Pradeep Gokhale, Senior Fund Manager, Tata Mutual Fund, who manages Tata Pure Equity Fund, Tata Tax Saving Fund and Tata Tax Advantage Fund talks about markets, the current state of the economy and his fund management strategy with Cafemutual.
Is the current euphoria in the market justified? Can the market sustain these levels?
I would not describe the current market conditions as ‘euphoric’. If we see valuation metrics such as P/E, P/B, we are near long term averages. Even on market cap to GDP basis we are near long term average. The retail participation in markets is still low. We have not seen a flurry of IPOs. Yes, there is optimism in the market but we are very far from euphoric levels.
I think the bigger risks to the market are more external than India specific. Thus, any sell off in risky assets due to an increase in risk aversion in global capital markets can impact Indian markets in the near term. Even the strong 2003-07 bull market had such phases. However, we feel over the medium term the improving economic growth and the improvement in earnings can take markets to much higher levels.
Do you foresee any imminent correction in the market? What strategies have you put in place to overcome such risks?
It is very difficult to predict market and we don’t try to predict it. What we see is that the high valuation differentials between the cyclicals and defensives and between large cap and mid-caps have corrected substantially over the last few months. Therefore, we feel a diversified portfolio of quality companies is more suited from a risk-return perspective in the current environment.
What is your reading about the current state of the Indian economy? What global cues are you looking out for?
India has seen very good improvement in its key macro-economic parameters. The current account deficit has come down. Inflation is also easing. The Cabinet Committee on Investments (CCI) is focused on faster execution of projects. Thus the government policies have helped reduce the macro imbalances and improve efficiency in the economy.
The new government with a strong majority is politically better placed to undertake reforms required for the economy. We feel the Indian economy is in the recovery phase. We expect economic growth to improve over the next two years. The indicators of growth such as cement dispatches, electricity generation, auto sales and Purchasing Managers' Index (PMI) are already showing improvement in growth. However, the pace of recovery in growth will also to some extent be a function of global growth. Global cues are mixed as Europe, China and Japanese economies are showing weak growth trend.
In a weaker global growth scenario, India is much better placed to grow as compared to most other emerging markets. But the pace of growth can come off a bit.
Both of your tax savings funds - Tata Tax Saving Fund and Tata Tax Advantage Fund have consistently outperformed their respective benchmarks. What helped these funds?
We have focused on stocks with good earnings growth, good return on capital employed (ROCEs) and reasonably competent managements. The focus has been more on bottom up stock picking. The fund has also managed to increase or decrease the proportion of mid-caps in the portfolio at the right time between 2011 and 2013. In a high interest rate environment, the funds had a higher share of large-caps while we increased the share of mid-caps in 2014 as valuations had started to become more attractive.
You have two tax savings fund –Tata Tax Advantage Fund – 1 and Tata Tax Savings Fund. One has a three year lock in while other is a ten-year close end fund. How is the fund management strategy of both fund different? Does ten year closed end structure help you manage the funds better?
I have not tried to manage both funds differently. I have always picked up stocks with a 2-3 year view and not with a short- term trading view. I generally buy stocks keeping in view the earnings growth prospects for the next two-three years, the capital efficiency and management quality of the businesses and current valuations. Each of these parameters are evaluated at regular intervals to see whether the investment should be continued or substituted with a better alternative.
Do you subscribe to the view that closed end funds can deliver better returns as compared to their open end peers?
I don’t subscribe to the view that a closed end fund structure is superior to open end structure. We have observed that in most diversified open end funds, the daily inflows-outflows are not as volatile. Thus, the open end structure does not put the fund manager at a disadvantage. Closed end funds also run the risk of the scheme maturing on a particular day. If the markets are weak during that period then the fund would be forced to liquidate its holdings despite valuations being attractive.
Your favorite book and why you would recommend it to others….
For the beginners in stock market “One Up on Wall Street’ by Peter Lynch is a very good book. The other interesting book I recommend reading is Philip Fisher’s “Common Stocks and Uncommon Profits”.
