WF: Your Dynamic Plan has outperformed benchmarks comfortably over the last 2 years - congratulations! What were some of your key calls that helped you deliver this outperformance?

Naren: Firstly I believe that we have to slightly look at longer term and I want to mention that in the year 2007, this fund underperformed the market, particularly in the second half of the year. The market was going sky high and it was looking very clear that you were in an over valued market. In that over valued market; we were overweight technology and pharma. And these two sectors hurt us very significantly in the second half of 2007. If you see the fund performance, the fund had underperformed the year 2007.

Now 2008 was a different batting pitch - because you started with a higher value and the market kept going down. And in fact if we had lesser mid-cap weightage - the mid-caps which were lying was a historical holding - actually if the mid-cap weightage had been lower, the fund would have outperformed much more than what it did in 2008.

The years 2008 and 2009 actually gave us lot of comfort on how to handle this fund, because we have seen through 2 really turbulent years in the market. And so the approach we have adopted in this fund is that - that there is a space for something called as a conservative equity fund in the market.

During the last 18 months, we continued to be significantly overweight on pharma and technology, and maintained our mid-cap presence. The same factors that contributed to our underperformance in 2007, gave us all our outperformance in 2009. In 2009, mid-caps outperformed the large caps very significantly. And technology and pharma - the 2 defensive sectors - have outperformed in the last one year very significantly.

We now have for example a good position in consumer stocks - which we possibly did not have earlier. These are stocks which are at their lowest relative valuations compared to their past. Markets are also scared of these stocks now.

Markets swing from extreme optimism to extreme pessimism on sectors and themes. So what we do is we use such opportunities which come our way, if we are convinced about the fundamentals and the valuation. For example, what we have done in the last 6 months is that we have cut our allocation to mid-cap and small cap - after seeing the big run up in that segment.

We also use a covered call strategy - up to about 15% of our fund. This strategy helped us significantly in 2008 and again in 2009 - except in the months of March 09 and May 09 - where this strategy actually impacted performance negatively.

In our derivatives strategy, the basic underlying theme that we work on is we assume that the markets won't go up or down 15% a month.

WF: Would it be right for me to state that the derivative strategy helps you in range bound markets rather than rapidly moving markets ?

Naren: Yes, but what we have seen is, it does work even in markets where there is reasonable appreciation - so long as markets are moving up - but without a sharp spike like what we saw in May 09, this strategy works and contributes substantially to performance. The downside is that if we get a very sharp upmove like what we saw in May 09, performance gets impacted.

Rather than calling it range bound - I would say that when the market is actually taking off - in those markets I think the derivative strategies could hurt.

WF: Would it be reasonable to state that after seeing such a sharp rally in 2009, going forward, the probability of seeing another sharp take off is quite low?

Naren: Yes. We have a situation where the market cap to GDP ratio in India is higher than most other markets. Our market has been re-rated significantly in the last 5 years - and today if you study market cap to GDP basis, India is one of the costlier markets in the world.

So consequently my belief is that from here on, if the market cap to GDP is to get re-rated further, it will need a very substantial fiscal consolidation - much higher that what we have seen in the recent past. If that happens, you could still have a re-rating - because the growth is in India. And there is limited growth in others parts of the world, so if the Government manages to create very substantial increase in fiscal consolidation, particularly if we see the revenue deficit going down sharply, maybe there is a case for re-rating.

Likewise, if you have a situation where the entire oil subsidy is dismantled and the revenue deficit goes down I think there could be some scope for re-rating - otherwise, prospects for another re-rating are remote.

If we have normal economic policies, market cap should move up in line with nominal GDP growth - 12% to 15% range. I will not be worried about a fund like Dynamic in such markets. It will only underperform if you have a very sharp rally due to some rerating triggers.

WF: Given that you have a sizeable position in defensives like pharma and consumer and you have a 15% + cash position, would it be correct to surmise that you are cautious about markets at these levels?

Naren: Yes, it is a function of the valuation. We believe that we are at the higher end of fair value. Just today, I got some data from my colleague on how the market has changed in the last one year. Most of the stocks which have done badly in the last one year are conservative stocks and telecom stocks. Which is why if you see our weightage in these sectors, they are much higher now.

WF: You are very valuations focused in this fund?

Naren: We look at relative undervaluation as one of the important parameters in this fund. When large segments of the market are significantly undervalued, perhaps our more aggressive funds will be more useful. But,in all other periods of time it makes sense actually to stay with funds like Dynamic. Because today, you will agree that mid-caps are really not undervalued relatively to large caps. And market valuations are not very cheap. So in my opinion, Dynamic is the best positioned in the current market situation.

WF: Banks are now among your top 5 sectoral holdings. There are some noises in the market about rising NPA's on one hand and treasury impact on hardening yields on the other hand. Is that something that worries you ?

Naren: That is an interesting part. If you go back 4-6 months to September-October, our banking weightage was sigficantly below benchmark. That time, no concerns were being expressed in the market about banks. We added to our bank holdings in February. Because in February what happened is inflation worry came up in the market and these stocks fell substantially relative to other sectors.

Our approach always is that because this is a conservative equity fund, we have to always look for opportunities where we can buy something cheap. Like if you see our portfolio in the month of February, we have bought some banks really cheap. In fact you should see the month on month portfolio change in the month of February - it is very interesting - you will see that we have bought stocks which have fallen substantially. When there is some negative newsflow on a sector and people are frightened and absolute valuations are reasonable, we will increase our weightage then.

WF: Is it fair for me to say that you follow a contrarian style in Dynamic? You also picked up telecom stocks when they were beaten badly in the market.

Naren: I don't think Dynamic is a contra fund - because we look at relative valuations in stocks and sectors we pick - not necessarily looking only at what the market is ignoring. If we find relative valuations attractive, we buy. We had a substantial position in Infosys for example - that's not contra.

In this fund, we focus on a conservative strategy - buy stocks that are relatively inexpensive, adopt a derivatives strategy and have some room in terms of cash positions to safeguard against downsides in bad markets.

WF: One thing that clearly comes out is that momentum based stocks and themes are a clear no for Dynamic. Is that a fair statement?

Naren: Yes, certainly I would like to avoid momentum based stocks. This is a conservative equity fund and we will not chase momentum.

WF: Finally, many market participants are calling 2010 as a year of range bound markets - and are predicting a fairly wide range. Do you have any such numbers in mind for the market?

Naren: There are too many factors at play. My belief is after the last 3 years, I don't think there can be any projection of range. .I believe that the market is not cheap presently that for another re-rating to happen, we will need some substantial triggers. Substantial trigger you can get at this point of time is either fiscal consolidation of a high order or substantial de-control in oil sector or a sharp fall in crude prices.

If any of these three happen I could have to change my stand on the market and believe in a bigger opportunity. Another trigger could be a big monsoon - a superb monsoon.

So these are the 4 possible triggers to warrant a re-rating in the market. In my opinion, If revenue deficit decreases, it can lead to a drop in Sensex earnings. However, I would give a higher P/E to that Sensex. But if the oil price falls substantially, irrespective of whether Sensex earnings goes up or not, I would have a positive attitude. If monsoon improves maybe the risk free rate which we use to determine the market P/E will go down due to which possibly you can give a higher P/E.

So, I would focus more on likely triggers and possible outcomes rather than predict a range for the market.