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What has resulted in the outperformance by your fund in the last one year?
Portfolio performance over any short period is driven by individual stock-price movements in the portfolio. Stocks like Bajaj Holdings, HDFC Bank, Balkrishna Industries and Alphabet have done well in the past year. Also, we have about 24 per cent cash in our portfolio. We have been holding this cash for a while now since it has been difficult to find bottom-up opportunities at reasonable valuations. Further, we also have about 27 per cent invested in foreign securities, which don't necessarily move in tandem with India stocks. Both these parts of the portfolio have given a reasonable cushion to our portfolio returns to be able to outperform the peers and the benchmark.
How do you pick stocks for this fund?
Our flagship scheme has a mandate to invest across market caps, sectors and geographies. We don't put much emphasis on the macro environment and the associated factors since they are not predictable and not within anyone's control. We believe in bottom-up stock picking, where the primary criteria for stock selection are management quality, competitive advantage and availability at a reasonable price.
Do you have any special criteria for selecting mid and small caps?
While investing in mid and small caps, one has to be extra careful about the management quality. If you are investing in a large cap or some company which is a part of a business conglomerate, then you can be sure of the management quality. But if you are investing in a company which has no other business, then ascertaining management quality remains a key and it is very subjective in nature. A lot of groundwork needs to be done in case of a mid- or small-cap company.
How do you allocate money across large, mid and small caps?
We are a 'go-anywhere fund'. Our flagship scheme has a mandate to invest across market caps, sectors and geographies. So we don't keep a hard rule as to what percentage of the portfolio goes into large, mid and small caps, respectively. In fact, we have investments in some mega-cap companies as well, like Alphabet. We look at a company individually and see if it fits our checklist, irrespective of its market cap.
When do you sell a stock?
There are only two situations where we intend to sell a stock. First, when the company's fundamentals deteriorate due to capital misallocation or new competition or disruption or a pricing war in the industry. Second, when the valuations have run far too ahead of the fundamentals and we feel that the valuations are not sustainable for a long period of time.
You also allocate money to foreign stocks. What's the thinking behind this?
The primary motive behind investing globally is diversification. We have taken a conscious decision of not taking any call on currency movements and hence we hedge up to 80 per cent of our underlying foreign-portfolio positions through currency derivatives.
What's your criterion for picking US stocks?
The criterion for picking any company whether Indian or any foreign remains the same. The additional criteria for a foreign company is its exposure to the emerging markets because that is where higher growth is. Also, there are some foreign technology companies for which there is no comparable in India. For instance, Alphabet and Facebook command a major share of the digital-advertisement pie globally. If you want to participate in the trend of digital media and marketing, then you have no investible idea listed in India.
What is the outlook for mid and small caps after the recent fall?
We feel that good-quality companies are still expensive. We don't intend to hold cash for a long period of time or time the market. We are just waiting for good-quality companies at reasonable valuations to come our way. We hope to deploy some portion of our cash in the next six-12 months.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully..