3 strong filters to ensure high quality ELSS portfolio
Fund Manager - Equity
DHFL Pramerica Asset Managers
WF: In the flexicap strategy employed in your ELSS fund, large cap weightage has remained in the range of 60-75%, with the current allocation at the top end of this range. Some fund managers tend to allocate a lot more to mid and small caps in their ELSS funds, given the 3 year lock in. What is the rationale governing your flexicap strategy for this fund?
Avinash: The reason for having a higher proportion in large caps over the last one year was due to relative valuations. The nifty has historically traded at 2% premium to nifty midcap index. After the outperformance of Mid and small caps over large caps in 2017, the nifty was trading at a discount of 50%. Hence we decided to have higher weightage in largecaps. As and when midcaps and smallcaps become relatively more attractive to large caps we will change our position accordingly.
WF: What are the key financial parameters you focus on to ensure high quality of stocks in your portfolio? How does your overall portfolio stack up on these parameters vs benchmark?
Avinash: We like to have companies that can grow over a period of time while funding their growth through internal cashflows so that there is little or no dilution. To meet this goal we look at ROE, Debt to Equity ratio (D/E ratio) (ex-financials) and EPS growth rate. ROE signifies the return the company can generate on the equity invested and hence we look for companies with high ROE. Lower D/E ratio shows that the company is not dependant on debt to fund growth and hence has lower risk especially when macro situation gets challenging. So, a combination of high ROE, low D/E and high EPS growth rate is ideal for us. The financial parameters of our fund and benchmark as of December 2018 end are as follows:
WF: Despite having a large cap tilt, your portfolio is quite distinct from the benchmark, with overlap below 50%. Is this more due to stock selection in mid and small caps or active weights among large caps?
Avinash: It is a combination of both. Our stock selection in mid and small caps have very little or no presence in the benchmark. Also, in the large caps we take active calls which leads to lower overlap with the benchmark. For instance, we were zero on OMC’s for the entire CY18 and we are close to zero in metals for the last few months.
WF: One of the themes that your fund is playing is the shift from unorganized to organized. The actual shift across sectors seems to have been far slower than anticipated. To what extent is this theme actually playing out and in which sectors do you see gain and where do you see pain?
Avinash: The GST is a complex tax to be implemented and hence was anticipated to take some time to show results. With implementation of the e-way bill we expect the compliance to improve over a period of time. The government has also been reducing tax rates on a number of products which will make the organized segment more competitive. We have already seen positive impact of this in select consumer staples and retail names. We expect the benefit to flow to other sectors too over a period of time where the unorganized share is high.
WF: Rural spend is a key theme in your portfolio: to what extent has this already played out, given that elections are now around the corner and all rural programs would have by now been given as much push as possible already?
Avinash: We feel Rural spend as a theme will not end with elections. Certainly, elections give a push to rural spend, but they are not the only drivers of rural income. Monsoons, Infrastructure spend, increase in MSP are some of the other important factors driving rural incomes. Monsoons have been largely normal in the last two years, Infrastructure spending robust and MSP increase quite reasonable. We expect the positive impact of these events to play out over the next one year.
WF: If you were to look at a 5 year horizon, which sectors do you see creating maximum wealth?
Avinash: We are positive on the private banks and pharma sector. Private banks continue to outgrow and take market share from PSU banks and we expect it to continue. In Pharma, we feel the news flow is incrementally turning more positive both in terms of regulatory clearance as well as pricing issues in US. We feel both these sectors can create wealth over 3-5 years and hence we are overweight on both.
WF: In what ways do you seek to differentiate your ELSS product when communicating to distributors and investors?
Avinash: We will continue with our strategy of buying companies with visibility of growth which are available at reasonable valuation while maintaining the quality of the portfolio in terms of high ROE, low D/E and good management. By following this strategy we believe we can achieve our goal of consistency in performance.
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