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WF: Its early days yet, but your fund already seems to have found its place in the top quartile in the equity oriented hybrids category. What are the drivers of this strong performance?
Gautam: We have been able to select the right stocks and allocate well in them. That is the core engine of our performance across all our multi-cap portfolios, be it Focus Long Term (which is our best performing fund over the last one year and the best performing Equity scheme in the industry since its launch in Jan 2015), Focus 35 (our flagship fund) or Focus Dynamic Equity (where the underlying equity portion is also similar). Being a dynamic fund brings certain flexibilities. In current environment we need to keep around half of the portfolio as equity exposure. That gives us the flexibility to also pick and choose the best ideas within our multicap universe in this portfolio.
WF: What are the components that go into your model? What is the equity allocation now in the fund and how that moved in response to rising market valuations?
Gautam: So as market valuations have drifted upward over the course of the last one year, since the launch of FDE, we have pruned our Net Equity Exposure. Net Equity Exposure is determined by the MOVI (Motilal Oswal Valuation Index) levels. Since the launch of the fund, in the first seven odd months, it was 55% net exposure which was determined by the MOVI value being above 100 and less than 110. In the past few months due to market movement, MOVI has gone well past 110. Hence we have cut down Net Exposure and it stands closer to 44-45% currently.
WF: To what extent do you think technical factors like trend, RoC, MACD etc should play a role in determining asset allocation in a dynamic fund?
Gautam: The input factor that we use for our asset allocation purpose determination is MOVI (which stands for the Motilal Oswal Valuation Index). The MOVI based allocation takes into account fundamental factors only. This is mainly based on use of trailing valuation ratios and a back-study of the same to determine what returns the market is given at varying historical MOVI levels. This then becomes the basis for deciding equity allocation at any particular level of MOVI.
WF: To what extent do you think a dynamic product from your fund house sends potentially conflicting signals - one which advocates sitting through winners over market cycles while the other advocates dynamically aligning equity allocation with market valuations?
Gautam: One thing is market need. If we can fulfil that market need without comprising our philosophy it is worth doing. There are enough and more investors who shy away from equities because of the very high volatility of the asset class. Dynamic funds provide an opportunity to such investors to participate in equities (albeit partially) with lower volatility. In that sense it is bridge product for risk-averse investors. The stock selection process for the underlying equity portfolio remains the same of investing in long term compounders.
WF: As markets continue their upward march ahead of valuations, are you still getting "buy right" ideas or is it more of "sit tight" on your positions now?
Gautam: Yes you are absolutely right, this phase of the market is more about sitting tight. Getting Buy Right ideas is tough today given two things. First all good ideas are expensive. Secondly, as the overall index earnings growth remains subdued, we are not seeing good Quality companies (which were not growing earnings hitherto) suddenly getting back into growth mode. While a plethora of good quality new equity issuances are hitting the primary markets, the flood of liquidity means that even these are getting somewhat over-priced.
WF: Worries are now beginning to get expressed now about FY19 earnings growth - some say that the GST adjustment process was perhaps underestimated; others worry about drought in key agri-focused states and its impact on the rural economy. What is your outlook on the long awaited earnings recovery?
Gautam: The consensus has been over optimistic on earnings growth when high double digit earnings growth for 2 years was being built. I have maintained faith in the high probability of index earnings recovery from the current fiscal. This however is led by cyclical factors like rebound in earnings of metals, PSU/ corporate banks etc. However, the critical piece of broad-based demand acceleration has been missing. GST and monsoon present potentially more negative surprises from a FY18 perspective. Our continued focus as an investment team is to find stocks which will grow earnings at a healthy space even in an otherwise subdued market earnings environment.
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Fund Focus - MOSt Focused Dynamic Equity Fund
