Q . The equity markets have rallied in the past few months. What are the reasons behind this? What are your views on the current market valuations?

Answer : 2020 was indeed an eventful year with many firsts to its credit. While the start was steady, global pandemic in Feb and March led to the fastest ever correction seen in bear market history with global markets entering bear territory in record 19 days. Analysts across the street cut estimates rather sharply amid demand deterioration due to lockdown and fear of job losses across sectors. However, unprecedented money printing by global central banks and proactive government interventions across the world led to synchronised revival of equity markets across the globe starting early April. Over the last few months, markets are rather positively surprised on 2 counts a) better than anticipated normalization of business activity and b) resilience of Corporate India to cut costs sharply in tough times. This has led to better quarterly results vs expectations and positive business commentary across various industries on future business outlook.

On market valuations, based on historical data, markets are rather richly valued vs long term average by around 10% points. However, the same needs to be looked at in the context of lower interest rate environment which can continue for sometime and healthy improvement in corporate performance over the next 12-24 months. We do believe that markets can correct from current levels given the sharp run up in recent months but are confident on the long term bullish trend of the market.

Q . What should investors sitting on good profits do? How should new investors invest in such markets?

Answer : Time in the market is far more important than timing the market. Investors already invested have certainly benefitted from gains over the last 9 months. Based on our years of experience, we do not recommend timing the market at any point of time but rather follow a disciplined asset allocation approach that suits each investors risk profile. Existing investor should ideally rebalance the portfolio annually based on the asset allocation that they would think is appropriate for their financial goals. For new investors, we would advise a similar approach. They can opt for either for a hybrid equity portfolio like balanced advantage fund or aggressive hybrid fund or conservative hybrid fund which has varied levels of equity and debt allocation that can suit your requirement. You should also consult your financial advisor to construct an appropriate asset allocation framework that would help you achieve your financial goals.

Q . How has your flagship funds changed in their composition over the past few months?

Answer : On an AMC level, we were well positioned to benefit from favourable tailwinds in sectors like pharmaceuticals and healthcare, specialty chemicals, small ticket consumer discretionary and private sector banks. Over the last 6 months, we have turned far more constructive on software Sector based on increase in global spending on IT in the post pandemic distributed work from home environment, cement sector as a proxy to revival in capex cycle with healthy cash flows and global metals due to expectations of price rise due to high inflationary trends that world may witness over the next few years. Our allocation across funds have changed accordingly subject to the mandates of the various schemes under management.

Q . What is your stock selection process? When you identify a good stock, how do you add the same to your portfolio?

Answer : We have a robust investment process wherein any stock that is part of the portfolio has to come from an internally defined investment universe. We undertake a detailed due diligence before including any stock to be a part of the investment universe. Our due diligence looks at a) soft parameters like competence of top management in terms of business execution, the culture of the enterprise, management delivery vs guidance etc b) financial parameters which is indicates cash generation vs P&L statement, leverage of the business, return on investment etc and c) corporate governance standards like related party transactions, adherence to ESG framework etc. Our team of 10 analysts track the companies in the investment universe aggressively for any corporate development or update on business during quarterly results. When we identify a good stock, the analyst makes a detailed presentation encompassing the above parameters to the fund management team which debates the business potential of the enterprise. The stock if approved post the discussion is included in our investment universe. Subsequently, Fund Managers based on the scheme mandate and their assessment of the investment opportunity can invest in the stock if it is a part of the investment universe.

Q . What are the red flags you look for in any stock to avoid?

Answer : We have red flags across each of the parameters on the due diligence list mentioned above. Some of the examples for red flags are low promoter ownership in the company and high related party transactions, high employee attrition ratio, poor cash generation from operations, high debt to EBIDTA, aggressive accounting practices vs peer group in the industry and any kind of auditor qualifications on annual accounts statements over the last 5 years. These are some of the key red flags that we monitor at regular intervals.

Q . Please share the most valuable lessons /learnings on equity investing with our investors.

Answer : Based on over the 3 decades of investment experience, we would like to mention the following. A) Don’t sell your winners too early even as they reach your estimated target price. Great companies continue to deliver year after year and patience here can help your compound wealth exponentially. B) Devote enough time to get the narrative about the company right rather than valuations. Narrative is the opportunity size, key competitive advantage etc as investing is a multi-dimensional activity rather than only focussing on valuations. C) Take advice from others but invest based only on your conviction as when company goes through a temporary rough patch, you conviction is what will help you to stay invested for long term. We hope you find these resonating enough in your investment journey. Wish you all healthy and prosperous 2021 and years ahead..