Fund Focus: Invesco India Growth Fund

Bear markets originate from bull economies, not recovering economies

Taher Badshah, CIO - Equities, Invesco MF

In a nutshell

For all of us who worry about stretched valuations and new market tops, Taher has one observation to share: bear markets usually originate from bull economies - we are as yet a recovering economy and far from being a bull economy. Brace yourself for 5-7% corrections and time corrections, but don't get overanxious about steep falls and bear markets yet. Speaking about Invesco's flagship Growth Fund which is closing a strong year of performance, Taher says its not just the right bets but also the fact that they were given meaningful weights in the portfolio, which enabled a top quartile performance in the large caps space.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: CY17 is turning out to be a strong year for your fund, with a healthy alpha and a top quartile position in the large caps space. What's been driving this year's performance?

Taher: We believe it's a combination of some stocks and sectors that we selected playing out well coupled to the fact that we backed them with sufficient weight in the portfolio - which enabled healthy alpha generation at a portfolio level. Our selections in the consumer discretionary space, in industrials, some services businesses, some financials and some reforms-related themes were key contributors in CY2017. A cross-section of bottom-up ideas as you can see, from diverse themes and sectors.

WF: What is your market outlook for 2018? Should we prepare for a mean reverting correction or expect another year of double digit returns?

Taher: 2017 has been a big year with large caps delivering 25% plus and midcaps giving returns in the mid-30s. I will be very surprised if 2018 turns out to be equally big - that's not a reasonable expectation, but what seems on the table is a year of low double digit returns, with periods of volatility. I would not assign a large probability for a significant correction - the 15% type - simply because those kinds of steep corrections usually happen in bull economies - and we are not yet in that phase of the economy. Bear markets usually originate out of bull economies - we currently have a bull market but not a bull economy.

When you have stretched valuations in an economy that's not yet in overdrive mode, you normally have time corrections and you have smaller price corrections - of the 5-7% type as you go along. Take the last 3-4 months - we are in the 10,000 - 10,500 band in the Nifty. A few more months in this zone and you have just played out a time correction as FY19 then becomes the relevant year for earnings numbers and PE calculations.

One aspect we are building confidence in is earnings growth. Admittedly, some of it is hope, but some is also based on visible signs, and some are based on pure math. Some of the near-term deterrents - including demonetization; GST implementation and RERA are now behind us. We are seeing some evidence of the economy digesting these and normalizing in the last quarter's earnings numbers. Only 25% of Nifty companies missed their earning's projections - as compared to 45-50% that we have seen in recent quarters. We didn't have any sector that underperformed expectations in the last quarter - so the quantum and pace of negative surprises seem to have subsided.

WF: Where are you seeing the most visible signs of earnings momentum now?

Taher: Private financials and NBFCs continue to offer good visibility of growth. Some parts of consumer discretionaries, some segments within the auto space are showing good earnings visibility. We will probably see earnings revival in the telecoms space going forward. We are seeing some green shoots in the infra space - particularly in sub sectors that are in the roads area.

WF: What are your key over and underweights in your fund now and why?

Taher: Our overweight positions are aligned with where we see good earnings momentum - which include stocks in financials, consumer discretionary and industrials. We are relatively underweight in tech, pharma and consumer staples.

WF: You don't see pharma as a value pick now?

Taher: Our Growth Fund is not positioned for contra plays. In the Growth Fund, our mix is generally 75% growth stocks and 25% value stocks. Secondly, we cap overweight at 150% of benchmark weight, and likewise, we don't go below 50% of benchmark weight with our underweight positions. So, even if we want to be underweight in pharma and the sector's weight in the benchmark is 2%, we will have 1% of the portfolio in pharma - and that's where some of our value buys come in. This enables the portfolio to be balanced in nature.

WF: In 2017, most fund managers advised large caps over midcaps. Is that still the call for 2018? Do large caps continue to look relatively undervalued to midcaps or has the gap now narrowed?

Taher: Large caps have played catch up in the second half of 2017. Until mid 2017, the performance gap between mid and large caps was quite stark, but that has narrowed considerably in the last 4-5 months. Many of the Nifty heavyweights, including have all done well in recent months. At a 25% CY performance, you can no longer say that large caps haven't performed! The gap between large and midcaps has narrowed considerably, and we may see more of this trend playing out in CY 2018.

WF: Are global markets a source of comfort or concern for you?

Taher: The periods when we got the 8% - 9% GDP growth were the years when exports grew at 25% plus. Global growth and our ability to participate in it is a critical factor to push our GDP growth to the desired levels. From that perspective, the recovery in global markets is a source of comfort for us. 2 years ago, our exports were shrinking at 20%. Today, we are seeing a 10-15% export growth, which is encouraging.

The other part of global markets is interest rates and their impact on fund flows. I believe the calibrated increase in US interest rates is a healthy sign as it is indicative of confidence in the US economy - which is a key global consumer. Then there is the question of FII inflows and whether they are tapering off due to rich Indian market valuations. I believe the key variable here is earnings growth - if we see earnings growth, flows will follow. As long as we see visibility on earnings growth front, I think the rest of the factors can fall in place.

DISCLAIMER : The views are expressed by Mr. Taher Badshah, CIO - Equities, Invesco Asset Management (India) Private Limited. The views and opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The sectors referred above should not be construed as recommendations from Invesco Asset Management (India) Private Limited and/or Invesco Mutual Fund. The Scheme may or may not have any present or future positions in these sectors. The views and opinions are rendered as of the date and may change without notice. The recipient should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. Invesco Mutual Fund/ Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.

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