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We normally hear of fund managers allocating their multicap diversified portfolio across cap sizes – large/mid/small. Ravi Gopalakrishnan has a different allocation strategy: 75% compounders and 25% alpha generators. Read on as he explains his portfolio construction strategy, his perspective on the current market volatility and why he believes multicap/diversified funds are the best place to be in going forward.
WF: Your fund has posted a strong 1 yr performance relative to benchmark and peers. What are the factors driving this recent performance? What have been your key alpha contributors over the last 12 months? Ravi: We follow bottom up approach to our stock selection process. Strong research and robust processes that we follow before investing in a company is what really makes the difference for us. Our team analyzes the fundamental attributes, historic business performance, recent developments in operating environment & future expectations. It has been our endeavour to select companies at reasonable valuations that could become a part of the overall portfolio. In the correction seen in Jan-Feb 2016, and post the demonetization exercise in Nov 2016, we could use the volatility in the markets to pick-up really good quality franchises across all sectors which had corrected. While we predominantly follow a bottom-up process for stock selection, if one wants to look at top-down allocation, there was a tilt towards broad-based themes such as auto, auto-ancillary, building materials and some select sectors like housing finance, insurance, including select NBFC’s which could be attributed to the performance of the fund. The fund essentially focusses on delivering consistent returns over long term. Over 75% of the portfolio is invested in companies what we call as compounders and the remaining in Alpha generators. Compounders are companies that operate in a competitive environment but have a unique business model which help them generate consistent returns year after year. These companies
Alpha generators are quality companies, irrespective of their market cap or sector and could be based on a theme, business innovation etc WF: In what proportions have you invested across large, mid and small caps in this fund and how has this mix changed over the last 12-18 months? Ravi: Our investment methodology across the fund house is very process driven. During the market upmove seen over the past few months, we saw many of our stock participating in the rally and meet the target price. We have taken profits on many of the stocks based on valuation consideration and invested in defensive stocks/sectors. Our current holding in mid & small is 16% compared to 20% in Jan’17 and 24% in Sep’16. WF: What is your outlook for equity markets going forward, in the context of recent global as well as domestic volatility? Ravi: We have had a wonderful run during the last year. Oil & Commodity prices were low, interest rates were declining and global markets were generally stable. But now in 2018, we are seeing commodity prices rising and could possible remain at these levels. Globally, interest rates are trending little higher. So with upward pressure on interest rates and impending general elections; we expect 2018 to be a slightly lower returns and high volatility year as compared to last year. WF: To what extent do you see deterioration in India’s macros and the rise in interest rates over the last year impacting earnings revival on which our markets are now critically dependent? Ravi: India’s macro situation has improved significantly over the last 3 years. Fiscal deficit has been contained, inflation has been brought down and currency is also stable. Interest rates over the past few months have been trending higher and this is a bit of a concern. High interest rates are not good for equity markets and if interest rates continue to harden, equity markets will find it difficult to sustain. Earnings growth is showing signs of making a comeback after the twin events of demonetisation and GST. We are seeing early signs of a recovery in select sectors and some of the sectors such as metals, Pharma and IT which were pulling down the earnings growth seem to be making a comeback. We believe earnings growth to come back in FY 19 and FY20. WF: Why do you believe that multicaps/diversified equity funds are the best place to be in, going forward, for equity investors? Ravi: Given the absence of major global tailwinds in 2018, bottom-up stock selection will gain a lot of relevance. For long term investors, it makes sense to invest in a combination of large cap and a few select mid cap companies. Diversified funds offer a good combination of both. For investors with a relatively higher risk profile, a higher allocation of mid-caps may be suitable. Share this article |
Fund Focus: Canara Robeco Equity Diversified
