"I do not read newspapers." When someone starts an interview with such a bold revelation, the rest of the conversation is sure to pack a punch. In the second edition of Coffee with Cafemutual, we chatted with Harshad Patwardhan, CIO Equities, Edelweiss Mutual Fund on work, life and everything in between.
Let us come back to what he said about newspapers; by now most of you must be piqued or worse, worried. Fret not, though. He may stay away from newspapers, but he makes it a point to go through summary of key developments. "I believe that a focussed approach helps reduce market noise. I do not believe in information overdose. At times, this excess data tends to confuse rather than help you. I prefer going through important stories as this leaves more time for research," he says.
Research – now that is something he has been passionate about right from the time he was a young boy. He grew up wanting to become a scientist. However, life had other plans. As we all remember, the early 1990s were a time of economic liberalisation in India. In this dynamic scenario, researching the financial markets seemed far more enticing than becoming a scientist. He has not looked back since.
He started his career as a sell side analyst reviewing various sectors. Post that joining fund management seemed like a natural progression. Looking back, he considers himself fortunate to have found his calling.
Moving on to fund management, Harshad follows the growth style of investment. Over the years, he has observed that even in a stagnating economy there are companies, which manage to compound their earnings steadily. “Thus, there is no scarcity of attractive opportunities for growth strategy,” says Harshad.
When we quiz him on portfolio creation, Harshad deconstructs the process for us:
“We divide the process into two parts,” he says. These are:
- Research: This is like funnelling. Input to the funnel is stock ideas, research reports, management meetings and business scope. These then go through multiple filters such as competitive advantage of the company, promotor track-record and so on. The aim is to shortlist compounding businesses with reasonably competent and honest management. “We are bottom-up stock-pickers, as we believe that evaluating a sector helps build a background. However, in the end it is companies, which create wealth. Additionally, a stock-first approach prevents you from going overboard on a sector based on your preferences,” he adds.
- Portfolio construction: Structuring a portfolio is as important as picking the right stocks for fund performance. Thus a lot of thought goes into deciding how much to buy. As mutual funds’ performance is measured relative to index, a decision not to invest in some stocks or be underweight in certain sectors means taking a negative position. “Thus, in portfolio designing we need to be cognisant of both our investment positions and exclusions,” he says.
He then goes on to describe the most difficult part of his job: “Stock exits are always a challenge. Generally, a stock is shortlisted after tremendous amount of research. It is when you realise that the stock no longer satisfies the investment hypothesis it is difficult to swiftly sell-off the holding owing to behavioural biases.”
Talking about his sectoral bets, Harshad says he is bullish on industrials and consumer durables and bearish on telecom.
Industrials: Though there has been significant government contribution in infrastructure sector in the last few years, it is only in the last one year that many private capital goods companies have started evaluating investment opportunities. This corporate interest is likely to drive growth in coming years, he believes.
Consumer durables: “This sector has many companies, which are expected to be long-term compounders as their businesses are expected to grow multi-fold. Thus, this sector is on our radar,” he adds.
Telecommunication: “We are negative on this sector because at present the competitive intensity in the industry is quite high. Moreover, the industry players have not yet been able to reach a dynamic balance, which would make them potential buys,” he says.
Harshad expects that global events as well as domestic factors may keep markets in a state of unrest in the coming year. At this juncture, advisors should spread out their client’s investments to reduce risk. “The advisory community has done a fantastic job in helping their clients make more rational financial decisions. With the election year expected to be turbulent, advisors may need to hand-hold their clients to ensure they take the best decision,” he says.
Harshad recommends advisors that they should recommend multicap funds as these can play around market capitalisation based on prevailing market conditions.
From his library, Harshad recommends Thinking, Fast and Slow by Daniel Kahneman to advisors as the book describes many key behavioural biases that prevent both advisors and distributors from making irrational decision.
