WF: Do you have a minimum dividend yield filter to short-list stocks? What beyond dividend yield and free cash flow do you consider when selecting stocks for this fund?

Dhimant: The investment objective of the scheme would be to provide capital appreciation and/or dividend distribution by investing predominantly in a well-diversified portfolio of companies that have a relatively high dividend yield.

High Dividend Yield Companies are defined as companies whose dividend yield, at the time of investment, is equal to or higher than the dividend yield of the company with the lowest dividend yield in the Nifty Dividend Opportunities 50 Index. The lowest dividend yield in the index is currently 0.55%.

The endeavor is to identify and invest in companies that are generating high free cash flows and consistently paying dividends. There is a strong focus on selecting companies with showing reasonable growth, strong business fundamentals and balance sheets, good quality of management, strong cash generation in excess of their capital expenditure requirements; and available at valuations that are at a discount to or at most in line with the sector valuations.

WF: Do growth stocks with low dividend yields automatically get excluded from the portfolio? Is there some space in the portfolio for promising lower dividend yield stocks?

Dhimant: Growth stocks with low dividend yields do not automatically get excluded from the portfolio. While the portfolio predominantly consists of stocks with a dividend yield higher than the dividend yield of the company with the lowest dividend yield in the NIFTY Dividend Opportunities 50 Index, a company’s growth prospects as well as the regularity and stability of dividends is also analyzed for inclusion in the portfolio.

WF: Do we have data (say Nifty Div Opps 50 TRI vs Nifty 50 TRI) that establishes the hypothesis that dividend yield portfolios are less volatile, while retaining similar wealth creation potential?

Dhimant: Currently, the volatility of the benchmark of the fund (NIFTY Dividend Opportunities 50 Index) is broadly in line with the volatility of the NIFTY 50 Index. This is probably because the Nifty Dividend opportunity index has big weights in stocks which are also heavyweights in the Nifty index. Besides, the Nifty index is composed of large caps which usually tend to be less volatile. Hence the volatility in the indices is not too different. On a separate note however, since the companies with high dividend yields are those that have stable businesses and cash flows there should be less surprises in these companies.

WF: You seem to be under-weight on Giant and large cap (~67% vs. benchmark ~89%) and overweight on mid and small cap (~33% Vs. benchmark ~10%). Any specific reason for this market cap mix?

Dhimant: The investment strategy and portfolio construction are benchmark agnostic. The endeavor is to invest in companies within the high dividend yield universe that provide consistent dividends, reasonable growth at relatively attractive valuations. As part of portfolio risk management, we have exposure limits on individual stocks vis-à-vis the benchmark. The market cap mix of the portfolio is an outcome of the stock picking approach and process.

WF: What themes are you specifically bullish about in your portfolio? How do you think markets and valuations will pan out over the next 12 – 18 months?

Dhimant: India may be better placed in a situation of rising trade friction due to its slower growth in exports vis-à-vis the growth in global trade in the past few years. Therefore, the impact of trade friction maybe somewhat muted.

In the past 3-4 years, consolidated earnings for the broad market have been impacted negatively by poor performance in the energy, metals, IT and financials sectors; each having disappointed at various points in time. Currently, these major sectors all seem to be performing well. Looking ahead, the wide divergence in the performance of large caps and mid-caps this year is expected to reduce and they may at least move in the same direction; though risk aversion would mean that large cap outperformance continues in the near future.

India has three key state elections in 2018 followed by the general elections in mid-2019. Elections are events which will keep noise levels high and we expect a more than average volatility till the election cycle is over. A sharp correction in the volatility should provide a good entry point in stocks where earnings are expected to be on track and whose valuations become more attractive.

Disclaimer:-

The views expressed and information herein are independent views of the interviewee and for informative purpose only and under no circumstances should be construed as an opinion or Investment advice. The information contained herein is not intended to be an offer to seek solicitation for purchase or sale of any financial product or instrument. Investment involves risk. The investment strategy stated above may change from time to time and shall be in accordance with the investment strategy as stated in the Scheme Information Document.

As an investor you are advised to conduct your own verification and consult your own financial and tax advisor before investing. The Sponsor, Trustee, AMC, Mutual Fund, their directors, officers or their employees shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages arising out of the information contained herein.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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