Management
Kenneth Andrade has been running this IDFC Premier Equity since October 2005. Prior to IDFC Asset Management Company, Kenneth was managing equity funds at Kotak Mahindra Asset Management Company. He has overall 15 years of investment management experience. Currently, Kenneth looks after five equity funds, including the IDFC Premier Equity, managing approx 18 billion rupees in equity assets.
The fund manager is supported by three equity research analysts, each covering three sectors, comprising of 10 stocks in each sector. Investment research ideas are generated at analyst level and discussed with fund managers. Being a small investment research team, investment ideas are discussed through formal as well as informal channels. Sound ideas are discussed with the investment management committee including chief executive officer. The portfolio manager is responsible for final buy and sells recommendations for the fund.
The fund relies to the extent of 35% on external analysts’ research whereby quality of research is evaluated through internal cross referencing and due diligence.
Strategy
This is a mid-cap fund with a growth bias. As per its investment style, the fund strives to invest in companies, which are at an early stage in their life-cycle and would benefit from high growth and profitability at the start of the period. The manager would also wants to tap shifts in the business environment--new opportunities, technologies, trends, etc. The fund has a bias towards companies, which are going to undergo transformational changes in their business prospects.
The portfolio manager, Kenneth Andrade, strives to indentify leaders, which would benefit from strong trends in a particular industry or a sector. The manager follows buy and hold strategy, which is clearly reflected in the fund’s turnover ratio, which is at 35% currently.
The manager follows relative valuation approach for stock selection and stocks with higher PEG Ratio (Price-to-Earnings Growth) are considered for investment, among other valuation metrics. Ideally, stocks with strong balance sheets, cash flows, order book position, higher return on investment/yield, etc., are likely to form a part of the portfolio.
The portfolio manager seeks to buy strong companies at low valuations. He adopts bottom-up investment approach for stock selection and small and medium size companies with good long term potentials are likely to mirror in the portfolio.
As of July 2009, Exide Industries, Shree Renuka Sugars, IRB Infrastructure Developers, Shriram Transport Finance and Shree Cements formed top-five holdings, constituting 27% of the fund’s portfolio. The portfolio manager does not like to hold more than 8% in a single stock and single sector does not amount to more than 20% of the portfolio at all times.
From a sector perspective, consumer non durables (18%), finance (11%), auto ancillaries (10%), transportation (8%) and pharmaceuticals (5%) accounted for the Fund’s top five sector holdings as of June 2009.
This is a concentrated portfolio with 30-35 stocks and therefore would amount to concentration risk. Clearly, the known mid-cap names are likely to feature in the portfolio, owing to the fund’s investment mandate. The manager is trying to add alpha by identifying themes at an early stage and also buying few small cap names.
The AMC does not shy away from closing the fund if its size grows significantly. During 2007, when this fund touched 3.5 billion rupees in size, the then management (Standard Chartered AMC) decided to close the fund to new investors. The fund’s size was 8.3 billion rupees as of June 2009.
Costs
The fund has managed to keep its expenses in line with its peers. Its expense ratio, as per its recently filed annual report, was at 2.24%, lower than its category average of 2.37%. However, we would like to see the fund’s expenses to be in the range of 1.75%-2%, in line with other equally best performing funds in the small/mid cap category.
Performance
Thanks to its robust investment management process and the manager active stock selection approach, this fund posted strong performance during the last three-year period as of June 2009. During the period, the fund registered 26.2% return on a compounded annual basis (CAGR), compared with its benchmark, the BSE 500 Index, which gained 10.9%. Since inception, the fund returned 19.6%, outperforming its benchmark, which posted 12.5%.
Performance over calendar years depicted marginal inconsistency as the fund moved between first and second quartiles between 2006 and 2007, however, remained in second quartile during 2008 and YTD 2009 periods.
The fund underperformed its benchmark, during the last three- and six-months period, due to its cash exposure, which remained at higher levels at 15% in June 2009.
In terms of risk, the fund was in line with its peers’ average. However, we think the manager needs to work on its risk management front and keep in line with the other best funds available in this category, which have showed strong performance, albeit at lower risk.
Despite this, the fund’s risk-adjusted performance was noteworthy among its peers, as measured by the Sortino Ratio. The fund’s Sortino Ratio was at 1.16 times, higher than the category average of 0.42 times.
Overall, the fund was able to perform well in bullish markets and bearish market conditions as reflected by its up capture and down capture ratios of 117% and 87% respectively.
Stewardship
The portfolio manager does not invest in this fund, owing to compliance and paper work related issues. Ideally, we would like if the manager invest in his fund, which brings strong stewardship to the table and depicts manager’s confidence in his own investment philosophy.
Conclusion
This fund is an ideal investment proposition for aggressive investors, who are looking for a concentrated portfolio and would prefer taking higher risk. The fund is expected to add strong alpha to investor’ wealth if considered for a long investment horizon (3-5 years). However, we think it is quite possible the fund may run a risk of underperformance in short term.