Seizing opportunities in a polarized market

Sailesh Raj Bhan

Deputy CIO

Reliance Mutual Fund

Reliance India Opportunities Fund (closed ended fund) is looking to create a differentiated high-quality, benchmark agnostic portfolio by picking stocks that are attractively valued in a highly polarized market. High market valuations are illusory Sailesh believes, due to this market polarization – which offers him a number of opportunities from which to build a focused portfolio of 25-30 stocks that can generate significant alpha over the 3 years of this fund.

WF: Your fund presentation suggests that stretched valuation of the market does not reflect reality of the entire market and that polarization and distortions abound. Can you elucidate this point?

Sailesh: It can be observed that across market phases there are opportunities due to near term distortion or polarization, which long term investors can benefit from. The current record high levels of indices like Nifty50 is a prime example of such polarization. On a YTD basis (Jan 1 to Aug 29, 2018) while the index delivered ~ 11% returns, only 5 stocks contributed ~ 65% of the index returns while the bottom 10 stocks declined between 10% - 40% for the same period.

The entire market rally has been concentrated in select few stocks as demonstrated by the performance divergence in Nifty50 and Nifty50 Equal Weighted Index, (which is essentially the same index constituents but with equal weights)


Source: MFI Explorer

Thus, while the market may appear to have touched new highs, the fact is that a large part of the market is yet to participate and hence providing an opportunity to invest in good businesses at reasonable valuations.

WF: What are the key sectors you plan to be overweight on when you cast the initial portfolio of this fund?

Sailesh: Reliance India Opportunities Fund will follow the key investment philosophy of Growth at Reasonable Valuation and the focus will be on investing in good quality business with strong growth visibility, currently available at rational valuations. Hence the portfolio will adopt a bottom up investment approach. However, the fund will be adequately diversified with investments across sectors. In the current market context, Financial Services, Cyclical Plays etc., provide interesting opportunities at a thematic level.

WF: What is the market cap mix planned for this fund? Will it be altered at any point based on market movement?

Sailesh: The fund will follow a high conviction approach through a focused portfolio of around 25 to 30 stocks. The underlying holdings would be selected on a combination of factors like: Companies trading at a significant valuation discount, higher earnings growth profile, higher dividend yield etc. The portfolio will be well diversified across market capitalization range with at least 50% of allocations to large cap companies. The fund will actively managed and allocations can be altered as long it’s in line within the product framework like higher growth potential, focus on quality, rational valuations, strong earnings potential etc.,

WF: How do you think the weakening macros (falling rupee, rising interest rates, increased current account deficit) affect your fund and the stocks you plan to invest in?

Sailesh: Some of the weaker macros like currency depreciation, rising bond yields is already being reflected in the current prices. To some extent the current higher ‘distortion or polarization’ is also a result of the weakening macros. However, we believe most of these negatives are short term in nature and the outlook continues to be reasonably positive from a medium term perspective. The declining macros, if anything, presents an interesting opportunity to invest in potential high growth businesses at reasonable valuations.

WF: How is this fund positioned differently from your existing open-ended diversified funds?

Sailesh: The fund attempts to create a high-quality differentiated portfolio benefitting from the current opportunities. As compared to open ended diversified equity funds Reliance India Opportunities fund offers the following distinct features:

  • Focused portfolio – only 25 to 30 stocks
  • No benchmark constraints – Open ended funds usually have some participation in benchmark based on the individual fund mandate

Thus, the attempt is to create a differentiated high quality portfolio aiming to generate potential alpha over the fund tenure.

WF: This being a 3 year+ closed ended fund, is there any downside protection proposed in the fund in the event of sharp market corrections?

Sailesh: The current markets are polarized with a focus on select few which have demonstrated strong performance in the recent past while ignoring good quality business which have faced near term challenges, but can register potentially superior growth over the medium term. ‘Growth at Reasonable Valuations’ is the core Investment Philosophy of the fund and margin of safety is a key investment parameter. Thus, the fund attempts not to overpay for growth.

In our view, domestic equities continue to offer reasonable growth opportunities supported by improving corporate earnings, meaningful pick-up in economic activities and stable global growth. Hence, we remain optimistic on equities from a medium-term view and believe the portfolio has in-built protection mechanism from a valuation perspective.

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