There is a buzz at the ITI MF office these days. With the fund house launching its first equity scheme, the excitement among the ITI MF team is palpable as is their conviction. We spoke with George Heber Joseph, CEO and CIO, ITI Mutual Fund and the scheme’s fund manager to understand why the fund house decided to start its equity product basket with the multi cap category.
What was the idea behind launching a multi cap fund as your first equity product offering?
Historically, we have seen that no sector or market capitalization has consistently been a top performer. Even if we analyse data of the last three calendar years, we see that large cap (Nifty) was a top performer in 2018, small cap (NSE Small Cap 100) in 2017 and mid cap (NSE Midcap 100) in 2016. Same is the case with sectors. Investors may not have the expertise to identify which is the best space to invest in at a particular point in time. The fund’s flexible mandate allows fund managers to decide allocation based on where he or she sees most opportunities in terms of risk-reward. Besides, we want to be selective in our fund offerings, and only launch schemes that make most sense to investors. As a multi cap fund fits the criterion perfectly, we decided to start our equity product bouquet with such a product.
How will the fund invest?
The fund will predominantly follow a bottom-up approach. As you know, the stock universe is divided into core stocks and tactical stocks. Our portfolio and research will be focused on core companies, which have a strong and sustainable competitive advantage. However, we do not believe in overplaying for growth so will follow GARP (growth at reasonable price) strategy of investing. At least 75% portfolio will be invested in core stocks. We may also tactically invest in some highly cyclical stocks available at attractive valuations. Overall, at any point in time, we will invest at least 90% of the portfolio in equities. The scheme will invest in 35-40 high conviction stories. Also, in line with its name, the fund will be benchmark and sector agnostic.
With majority of the fund houses having a fund in the multi cap space, how does your fund stand apart from peers?
We plan to dynamically manage our allocation across market capitalizations. Allocation to large caps will move in the range of 40%-100%. The allocation to the mid and small cap will be carefully calibrated to maximise alpha using our research driven methodology based on business cycles, earnings growth prospects, market valuations and liquidity. This approach is unlike majority of the multi cap funds, which follow a more static allocation. In addition, our strong and clear investment philosophy abbreviated as SQL sets us apart from our peers.
We have heard you talk about your SQL investment philosophy. Could you please share what it means?
To generate long-term wealth for our investors, we have based our investment process on the SQL philosophy.
S stands for margin of Safety – This means the fair value of business minus the current share price. The fund house will look to buy stocks with a good safety margin so that there is more room to generate long-term wealth for our investors.
Q stands for Quality of business – This is crucial as strong businesses are long-term wealth creators.
L stands for Low leverage – Low leverage companies are generally cash rich. Therefore, they can invest and grow their business. In addition, high leverage companies are at a greater risk in case of business downturns.
This investment philosophy, which we think would stand the test of time and follows from our overriding belief that "If we avoid the losers, the winners will take care of themselves."
When it comes to mutual funds, portfolio construction is as important as stock selection. How do you plan to mitigate portfolio related risks?
Primarily the scheme will invest at least 40% of the portfolio in large cap stocks to provide stability. The fund house has set internal risk limits to monitor the stock and sector exposure of the fund. The fund will not take more than 10% overweight or underweight position vis-à-vis the benchmark; however, deviation beyond 2.5% is taken after consultation between CIO, fund manager and sector analyst. Any stock underweight or overweight position beyond 3% of the benchmark weight requires similar consultation. In case of non-benchmark stocks, the exposure is capped at 3% of the AUM.
Many distributors tend to prefer funds with a strong track record. Why should distributors look at recommending the NFO?
While this is the first equity fund from ITI Mutual Fund both my co-fund manager Pradeep Gokhale and myself have a long track record of managing different categories of equity schemes. Our combined experience is of over 25 years. This is the pedigree and expertise that we bring to the fund. Advisors may already be aware of our conservative investment style and focus on risk-adjusted performance. And the cherry on the cake is our sound SQL philosophy, which will act as a guiding principle in all our investment decisions.
Being a new fund house, how do you plan to generate interest about the fund among advisors and investors?
Initially, we plan to establish our presence in the Top 30 cities with a distribution led model and stay focused on our processes and philosophy. We will build strong relations with our distribution partners through meetings and roadshows in various locations. Our focus is to partner with IFAs for the long term and in turn reach out to the investors through them by sharing our investor centric philosophy.
We intend to first focus on existing mutual fund investors and reach out to them through our distribution partners and by also using the conventional marketing route. In B-30 markets, our focus will be more on the digital front.
Also, we would focus on launching products that add value to investors and communicate with them clearly and transparently. I am sure this would help us build trust among distributors and investors.
How are you working with advisors to make the empanelment process smooth so that they can participate in the NFO?
We have developed an insta empanelment facility for our IFA partners with individual ARN, which makes the empanelment process extremely convenient and quick. It is paperless and hassle-free and our partner IFAs can complete the process in just a few minutes.
For our non-individual IFA partners, we have an empanelment form, which is available on our website. The form needs to be duly filled, signed and submitted with the required documents to the nearest Karvy centre.
