We recently looked at two funds, L&T Equity and L&T Tax Advantage, both managed by Soumendra Nath Lahiri.
Lahiri is known for his bottom-up, benchmark-agnostic investment approach with a focus on companies that are efficient allocators of capital. Thus, return on capital (RoC) employed is one of the critical parameters used for evaluation. The manager focuses on the profitability and attractiveness of a business, competitive position in its industry, and stage in the business cycle. Lahiri considers discount cash flow valuations along with price/earnings, enterprise value/EBITDA, and price/book value as key parameters to look at while evaluating stocks, and considers relative valuations within the industry to find the firms in which he wants to invest.
Analysts at the fund house, track a core list of about 300 companies that are evaluated on the basis of business, management, and valuations. The analysts derive price targets for the stocks and run sector neutral portfolios for the sectors, which serve as guides to the fund manager while investing.
A benchmark-agnostic approach may result in large overweight or underweight positions relative to the benchmark. Furthermore, the fund house can tend to hold a significant portion of a company as a whole. The risk-management function plays a critical role in highlighting key portfolio risks and defines limits in terms of the maximum holding that they can have in a company.
Lahiri tends to invest in a lot of fresh ideas and this can tend to give rise to a portfolio that is distinct compared with its peers. He prefers running portfolios of 50-60 stocks and mitigates concentration risk by maintaining a maximum individual stock exposure of about 6% in the portfolio.
L&T Equity Fund
- Category: Flexi Cap
- Index: S&P BSE 200 India TR
- Star Rating: 3 stars
- Investment Style: Large Growth
- Fund Manager: Soumendra Lahiri
- Analyst Rating: Bronze
- Analyst Name: Kavitha Krishnan
- Date of Analysis: March 2018
The process is sound, however execution of the strategy is yet to be reflected in the fund’s performance, which, under the stewardship of Lahiri has remained average. However, we build confidence from the in-house process and the manager’s portfolio-management capabilities. From November 2012 through January 2018, the fund returned an annualized 17.97% compared with 15.33% for the benchmark index S&P BSE 200, beating 40% of its peers and falling in the third quartile within the Flexicap Morningstar Category.
Lahiri prefers to invest in good businesses at reasonable valuations or companies with improving fundamentals.
This is evidenced from his investment in companies such as Indian Bank and Godrej Properties. Logistics companies like Future Supply Chain Solutions finds a place in the portfolio alongside stocks like ITC Ltd. as the manager sees these companies benefiting from rising trade and ecommerce.
There is a focus on bottom-up stock selection, but a top-down overlay is exhibited by the fund’s overweight position in industrials based on expectations of reforms that may lead to an improvement in economic growth. The manager has a positive view on the cement sector based on a favourable demand-supply scenario. The sector supports better capacity utilisation, has high entry barriers, and has a strong moat that drives Lahiri’s conviction. Stocks like Shree Cement, Ambuja, Ramco, and Ultra Tech find a way into the portfolio.
This fund has a large-cap bias, with an allocation of 20%-30% to mid-caps. Lahiri prefers to manage the portfolio with around 50-60 stocks, with the top-10 holdings constituting about 40% of the portfolio. Exposure to a single stock is generally maintained below 6% of the portfolio to manage the risk. Given the manager’s long-term view the fund has a lower turnover than its peers.
L&T Tax Advantage
- Category: ELSS
- Index: S&P BSE 200 India TR
- Star Rating: 4 stars
- Investment Style: Large Growth
- Fund Manager: Soumendra Lahiri
- Analyst Rating: Bronze
- Analyst Name: Kavitha Krishnan
- Date of Analysis: March 2018
Lahiri’s execution of the strategy has delivered above-average returns, with the fund falling in the top two quartiles over the long term.
The fund’s slightly lower downside risk and lower turnover ratio are indicative of the positive risk/return characteristic on the fund. Under the stewardship of Lahiri, from November 2012 through January 2018, the fund returned 20.04% annualised compared with 15.33% for the S&P BSE 200 Index and 19.22% for the India Funds ELSS Morningstar
Category average. The fund outscored 69% of its peers, falling in the second quartile during the same period. On the Morningstar Risk-Adjusted Return Basis too, the fund outscored its category peers slightly.
In our opinion, the processes at the fund house have been structured in line with their goals. The investment team has remained fairly stable and seems to work well together. We are watchful of how the AMC builds on their existing resources and structure over the long term. For now, our conviction on Lahiri’s stock-picking ability and his skill in executing the strategy lead to a Morningstar Analyst Rating of Bronze on this fund.
