You have been managing funds for several years now. What have been your 3 key learnings? What according to you is the best part of being an equity fund manager?
Never panic in a bear market. Be cynical when things seem to be too good to be true and play to your strengths (Stock and sector selection).
The best part of being an equity fund manager is the overall learning curve due to constant exposure to different businesses and the access and ability to interact with some of the brightest minds out there. The biggest thrill for a fund manager is to select a business which could become the next multi-bagger stock in the portfolio.
What is your medium-term outlook on equity markets?
The next year is likely to pose a series of challenges as the market has to work its way through a confluence of factors such as inflation, global liquidity tightening, Fed rate policy, geo-political issues and last but not the least, whether capex and investments will make a multi-year comeback. Confidence with regard to the overall growth outlook is going to be the key focus given these macro variables. I continue to remain optimistic on the overall capex cycle (including real estate) and believe that domestic cyclicals are likely to deliver alpha over the medium term.
What is your take on valuations across market capitalization?
I don’t believe that there is much to choose from as far as valuations are concerned, unlike the case in 2019-20 when mid and small caps were relatively attractive. However, there are plenty of pockets in the market which remain attractive from a valuation stand point across market capitalizations over the long term and those are the areas that I would focus on irrespective of the market cap.
The IDFC Tax Advantage (ELSS) Fund is among the top five performers across time frames (6 month, 1 year, 3 year, 5 year and 7 year). What factors have led to this consistent outperformance?
The fund has always been consistent in its approach towards allocation across large, mid and small caps over the last 5 years even during the 2018-19 period when mid and small caps underperformed. This disciplined approach along with the fund’s positioning towards owning growth stocks at relatively attractive valuations has helped in generating alpha across longer time frames.
Beyond tax savings, what are the other reasons to invest in ELSS?
ELSS has advantages which go beyond tax saving. Compared to any other tax saving instruments, ELSS has short lock-in period of 3 years. However, it is recommended to stay invested for the maximum duration possible, since the wealth creation opportunity in the case of an equity-oriented fund like ELSS is better over the long term. An investor can invest in ELSS with a minimum of Rs 500 per month through the SIP route, which inculcates discipline in investing.
ELSS fund managers have high flexibility to invest across market caps. But despite that most fund houses, including IDFC MF, prefer to invest a very large portion (70-80%) in largecap stocks. Given the higher scope of alpha generation in mid and small cap space, why don't ELSS managers invest more in these stocks?
IDFC Tax Advantage (ELSS) Fund has always maintained an exposure ranging from 50-60% in large caps and the remaining is invested in mid and small caps. We continue to believe that there are several pockets in the mid and small cap segments where valuations are reasonable in the context of expected earnings growth and we may continue to maintain our allocation towards the same.
IDFC Tax Advantage (ELSS) Fund is comparatively underweight on financials and overweight on automobiles and materials. What are the reasons behind this variation?
Financials is a broad sector and hence we have look at weightages by dividing the sector into lenders and non-lenders. We are more constructive on lenders as we believe that valuations are reasonable given that loan growth could pick up with normalization in economic activity. At the same time, asset quality appears to be holding up well. The portfolio underweight in financials is primarily driven by lower weightages towards non-lenders.
The auto sector was hit hard due to covid-19 and it is yet to recover due to semiconductor shortage and rising commodity prices. However, pricing discipline (lower discounts) and better cost structures are likely to aid profitability over the medium term. Moreover, we expect the demand to improve over the next few quarters as the economy recovers and unemployment reduces. Soaring commodity prices is a key risk as it could put short term pressure on margins. Together, with a robust demand recovery in 2022, we believe that the auto sector could outperform.
We are overweight on materials (cement, steel and building materials) as they are linked to the investment/real estate cycle recovery that we expect to take off in the next 2-3 years.
How can MFDs make investors comfortable with heightened volatility in the equity market?
The Ukraine-Russia conflict has stoked near-term worries of further dislocation in supply chain, especially gas, key industrial metals and agricultural commodities. As a result, commodity prices have soared with Brent crossing $110/barrel levels. This could drive up inflation and dampen investor sentiments. During these volatile times, continuing with one’s equity investments in a staggered manner especially through SIP is a suitable strategy. Investors with long-term investment horizon can choose to invest a lumpsum amount.
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Disclaimer: Investors are requested to note that the above views expressed basis on interview questions only. Investors should not consider the same as investment advice by PPFAS Mutual Fund. Please consult your financial advisor for more detail for financial planning.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing
