In the past four years, DSP BlackRock Opportunities has consistently beaten the category average and put up a great performance in 2015. Its current 15-year annualised return is an astounding 22%. We talk to the fund manager who replaced Apoorva Shah at the helm last year.
In Morningstar’s large-cap category, we have Opportunities, Focus 25, Top 100. Am I right in saying that Opportunities is the riskier fund?
No. A higher percentage holding in a stock need not mean the risk is more. It just shows our conviction on a stock. Where our conviction levels are high, we would allocate a higher weight in the Opportunities Fund.
You mention higher allocations, but there are plenty of stocks with tiny allocations. I counted around 20 with allocations less than 1.5%.
If we identify a stock, which we believe, will generate returns over a longer time frame, then we need to start building a position gradually from that point of time, rather than waiting.
For instance, we liked a company whose stock corrected from sub Rs 700 to Rs 475 and further downside from here looked difficult. The view at that time was that for the next nine months the stock might go nowhere but post that we expected business to turn around and stock to gain once the results came in. The option for us was to either to build our entire target weight today or over a period of time. Looking at stock liquidity and the market view, we decided to gradually build positions over the next few months.
Since we have time to build our position gradually without incurring the impact / opportunity cost, by the time we expect the turnaround to be visible, we would have built a decent weight which would then help us participate in the upside.
So what we do as fund managers is to manage expectations from what we see for the next few months to the next few years.
Look at today’s market in terms of performance and earnings growth. Earlier to be defensive one would be overweight in Infotech, Pharma and FMCG sectors. However, this has not been true in the recent past. Earnings growth in these sectors have been volatile and so has the stock price. This makes it important to focus more deeply on stocks rather than sectors, whatever may be the market view.
So at certain price points, we may be aware that we will have to face some pain for a short period. The stock may also correct. But can we go to zero weight in the portfolio and then buy it again? There is no point in such frenzied trading unless we see a change in the core investment thesis. So we may take a call that we will take a hit in the near term but will hold it because we see value in it over medium term. But if a stock is liquid enough, we may trade 15-20% of our holding in the same.
But you did own a leading engineering stock, then the allocation dropped to 0% last year, only to come back in later.
In the first half of CY15, we were bullish on that company and we had a significant position in the name before offloading our entire exposure. The reason being, 25% of the order book had exposure to the Middle East. We were confident that crude would continue to trade lower, which in turn would keep this business volatile and uncertain. And in India, domestic execution would lag expectations. Hence we exited the stock but picked it up again when it corrected and valuations were more favourable.
At times we try to be opportunistic and tactical in our stock positioning. But for any trade (buy/sell) there has to be a fundamental reasoning to it.
What makes you own a PSU bank?
Most investors tend to draw two categories – public sector banks and private banks. We look at it differently – as a corporate bank or retail bank. The PSU bank in question, and some of the leading private sector banks, fall under the same category with regards to the lending profile.
So if we expect corporate and economic recovery to happen, this should logically help these banks.
When we look at bank valuations, we look at the adjusted book value (based on adjustment for potential NPA’s), profitability and ROE. Post this, if current valuations of a bank and valuation differential amongst them is similar to its historical levels, it gives us more options to bet on. So basically, at certain price / valuation one needs to take a call for a medium-longer term ignoring near term news flows.
You had a below average performance in 2008 and 2011 leading many to assume that the fund underperforms in down markets. Yet last year you did well. Can you explain?
At that point in time, the fund had a higher proportion of economy sensitive stocks, which underperformed the broader market. Last year, we had a better balance in the portfolio.
In 2013, the equity funds from the DSP BlackRock stable underperformed their respective category averages. Apoorva had explained that it was the wrong positioning of the portfolio that hit in 2013 – premature in the assumption of recovery. Does that mean it was a different macro positioning for this fund?
During CY13, significant overweight in infotech and underweights in consumer discretionary and cyclical, along with higher allocation to the large-cap space, helped DSP BlackRock Opportunities perform better.
The fund has undergone many changes at the helm – Anup Maheshwari, Harsha Upadhyay, Apoorva Shah and now you. What has changed since you took over?
I started managing the fund in July 2015. Since then the portfolio has dropped from 70 to around 50 stocks. That is because I believe in a concentrated approach. A more substantial weight keeps me on my toes and I am thoroughly updated on issues regarding the company and the sector.
Also, I have been more active in moving in and out of stocks.
What has stayed constant?
What has not changed is the stock selection process. The large-cap bias too stays.