Interviews

Ms. Shibani Sircar Kurian

Fund Manager - Kotak Mutual Fund

Ms. Shibani Sircar Kurian has a PGDM (Specialization in Finance), BSc (Hons)- Economics. Ms. Shibani Sircar Kurian has a total experience of 20 years in the Indian equity markets of which almost more than 12 years have been with Kotak Mahindra Asset Management Company Limited. Her primary responsibilities include equity fund management and heading the equity research team. Prior to joining Kotak Mahindra Asset Management Company Limited, she worked for almost 6 years with UTI Asset Management Company Limited. and for 1 and half years with Dawnay Day AV Financial Services. She holds a PGDM (with a specialization in Finance) from T.A. Pai Management Institute, Manipal and a BSc (Hons) in Economics from St. Xavier’s College, Kolkata.

1. Mid- and small-cap stocks have suffered the most from volatility across various market categories, whilst large-cap equities have stayed largely stable? What is your view on these segments? Do you foresee any further volatility?

Ans: We continue with our relative preference for large caps over mid and small caps in the near term. At the current juncture, we see better risk-reward in large caps. From their peaks, till 27th Oct, Nifty is down 5.7%, NSE Midcap is down 6.6% and NSE Small cap is down 3.2% whereas from the lows to their peaks the indices were up 19%, 41% and 50% respectively. Midcap and small cap indices are trading at multiples (on a one year forward P/E basis) which are higher than long term average while the Nifty is trading at multiples which are at long term averages. Further, market cap contributions of mid and small cap companies have continued to expand from their CY20 lows and now are close to their Dec 2017 highs while large caps are near their lows. With this backdrop, we believe that the recent pullback in midcap and small caps has not been meaningful. Hence, while we are positive on midcap and small caps in the mid to long term, near term volatility is a possibility that can’t be ruled out.

2. what role does forensic accounting have? What impact does it have in the stock selection process?

Ans: Forensic accounting analysis is an attempt at identifying manipulated statements or imprudent capital allocation measures as well as corporate governance practises of the management of the company. This identification exercise is important to assess the fair value of a company by analysing beyond the headline reported numbers which may form basis of the valuation framework. It helps in identifying accounting red flag which may impact the sustainability of the business. Hence, undertaking the forensic analysis on the companies on a regular basis should be an integral part of the stock evaluation process.

3. As a fund house how do you handle market volatility and economic uncertainties? Do you adhere to any particular strategies?

Ans: As a fund house, our philosophy of portfolio construction has been bottom up stock picking but with a top down thematic overall. We are growth biased but seek to identify high growth, high quality companies trading at reasonable valuations. During periods of uncertainty, we continue to adhere to our process and philosophy focusing on identifying companies using our BMV (Business – Management- Valuation) framework. Quality anchoring at this stage is extremely important. Broken balance sheets and broken businesses should be avoided, leverage should be avoided at any cost. Also, stock selection should be very selective where there is earnings visibility and predictability.

4. While analysing a stock what is the investment horizon that you consider and why? What minimal upside potential should a stock have in order to be included in your portfolio?

Ans: We have investment horizon of minimum 1 year and earnings forecast for at least 2 years when we have analyse stocks while also taking into consideration the long term growth potential beyond this timeframe. This allows fair timeframe for an investment thesis like earnings compounding or value unlocking to play out. In our opinion, earnings forecasts beyond 2 years will be less reliable even though we may have a subjective opinion on the business outlook beyond 1-2 years. We try and use DCF valuations wherever possible, where we do implicit forecasting beyond 2 years. Considering that markets will discount forward earnings, we believe 1 year timeframe will be optimal. On rolling basis, we keep monitoring the stock fundamentals and we review our investment case on ongoing basis and reviewed at least once in a quarter.

5. What are the upcoming sectors you are betting on and why? How big the Amrit kaal is going to be for these sectors?

Ans: We have been positive on many domestic-oriented businesses. Clearly, domestic growth remains more resilient than global growth and earnings visibility in such sectors appears much better.

Some of the sectors and themes we have been positive on include the following:

• Infrastructure (including defence), manufacturing and capital goods. Capital goods as a sector which could be beneficiary of global manufacturing outsourcing to India and Aatmanirbhar India. We see this as a multiyear growth story.

• Auto OEMs are play on aspirational India and rise in per capital income enabling higher per capita consumption.

• Home building and building materials (including cement) sector to benefit from the growing need for housing and better quality of living.

• Private banking and financial services to be beneficiaries of financialisation of savings

6. what advice would you provide to a young, inexperienced investor? What kind of asset allocation should they have & exposures by categories?

