Hope investors buy into not just our recent performance, but even philosophy, says Atul Bhole of DSP Mutual Fund
We select prospective companies with a philosophy that is based on decent business models, competent management with good corporate governance, and decent growth visibility.
DSP Equity Fund is one of the toppers in the performance charts in the last year. The scheme managed to offer around 26% returns. What are the factors that contributed to the performance?
The last three years have been very volatile and challenging for the economy and with many business reforms or events squeezed into this short time frame. The outcome of this has been that businesses which were, by and large, prepared, compliant and where managers understood the incoming changes and navigated their companies to their advantage are reaping the benefits of market consolidation.
Over the last one year, we could identify and invest in such sectoral leaders or winners. We select prospective companies with a philosophy that is based on decent business models, competent management with good corporate governance, and decent growth visibility. At times, we are willing to pay higher valuations for such selection. With these criteria, we ended up selecting winners and at the same time could avoid a lot of downside which we have seen in a large part of the market. We do believe that such market share migration towards sectoral winners would continue due to uncertainty in the environment caused by reforms, funding issues and technology disruption.
The impressive performance is coming at a crucial period. The fund house has seen ownership change recently. It even witnessed a lot of changes in the fund management team in the last few years. Does this mean the fund house has found its mojo again?
Change is part of nature. Most firms go through changes. In our case, some of these changes just happened together and captured the attention. It would be exciting to write about how we manage these changes. The truth, however, is we kept doing what is our mandate. Respect investment principles - and stick to them patiently with an eye on constant evolution.
We used this phase to finetune our investment frameworks, added new, yet complementing talent, and used the price corrections to align portfolios to core beliefs which are not just well documented, evidenced but also transparently communicated. We would be happy when investors buy into not just our fund performance, but even the attached philosophy
DSP Equity Fund was known for its conservative approach and reliability. However, it is not in the recommendations lists of most advisors. Do you think the recent performance would change the perception?
We sincerely hope that rather than based on the recent performance, advisors and investors choose or recommend our fund for its investing philosophy and discipline. We invest a large part of the fund, say, 75-80%, in quality companies which are in kind of a virtuous cycle of growth and leaders or winners of their respective sectors. We also upfront admit that we are ready to assume risk of higher valuations. However, we don't think it is prudent to invest in companies where business models, balance sheet are broken or management quality is not up to the mark even if valuations are optically very cheap. We would like to see a buy-in for this philosophy rather than performance.
How are you going to position the fund? What changes and what doesn’t?
DSP Equity Fund continues to be a multi cap fund and will have large cap and mid cap exposures in balanced measure of around 65% and 35% respectively. The fund management also remains more or less same though there have been few changes in fund managers. We are now willing to put those beliefs in writing and hard-code the philosophy behind stock selection and portfolio construction.
The stock selection revolves around Business -Management -Growth (BMG) principle, where greater importance is given to the management factor. Such stocks would constitute about 75-80% of the portfolio and would feature for extended periods of time in the portfolio, as we don't believe in exiting any business just because stock price has gone up. Unless business model or growth rate has suffered enduring damage or management has committed any mistake, we like to ride on the company's growth for long.
The rest of the fund would be comprised of tactical ideas. Even in this portion, certain minimum level of corporate governance would be adhered to and margin of safety in terms of downside would be established before taking positions.
The scheme has started performing better after you took over as the fund manager in June 2016. DSP, as a fund house, is known to follow a process-driven approach for fund management. How much difference can an individual fund manager make? What are the changes you have brought to the scheme?
DSP was and will continue to be a process-driven fund house. We give utmost importance to the process, risk frameworks and some of the elements are actually proprietary to DSP MF like judging every company on an objective framework of intelligence and emotional quotient parameters. Part of the process of having extensive weekly meetings also makes the decisions more balanced through discussions and debates and also prepares people for more responsibilities. Having the process on paper is one thing and following it consistently is actually the test of it. We are doing that now for many years.
A fund manager carries a responsibility towards a fund, and as such can follow his style of stock selection and portfolio construction within the overall process and risk framework of the fund house. As we are aware, investing is a combination of science and art. The science part is provided by the overall process and frameworks, while the fund manager can add more value through sticking to his/her philosophy and better control over behaviour.
The portfolio composition of the scheme is not much different from its benchmark. The scheme has allocated a little less giant stocks and a little more to mid cap stocks. How much difference did it make to the performance?
The fund buys into companies only if they are satisfying the criteria of good businesses, competent management and decent growth visibility. A stock is not just bought because of heavy index weight or large market capitalization. In this way, the fund is actually pretty much away from the index as we are not owning four or five very large companies. The fund is actively managed and there is no benchmark hugging and this sometimes can bring in volatility in performance and other risk measurements for the fund relative to the benchmark.
The large cap proportion is around 70% as of now and as stated earlier we will try to have large and mid-sized companies in measured weight of around 65% and 35% respectively. We do believe in long-term wealth creation potential of mid- and small-sized companies and shall focus on stock selection in both sides of the market. Most of the mid cap stock selection in the fund had contributed towards the alpha that the fund could generate.
The allocation to financial, healthcare, and construction sector is more than the benchmark. Did it contribute to the extra returns?
Higher allocation towards private banks, NBFCs and insurance companies has contributed well to the performance. As said earlier, this selection is a big beneficiary of the market share shift in the respective sectors. We also believe all these companies are future-ready to the ever changing regulatory, market and technology dynamics. Some of the companies classified as construction are actually consumer discretionary in nature like electricals among others. Healthcare is now a significantly overweight component of the fund but it's all about individual stock selection and those weights adding up to the overweight sector exposure. We believe all these companies individually may be the initial few from the pharma sector to come out of the extended period of underperformance due to their positioning and action taken by the management.
What would you tell investors? Who should invest in DSP Equity Fund? What can they expect from the scheme?
Investors and distributors could benefit in terms of reduced expectation mismatch if they can identify the underlying style or philosophy of any particular fund and its fund manager. As we outlined above, in this fund we largely have good quality, consistently growing companies, even at slightly higher valuations. Although these may be well-discovered and the so-called boring stocks and the portfolio may lack the punch of 'something new' or 'beaten down' stocks, we like to believe that returns may be decent and with better consistency.
We can observe many of these companies in our daily life as a customer and they are growing by leaps and bounds. We should try to benefit from their growth.
A fund with such a portfolio also won't be able to escape market volatility, but it has been observed that these companies correct by a lesser margin and rebound relatively better. Such volatility can be again used to our advantage by investing in a systematic way.