What is the rationale for launching ITI Large Cap Fund?
Large cap funds give the investors an opportunity to participate in the India’s long term growth story by investing in some of the stocks of largest corporates. Large cap companies typically have a proven track record; they are leaders in their respective businesses and have resilience to weather the vagaries of business cycles successfully. Hence, large cap funds provide reasonable long term compounding returns with much less volatility. This product is ideally suited for investors who want to benefit from equity market returns with least volatility among all equity products.
At a time when many investors are worried about their equity investment due to impact of corona virus outbreak on equity markets, why do you think it is the right time to launch a large cap fund?
We were of the view since October 2019, that the valuations of mid and small cap segments have turned attractive, the large cap segment valuations were on the higher side. Hence, we had planned not to launch large cap fund, though it is an essential part of the product bouquet. However, with the sharp and steep correction in the markets of over 30% in the last few weeks, valuations of large cap segment have become attractive. Nifty is trading at close to the lowest P/B valuation band in the last ten years. Several large cap stocks are trading much below their long term averages which makes them a compelling buy.
We feel corona virus related economic impact would not be very long lasting as it causes a temporary disruption in economic activity. It is different from economic impact of a recession caused by a financial crisis or the recession that followed by a period of long economic boom. We therefore feel that at current valuations, it is very good time to invest in large cap segment of the market.
How do you plan to market this fund among distributors and investors among these difficult times?
My senior colleagues and myself from investments and other senior members from our sales team have travelled extensively over the last few months and have met distributors across India and have explained them our investment philosophy, investment strategy and what to expect from our fund house in next 5-10 years. For our Large Cap fund launch we will use digital campaigns to support the sales team’s efforts.
Tell us about your stock selection process?
We have developed our own ‘SQL’ Investment philosophy using our team’s experience in fund management, and also using the learnings of some of the most successful investment houses / investment managers.
“S” stands for margin of Safety – This means the fair value of business minus the current share price is positive. 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 the business – This is crucial as quality businesses are long-term wealth creators. These are strong and sustainable businesses with a track record of good ROEs and ROCEs. Quality companies generally give positive surprises in earnings.
“L” stands for Low leverage – Low leveraged companies are generally cash rich. Therefore, they can invest and grow their business. In addition, highly leveraged companies are at a greater risk in case of business downturns.
At least 80% of the equity investments are in ‘core’ set of stocks ie. companies are strong and sustainable businesses with competitive advantages in their respective field and have good capital allocation track record. Tactical bets ie. companies with significant upside potential but going through temporary problems and at the same time trading at beaten down prices can be taken upto 20% of the portfolio.
We focus both on the ‘quality’ of underlying business and ‘margin of safety’ ie the price or valuation that we are paying for the business. We give equal importance to both, which we feel will provide investors with a smoother investment experience. Our focus is to provide investors with reasonable returns, by investing in a portfolio of quality stocks.
How do you plan to utilize 20% of the corpus where fund manager has a flexibility to decide stock selection irrespective of asset class and market capitalization?
We plan to invest only in the large cap universe as defined by the AMFI/SEBI guidelines. We want investors to get the flavour of pure large cap fund and not have investment in a quasi multi cap fund. Thus, fund will invest only in those stocks which are classified as large cap stocks at the time of purchase.
How ITI Large Cap Fund is different from other large cap funds in the market?
As mentioned earlier above, the fund will only invest in large cap stocks. The fund will have a concentrated portfolio and will invest in maximum of 40 stocks. The focus will be on alpha generation through stock selection. We will primarily follow the GARP (Growth at Reasonable Price) investment style, combining with our fund house ‘SQL’ philosophy. We will not take sector deviation of more than 5% versus the benchmark, thus we will not take excessive sectoral bets and thereby the risk is minimized to a certain extend.
Why should distributors look at recommending ITI Large Cap Fund to their clients?
We are a new fund house with a very experienced team. As fund managers, we have had a decent track record of performance in our previous stints. Our product is designed as a pure large cap fund with no mix of mid/small cap stocks. We are sticking to our philosophy of ‘Right product at the right time’.
What would be the impact of coronavirus outbreak on large cap companies?
The impact of corona virus would be more transitory in nature. It does not cause a long lasting damage to corporate / banking sector balance sheets, leverage and liquidity. Hence, whenever this pandemic ends, the recovery would be swift. 30% fall in markets means almost 2 years growth in earnings is discounted already and we don’t believe the impact can prolong beyond a quarter of the year.
Why do you see current market scenario offers attractive entry point to investors?
Indian economy is close to the bottom of the economic cycle. Corporate profits to GDP are very low and at levels last seen in 2002. We feel this weak growth phase is more cyclical in nature than structural. The structural reform measures (GST, RERA, Bankruptcy Law, Corporate Tax Cuts) are very positive for the economy. The recent fall in oil prices is also beneficial to Indian economy. Formalisation of the economy is happening at a rapid pace and we see many opportunities to invest in this regard. In such a scenario we are bullish on the economy. On top of that, the recent fall has made valuations attractive. Thus we feel the current scenario offers investors a fantastic wealth creation opportunity. Once in a decade we get a very cheap valuation scenario and one of those kinds is available now. Last time we saw this kind of opportunity only in October 2008.
What are the three sectors you are bullish on?
We are bullish on domestic cyclicals sectors such as auto, cement, consumer discretionary and industrials as the benefit of lower oil and commodity prices will further aid the economic recovery. We are also bullish on corporate banks and industrial commodities which are trading at very attractive valuations.