Ans: My mantra to the young investor would be four fold:

a) start investing early – time in the market is better than timing the market. SIP into mutual funds is a great way to start the investment journey

b) be disciplined and systematic in your approach especially in times of market volatility.

c) do your research well – there is no substitute for research in investing

d) If in doubt of the appropriate asset allocation, chose a multi asset allocation strategy which leaves the asset allocation decision to the professional fund manager

Mr. Abhishek Bisen

Senior Vice President - Kotak Mutual Fund

Mr. Abhishek Bisen has done BA Management, MBA Finance. He has been associated with the company since October 2006 and his key responsibilities include fund management of debt schemes. Prior to joining Kotak AMC, Abhishek was working with Securities Trading Corporation Of India Ltd. where he was looking at Sales & Trading of Fixed Income Products apart from doing Portfolio Advisory. His earlier assignments also include 2 years of merchant banking experience with a leading merchant banking firm.

1. CPI inflation hitting 7.44% in July 2023 is higher than RBI’s tolerance band of 6%. The next monetary policy review is due on October 6, 2023. Are you expecting another hike in interest rates or a status quo will be maintained?

The above inflation numbers are outdated as latest CPI number for September 2023 stood at 5.02%, as compared with 6.83% in Aug 2023. Headline Inflation has trended lower primarily because of correction in vegetable prices.

Also, in its last monetary policy, RBI paused for 4th time in a row, kept the repo rate unchanged at 6.50% and maintained stance as "withdrawal of accommodation". The RBI has kept its FY24 CPI inflation forecast unchanged at 5.4% while flagging risks from food inflation. Also, the RBI has reiterated that it remains highly focused on anchoring inflation to align to its target of 4% on a durable basis and not in the range of 2-6%. But, looking at inflation expectations and recent commentary of MPC members, we don’t expect another hike in interest rates. And any pivot, i.e. rate cut is likely to happen only in later part of 2024, and mostly only after the US FED decision to cut rates.

2. What are the things you look for as an investor before investing in debt funds?

An investor needs to mainly analyze two things before investing in a debt fund – credit and duration. The duration is chosen as per the investor’s investment time horizon and interest rates scenario, while credit depends upon the risk an investor is willing to take.

Ignoring the short-term volatility, the investors should invest in debt funds which are suitable to their investment time horizon. And then should select funds as per investor’s risk appetite.

Credit owned strategy gives higher accruals to the investor and hence investor looking to earn higher accruals with degree of credit risk, can look at these funds.

3. After witnessing a net inflow of Rs 61,440 crore in July, debt-oriented mutual fund schemes saw a withdrawal of Rs 25,872 crore in August. What changed in one month?

As mentioned, Debt oriented mutual funds witnessed net inflow of Rs 61,440 crore in July and net outflow of Rs. 25,872 crore in August. The point to note here is that the large portfolio of debt funds is invested in less than 1-year category, such as overnight/ liquid/ money market / ultra-short / low duration funds. Also, the majority of the money in these category of debt funds is of institutional clients and treasury. The in and out of the funds by institutions and treasury keep happening depending on cash flow requirement of investor and other avenues of investment

Another point to note is that in September 2023 also, debt oriented funds saw net outflows of Rs. 101,512 crore. It was also the routine quarter-end redemptions by corporates to pay their advance tax liabilities. Hence there is nothing unusual or uncommon about these redemptions.

4. How are you currently positioned on duration front in your fixed income schemes? What advice you would give to an investor with a higher risk appetite?

Apart from risk from global uncertainties, domestically things seem stable. Over the last 1 year, FED has hiked rates by ~ 225 bps and RBI by ~ 60 bps. We expect FED/RBI to stay on hold during CY 2023 and cut rates in later part of CY2024. In near term yield curve might see the upward movement, but over the next 18 months, we expect yield curve to trend lower. Hence, we prefer longer end of the yield curve and have increased duration in our actively managed duration funds and as yields may inch up further we may look to increase duration further over period of time. Investors can reduce reinvestment risk by investing in higher duration funds. Given the forward guidance and expectation of cuts is potential for capital gains over next 18m in debt products investors shall look to increase duration of the investment pirtfolio as much as they can or consider actively managed duation funds.

5. What elimination criteria do you utilise as a fund house when choosing a debt security for a portfolio?

Portfolio construction is done by fund manager depending upon the respective scheme mandate i.e. its investment objective in terms of duration and credit risk.

There is detailed due diligence process for credit analysis for each company and each credit is subject to approval by the investment committee (IC). There are also investment committee approved limits in place for each company. The fund manager can invest in debt securities of IC approved companies only and that too within approved limits. This prevents any kind of unnecessary credit risk.

