WF: Its not often that a fund manager gets to cast a fresh portfolio for a maiden equity fund of an AMC - with no baggage at all - and have a substantial amount of cash to do so. You are in that enviable situation, after the successful launch of the Axis Equity Fund - with over Rs. 900 crores in fresh cash to invest. What are the key considerations that played in your mind when you began casting the first portfolio of Axis Equity Fund?

Chandresh: Let me start with the thoughts we took to the market when we launched this product. There were three things in terms of the macro environment that we talked about.

Strong macro story

If you look at the last 10 to 12 years there were ups and downs but typically the economy has been going quiet well. I think what changed from 2004-2005 to 2007-2008 was a kind of belief in the growth trajectory of the economy. Back in 2003, nobody would make projections of an 8% to 9% GDP growth for India - today, that is what the market expects from India.

Yes, we've had a slowdown in 2008 - but we will still see a number of 7% + for 2009 and by 2011, we should be back to the 8.5% to 9% p.a. GDP growth levels. Global money will flow to higher growth markets - which will help finance our growth. Even if we don't have any dramatic reforms thrust, but improvements at the margin, we will still be able to maintain a strong economic growth environment. So, a strong growth environment over the next 3-5 years is what we see for India.

Micro story able to harness the macro opportunity

On the micro side there are enough listed companies in the country they will benefit from this growth. If you look at 2004-2008 period when the economy was growing well, these companies were growing compounded for 4 years period upwards of 25 to 28 %. We are therefore very comfortable projecting an earnings growth for the corporate sector at maybe 20% for next 4 to 5 years.

Demand and supply for equity

The third piece of the action is the demand and supply for equity itself. A high savings rate and low interest rates enables money to come into equity markets. Insurance companies are now becoming a big set of institutional players. Domestic institutions today invest around $ 20-25 Bn into equity markets - that figure can go up to US$ 50-60 Bn over the next 3 years.

Then you have the FIIs - who can match these amounts easily. Money will flow to higher growth markets - and India will be up there in rankings. The total amount of money that can flow into Indian equity markets is therefore large and likely to grow substantially.

The equity story in India is one therefore where you have a robust macro picture, a strong micro environment to harness the macro opportunity and sufficient money flows to buy into this story.

Capturing this opportunity in the portfolio

There are a few sectors and themes that clearly stand out.

We are all familiar with the consumption story. But, if you look a little closely, you will see that while agriculture has been growing by 2% to 3%, rural farmer incomes have been growing by 15% p.a over the last few years. This is what is propelling rural consumption demand - and will continue for a long time. Already, in a number of consumer products and consumer durables segments, rural demand is growing faster than urban demand.

The financial sector also holds tremendous long term potential. Consumer loans, which is around 10% of GDP should grow to 50% - 60% of GDP in the next 10-15 years. Coupled with that, if you look at financing the infrastructure build out, there is significant growth potential for the financial sector in India. We can comfortably look at a 20% plus growth for this sector over the next 4-5 years.

Health care is another sector which has very strong long term growth potential.

Within infrastructure, we look for companies that own infrastructure. That is a more sustainable business with competitive strengths, where you can manage the execution process. It is quite possible to look for a 20% to 25% ROI over long periods of time in such projects. That helps create value.

Another key theme - which went to the back burner after the financial meltdown - is companies that are expanding overseas through acquisitions. This will be a big growth driver for a number of companies - and we will see more activity on this front picking up going forward.

We are building a core portfolio - and want to own stocks which will grow at a good pace for a long period of time. We are a completely bottom up house and look at ourselves as private equity investors in the companies we buy. We look at opportunities over at least a 20 to 24 month horizon.

Risk is as important as returns

Apart from the normal objectives for a fund which is to provide capital appreciation, I think one thing that distinguishes us is we have risk targets as well. Provide capital appreciation by taking what kind of risk? From our perspective, risk goes hand in hand with return and there is no point saying that I am going to target this kind of a return unless and until you clearly state what kind of risk you are going to take to do that. What it means is what is the volatility profile - the volatility of the portfolio which the investors can expect to see. We quantify our volatility targets and manage portfolios to stay within our vol targets. Our vol targets are less than the market - so we will take very large size bets.

WF: Are you presently leaning more towards large-caps or mid-caps?

Chandresh: The Axis Equity Fund is a multicap fund. Large caps will be around 70% to 80% and the balance 20% to 30% will be mid-caps.

WF: In terms of diversification, do you have any particular guidelines on stock and sector limits or do you go by the regulatory norm?

Chandresh: We are going by the regulatory norm i.e. 10%. We are building a portfolio of around 30 to 40 stocks. We will have 15-20 large cap stocks that will account for 70-75% of the portfolio and another 15-20 mid-cap stocks which will account for around 25-30% of the portfolio.

Apart from this, we have sector limits. A single sector cannot cross 25% of the portfolio and we must have a minimum of 4 sectors represented in the portfolio - and these must be un-correlated sectors.

WF: How much of the cash have you deployed already and when will you complete casting the portfolio? What is your philosophy about managing cash in the equity portfolio?

Chandresh: About 50% or so is deployed. We will complete the process over a two month period - so another month to go by the time we complete at least 80% of the deployment.

As regards managing the cash levels, actually we don't look at cash - we look at the exposure. We would like to look at the beta adjusted exposure. You can have a 30%, 40% or 50% mid cap exposure which gives you equivalent to 100% exposure in large caps. So internally what we focus on is the amount of risk that we take. As I said we do have these vol targets so there will be a situation wherein I am only 85 to 90% invested but hitting my vol target because of my mid cap exposure.

WF: How actively do you plan to use the F&O segment?

Chandresh: I think there are opportunities in the F&O market, especially the options market. If the F & O market offers good opportunities to execute some of the strategies, should the need arise - we are geared to do that. Also we will look at yield enhancement in the portfolio though this segment - though it will be only at the margin and not a main stream strategy.

WF: You have talked about the long term bull market case. However, many advisors and investors have near term fears of an imminent correction - which has not yet materialized - but has yet driven many investors to redeem their equity fund holdings. How do you see the near term outlook?

Chandresh: I think what you are saying is absolutely right, people are worried. You have to be watchful about near term movements. Corrections are part of any market - this time also corrections will happen. We don't know at what level it will begin and how far it will go - but these are bound to happen.

The issue is - because of this expected correction whenever it happens you kind of get frightened about the market. Is that the right strategy? No. When compared to any other financial investment form, if you stay away from the market and somehow you are not able to enter into the market over the next 3 to 5 years the difference in wealth creation can be substantial.

So I think volatility is the price we probably will have to pay to be able to earn the 15% to 17% compounded returns which equities should give in the next 5 years.