“We run Kotak Standard Multicap Fund with a large cap tilt,” says Harsha Upadhyaya, CIO – equity, Kotak AMC
If you look at past trends, I would say both sector allocation and stock selection have delivered positive attribution for the fund.
Kotak Standard Multicap Fund enjoys much higher alpha than the average alpha of the multi cap mutual funds category in both the three-and five-year periods. In fact, the scheme is a category topper in terms of generating returns for its SIP investors as well as lumpsum investors. How did you manage to deliver the best performance?
We stuck to our investment mandate and that discipline has worked to generate this kind of returns, despite the volatile market conditions. Investment mandate of the fund is fairly simple. We are supposed to take bets in sectors which are likely to outperform the market at any point of economic cycle. We generally try to look for sectors which in our opinion are likely to outperform over the next few time periods and try to build in individual stock positions in those sectors.
Also, the flexibility of investing across market capitalisation helps us in delivering alpha. If you look at past trends, I would say both sector allocation and stock selection have delivered positive attribution for the fund.
Kotak Standard Multicap Fund is the largest fund in the equity mutual funds universe with assets worth Rs 26,010 crore. Given the scheme’s outperformance against its peers, the scheme can easily garner more funds from investors. Do you think the scheme is bloated in terms of AUM? Won’t it be a threat? How do you manage the biggest scheme in the equity category?
Until now, even with the increase in size of the fund, the performance has been fairly consistent. We never really look to take short term or tactical positions. To that extent our portfolio churning is quite low. Historically our portfolio churning ranges between 25 per cent and 35 per cent. On an average we hold stocks for anywhere between three to four years. With that kind of investment approach, we really do not see challenge at this level of assets. And most stocks that are there in the portfolio are a part of the derivative list which allows us to enter and exit without much of an impact if there is a case for that.
The scheme fared well in bear markets as well. The scheme has a downside ratio of 86. Downside ratio of less than 100 indicates that the fund lost less than the benchmark in periods of negative returns or when the benchmark was in red. How did the scheme manage to do that?
Our focus when we construct our portfolio is to look for companies which have proven business models and also which have steady cash flow generation. We do not like plays which have balance sheet issues or high level of debt. To that extent, at the entry level itself we are avoiding stocks which can have a major downside. The construction of the portfolio is inclined to lower downside compared to the market in case there is a negative outlook.
If you look at overall portfolio, while it may have concentration at the sector level, we really have a diversified stock portfolio. At most points of time, you would see anywhere between 50 to 55 stocks in the portfolio. This diversified approach has also helped us to limit the downside.
Kotak Standard Multicap Fund is tilted towards large cap sector. The scheme has around 73 per cent portfolio allocation to large cap stocks. What is the strategy? Why this tilt?
It is a multi cap portfolio, but historically we have run this fund with a large cap tilt. Anywhere between 65 to 75 percent has historically been invested in large caps and rest has gone into mid and small caps. Despite market cycles, we generally have been in this range for allocation. We believe that along with sectoral overweight or underweight, which in this scheme is going to be higher than a normal diversified fund, the level of mid and small caps should be good enough to provide risk-adjusted returns and that is what we have been continuing.
Kotak Standard Multicap Fund has 38 per cent of its portfolio in financial sector, followed by 15 per cent in energy sector and 10 per cent in construction sector. Can you elaborate on the sub sectors where the scheme is focusing?
These are the three large bets that we have taken. In financial sector, most of our bets are in private sectors. We hardly have anything in PSU banks or NBFCs. It is obvious given the kind of pain that is there in these two segments. Other than the lending business, if you move to non-lending part, we have reasonable exposure to general insurance and life insurance, both of which are at a nascent stage in our country in terms of penetration. We believe there is a long-term growth trajectory in that particular segment.
A far as oil and gas is concerned, within oil and gas, we are keener on gas utilities. We believe since the government focuses on having clean environment, the push towards gas usage will continue and hence some of the names that we have in our portfolio have a very large entry barrier and hence as a kind of a design to generate higher return ratios and have a very strong competitive advantage and the valuations are also reasonable.
We club construction under industrials. We would believe on a relative basis the valuations are very reasonable because this segment has not participated in the up move in the last several years in market. We believe there is already a reasonable degree of visibility to look at the entire sector anywhere between 18 to 24 months. Also, we believe the new government will continue embarking on the infrastructure activity which will again increase the visibility that these companies have. And, at these valuations there is merit to enter this segment.
SIP inflows have seen a marginal slowdown of 0.67 per cent over last month to Rs 8,183 crore in May. Kindly comment.
The money that comes through SIP is very structural. There could be some moderation here and there, but the overall trend is quite strong, and we expect it to continue. If some SIPs matured in terms of instalments, may be investors did not really want to continue immediately without knowing the action outcome and we believe some of the big events are behind them. The numbers will gradually pick up.
Many mutual fund advisors say even the equity investors are a bit shaken due to the NBFC downgrades and defaults. Some investors have even asked their advisors to redeem every single penny from mutual funds. What is your advice to these nervous investors?
I think whoever comes into equity should have a three to five-year horizon if not more. Also in that period there will be various events and development that will affect positively or adversely but if you believe that the fund house or fund manager are doing justice to the portfolio construction then over a period of time you are expected to get better returns than any other asset classes.
There is no one size fits all recommendation for equity investors. Even within equities there could be investors who are more conservative, for them large or multi cap allocation SIPs will do well. More aggressive investors obviously can go for mid and small cap exposure or lumpsum exposure.