. What are your views on the budget? Share your thoughts on the fiscal consolidation.

Budget is generally a statement of account with most of the reform initiatives and policy initiatives taken outside the budget and that is what has happened even this year. Petroleum price increase that is definitely one of the biggest decisions that the government has taken in the recent history was done outside the budget. Railway fare hike was done outside the budget. Some of the FDI related decisions were also taken outside the budget. To that extent the entire focus of the recently announced budget was on the fact that the government is going to go on the path of a fiscal consolidation and how that is going to affect growth and consumption.

The government seems to have a clear path on the fiscal consolidation front. It seems there is a credible plan and let’s see if they stick to it as we go forward.

  1. Where do you see the markets going from here?

The markets in the short term can be volatile; those are generally driven by sentiment and liquidity, which can’t be predicted. Over a medium to long term, the business environment will gradually change for the positive. We are not expecting a ‘V’ shape recovery but we believe that most of the negatives are already priced in and we are close to bottoming out both in terms of economic fundamentals and corporate fundamentals.

Corporates fundamentals, while they were mixed over the last two quarters in terms of earnings, we have not seen too many downgrades in earnings number as a basket. The negative trend in terms of downgrades has stopped. Now the pertinent question would be, when will the upgrade earnings cycle start?  We think there is still time for that. We believe that we are just starting to look at the lower interest rate regime. As you move forward, because of cyclical recovery and as well as some monetary push, you will see some of these numbers improving .This will take place over the next 12 months or so.

Until then, the market will look at the incremental changes taking place in the economy. Let’s say the macro-indicator like inflation, or interest rate. They should be more constructive for the market, depending upon which the market will move going forward.

Currently, the expectations from the market are quite low. We are still below the long-term averages in terms of valuation. On the earnings front we believe it is going to grow in double digits. From that perspective, markets can give you reasonable returns even from a one year perspective.

Usually when the expectations are low and the things are incrementally changing for the better, market tends to give decent returns.

  1. Which sectors, according to you, will maintain growth over the next few years?

We believe that over the next year or so, interest rates are definitely going to fall. The sectors which are sensitive to interest rates are the ones we like, banking, financials and auto. We also like sectors which have witnessed structural changes like media since there is digitization, telecom as the regulatory uncertainty is behind us and oil and gas due to move towards price deregulation.

  1. Which sectors are you avoiding currently?

We are clearly underweight on metals because we believe that global growth is a concern, and in a scenario where most of the central banks and companies are deleveraging the consumption of commodities is going to be under pressure. Another sector is FMCG, we are not negative on the business per se but we think that the valuation is more or less discounting a good earnings growth.

 
 
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