Then depending upon the scheme duration mandate, interest rate scenario/outlook domestically as well as considering impact of global interest rate scenario on domestic rates, the fund manager takes the duration call.

6. Debt investments are subjected to downgrade risk? How do you manage this risk in the portfolio?

As a fund house, we endeavor to select issuers / instruments which have low probability of any downgrade. But there can be an event-based downgrade in the medium-term horizon.

It is mitigated by various ways. One of them is diversification in the portfolio both security and sector wise, which can reduce the risk from downgrade in any particular security or negative view on any sector.

There are also certain checks and balances both internal and regulatory to manage the risk. Some of them are – there is rating-wise % of AUM of scheme can be invested in any issuer, periodic stress testing of schemes for credit risk, liquidity risk & interest rate risk, etc.

Mr. Amit Ganatra

Head of Equities, Invesco Mutual fund

Q1. As August series ended on a sombre note, how do you see September unfolding? It seems to be lacking cues and has begun on the lower end of the rollovers. What do you think will happen in the coming months?

We continue to remain sanguine on the arbitrage spreads. Reasons being:

1. Retail/ HNIs continue to remain long on stock futures. Also, midcaps/ small caps have performed superbly inspite of the large cap performance being muted in Aug. Retail/ HNIs generally tend to pay higher roll spreads and more so when they are sitting on profits which is visible from the performance of non-Nifty names in the last few months.

2. Mfs as %age of total open Interest is still at the lower end of the historical range. When this percentage increases, arbitrage funds tend to fight amongst themselves, thereby putting pressure on the spreads. As of Aug end, this %age was only 49% on August 30, whereas the range has been 45% to 65% in the last 2 years.

However, one should keep a watch on the corpus of the industry. If that continues to balloon, spreads will get impacted adversely in the future.

Q2. In the last three months, the BSE Smallcap index rallied by over 20%, and the BSE Midcap index by 17%. What is fuelling this rally in the small & midcap space?

Small Cap’s and midcap’s valuations had become attractive by March 2023 – as the set had undergone some time as well as price correction in FY2023. Also, earnings growth in India continues to be broad-based ensuring participation of a broader universe in the earnings growth. This twin aspect of continued earnings growth support and attractive starting valuations attracted large flows to the category, which in turn led to a sharp rally from lows.

Q3. What is the most significant change you've made to your portfolios between April and now? Is there any fundamental shift in terms of positioning?

In most of the funds, midcap and small exposure was increased in March and April due to the factors explained above. Otherwise, most of the other changes are specific to the mandates of the fund.

Q4. With the successful landing of Chandrayaan 3 on moon, the space industry is expected to grow in many folds. What are your views on this industry and have you made any significant changes after this news in your portfolio?

Space Industry is part of the overall Industrials space and most of our portfolios are already overweight Industrials for the last couple of years. Hence, no incremental changes were required on account of this event.

Q5. What are your thoughts on the latest passive trend? Is it just a herd mentality, or are investors truly following the passive approach?

Outperforming the benchmarks on a consistent basis is becoming difficult, specially in Large Cap space and hence, passive funds especially in large cap categories are attracting flows. However, passive investing also has its own perils and one should respect asset allocation as well as have a blend of active and passive to achieve long-term journey of wealth creation.

Q6. Are there any new emerging market trends that look interesting to you and worth betting on?

India is experiencing a strong broad-based earnings recovery largely due to the confluence of the following factors, and each of them are important themes for future:

1. Strong balance sheets of Corporate India and the Banking sector is driving willing as well ability to borrow and lend – thereby driving credit upcycle in the country.

2. Market share gains of organised versus unorganised in various sectors – especially in consumer space are driving strong outcomes for the listed universe at the expense of unorganised.

3. Capex by the Manufacturing sector for export opportunities and import substitution is leading to revival of private sector capex in the country.

Mr. Vikas Garg

Head of Fixed Income, Invesco Mutual Fund

Mr. Vikas Garg heads the Fixed Income investment function at Invesco India and also serves as a fund manager for various debt schemes at Invesco India. He has over 15 years of experience, of which 13 years are in the asset management industry spanning across credit research and portfolio management. In his last assignment, Vikas was working with L&T Mutual Fund as a Portfolio Manager where he was responsible for managing the Debt funds in various categories, including the high yield-oriented funds. In the past, he has worked in the credit research team with companies like FIL Fund Management Pvt. Ltd. and ICRA Ltd. Vikas holds B. Tech & M. Tech in Chemical Engineering from IIT- Delhi, PGDBM from XLRI -Jamshedpur and a CFA charter holder- USA.

