Can you take us through the fund management philosophy of DHFL Pramerica and how it is different from other fund houses?
As a fund house, we follow a philosophy of investing in growth-oriented capital-efficient companies, which have a history of good corporate governance. We believe companies that utilise capital efficiently can generate wealth for its investors.
Is the investment philosophy same in the equity portion of DHFL Pramerica Balanced Advantage Fund?
In addition to above, the fund intends to invest in companies that have competitive advantages. A company which has competitive advantages should be able to sell more than the peers, and that too at higher profitability. If a company can do so, it is said to have gained market share. A company that can gain market share for a consistent period of time can steadily compound its earnings. We look to create a portfolio of such market share gainers and steady compounders.
But how do we find out this advantage? We look at companies, which can sell more than its peers, but in a profitable way. Merely selling more to capture market share may not work for investors. It should sell at a good margin. For instance, there are so many smart phone makers in the world. However, there is only one maker that can sell its products at significantly higher price and margins than most of its peers. Yet, people almost queue up to buy a new launch by this company. This is competitive advantage – the ability to sell more, that too profitably, despite competition. Such companies have the ability to gain and retain market share over a period, and become a steady compounder. Over a period of time, market rewards them, thereby creating wealth for the investors.
Another factor that we consider while selecting a stock is an acceptable level of leverage.
Simply put, our investment philosophy revolves around capturing two things – market share gainers and steady compounders.
Markets are at an all-time high. What do you think is driving the rally?
India is in a sweet spot. Our macro-economic situation has been improving coupled with easing inflation and good prospects of monsoon. The reform measures undertaken over the past few years are likely to bear fruits for a relatively longer period of time. Like most reform measures, one has to undergo the period of adjustment and alignment.
Markets are at all time highs with earnings in last few years growing at tepid rate. Hopes of positives from reform measures, improving macro-economic indicators and adequate liquidity have been driving the markets. FIIs hold about 23% of the overall market while Indian mutual funds hold close to 5% of the overall market. The pace of financial savings is picking up in India, as can be seen in the higher inflows in the mutual funds. With alternative destinations of investments looking less attractive, this phenomenon is likely to continue.
Many experts say that the market is overvalued. What are your thoughts on this?
Markets have gone up at a time when we had low earnings growth in last 2-3 years. In terms of P/E ratio, we are above historical averages. On FY19 consensus estimates, Nifty valuation is slightly above averages. The key is to get the earnings growth. Parts of market are witnessing significantly higher valuation compared to their own history. We are careful about those segments.
Another popular and meaningful way of measuring the valuation is the market capitalization to GDP. This number is closer to 80% for India, compared to 10 year average of 78%. This ratio was in excess of 140% in 2007-08; we are substantially below those numbers.
With structural positives of the country not to be missed and valuations above historical averages, one of the better ways of managing the investments could be through a balanced fund. Our fund has a clearly defined investment strategy and caps net equity exposure at 60%.
What do you think could derail the market?
In the short term, markets are affected by more number of factors than we can count. Any unlikely event can have short term impact on the market. Last year, we saw events like Brexit, demonetization and US Presidential elections having a short term impact on the market.
In the longer run, the most important determinant is the earnings growth. India is among the fastest growing large economies. With nominal GDP growing at double digits, corporate earnings are only likely to catch up.
We have been hearing for quite some time that earnings growth will revive. When can investors expect that to happen?
After 2-3 years of low growth in earnings, we expect earnings to bounce back. But one cannot expect an immediate and very sharp recovery. Currently, things are settling down and reforms will start yielding results. Over the next three years, we can expect mid-teens earnings growth, i.e., in the range of 14-15% CAGR.
What are the sectors that you are overweight and underweight on?
In the DHFL Pramerica Balanced Advantage Fund, we are overweight on private sector banks, consumer discretionary, industrial chemicals, agri-inputs sectors. We are underweight on energy space, PSU banks, NBFCs, telecom.
Private sector banks have been gaining market share from their PSU counterparts both because of their efficiency and significantly stronger balance sheets. We are positive on rural side of the economy and select consumer themes as a result of the combination of good monsoon prospects, 7th pay commission payouts and farm loan waivers.
What has contributed to the growth in the size of your balanced fund?
We started with a small corpus, which nearly doubled in the last 7-8 months. A balanced fund investor is the one who is looking for returns higher than debt and closer to equity, but definitely risks much below equity. Our fund is uniquely positioned to clearly meet this requirement of the investors. We typically have close to 30 stocks and our strategy is well defined that we invest in market gainers and steady compounders – something that differentiates the fund.
You manage a relatively new breed of balanced funds, which are not allowed to increase their pure equity exposure beyond 60%. How do you plan to compete with the existing balanced funds, which have higher equity exposure and can generate returns like pure equity funds?
Balanced funds are meant for investors having moderate risk appetite. In our fund, the unhedged equity portion can be upto 60% and hedged equity another 10%.
The objective of the investor is more important, who is certainly looking at significantly lower risk than pure equity allocation for higher than debt and closer to equity returns. A 60% net equity balanced fund like ours achieves exactly this purpose.
In terms of portfolio, we have a concentrated portfolio of about 30 stocks, unlike most other balanced funds. We do not mimic the index, the overlap of equity portion with Nifty at just 25%. Our investment style of picking market share gainers and growth companies can help generate higher returns for our investors.
Which category of equity funds would you recommend investors to invest in at this juncture?
Investors can invest in balanced funds – one gets best of both the worlds. Balanced funds are for investors who want returns higher than debt, which is closer to equity, but the risk much lower than equity. If we compare Nifty returns with that of CRISIL Balanced Index (Aggressive) across cycles, we see that the returns are close to each other. However, the volatility of balanced fund is much lower than pure equity fund, thereby delivering superior risk adjusted return.