Q1. Concerns about inflation and rate hikes are resurfacing on both the domestic and global fronts. Is this likely to dampen the momentum of the Indian market in the near term?

Global monetary policies outlook remains challenging as growth / inflation data continue to give mixed signals. US FOMC paused in September meeting but has kept the room open for one more rate hike in 2023 and has also guided the market for lesser rate cuts in 2024. The domestic rate environment has also become relatively more challenging with uncertainty on the global backdrop, domestic inflation concerns, elevated crude oil prices and as monsoon deficit has worsened.

While the uncertainty on various fronts has increased over the last month, we believe Monetary Policy Committee (MPC) will maintain a status quo on policy rates in October and sound watchful on inflation trajectory. Inflation is expected to cool down October onwards and provide comfort to MPC to overlook the recent spike. MPC is also expected to decouple itself from the global rate hike cycle on the back of a comfortable situation on the external front with healthy Forex reserve. Recent news on the inclusion of India in global bond indices is also expected to provide positive momentum to rates as well as the currency.

Q2. How are you looking at the bond yields trending in light of the fact that it appears that the Fed is clearly focused on inflation and jobs right now, based on the data?

Captured in Q1 and Q3.

Q3. What has been your last purchase in debt market and where are you looking to exit completely because you think the valuation, or the template is now shaky?

We have been gradually increasing our duration in funds with every correction in yields. Domestic rates have surged back to almost March 2023 levels when the backdrop was much more challenging with expected global rate hikes, India’s relatively weaker external factors, and most importantly, almost a consensus view of MPC rate hike in April 2023 policy. For instance, 10 yr G-Sec has moved up from sub 7% level seen in June 2023 to now at 7.20% - 7.25% and is very close to the 7.30% - 7.35% levels seen in March 2023. We believe, India’s current fundamental situation is much better than that in March 2023, and hence looking to buy at such levels. Net fiscal supply in 2HFY24 is expected to be much lower than that in 1HFY24 which will also support the yield levels.

Q4. In August, the rupee has weakened against the dollar. What is weighing on it?

INR has moved in line with other Emerging market currencies against the general strength in USD. Various factors are at play. US FOMC’s continued hawkish commentary on policy rates with the likelihood of “higher policy rates for longer”, substantially higher fiscal supply in the US in June to Dec 2023 period, general weakness in major trading currencies like Euro, Yen & Yuan, and specifically for INR – the recent surge in trade deficit with higher crude prices & gold import. 2HFY24 is expected to be more stable for INR as global rate hikes come to an end and India see FPI inflows triggering in with inclusion in global bond indices.

Q5. Please comment on the quality or credit rating of your primary debt funds.

Invesco India maintains a superior asset quality portfolio across all the debt schemes. Eight out of eleven open ended actively managed debt schemes have been categorised in the highest asset quality bucket A of PRC metrics, which reflects a disciplined approach on always maintaining a high-quality portfolio. This helps in ensuring a highly liquid portfolio, which is critical for maintaining a well-diversified and an optimal portfolio mix while taking into consideration the regular inflow / outflow in debt scheme.

Q6. Looking at the current scenario, what should be the investor’s strategy? What kind of a fixed income duration should they lock their money in?

With the likely peaking of domestic policy rates and the recent inclusion of India in global bond indices, we believe India’s fixed income market provides an attractive entry point to investors, especially in the 2 to 5 year duration segment, as elevated yields are expected to deliver positive returns over inflation. Near-term volatility led by evolving factors, if any, is expected to be range bound and should be ignored. Over the medium term, as the market builds expectations on the rate cut cycle at some point in time, it will enhance overall returns through mark-to-market benefit. Having said that, active fund management is critical as uncertainties may emanate from domestic inflation, fiscal supply, and global backdrop, which may influence various yield curve segments differently. Credit environment remains healthy, and selective AA / AA+ rated exposure can be explored at fair credit spreads.

Disclaimer: The Equity outlook views are expressed by Amit Ganatra, Head of Equities and Debt outlook views are expressed by Vikas Garg, Head of Fixed Income, at Invesco Asset Management (India) Private Limited. The write up is for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. It should not be construed as investment advice to any party. The views and opinions are rendered as of the date and may change without notice. The statements contained herein may include statements of future expectations and other forward-looking statements that are based on the prevailing market conditions / various other factors and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The data used in this document is obtained by Invesco Asset Management (India) Private Limited (IAMI) from the sources that it considers reliable. While utmost care has been exercised while preparing this document, IAMI does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The readers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.

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