DSP BlackRock Top 100 gave a tepid performance in 2010 compared with some of its leading peers. Why?
It suffered largely on account of three factors. First, large-cap stocks did not perform as well as mid-cap scrips. Second, our definition of large-cap is stricter. We restrict ourselves to top 100 scrips by market capitalization. Most of our peers have a liberal definition of large-cap stocks that allow them a broader variety of stocks. Third, we were late in reacting to a change in market trend in 2009 (the scheme did not deploy cash in time when markets shot up). That was the major difference; its effects remain because in three months markets moved so rapidly, we lost about 24% of the performance vis-a-vis our benchmark. Now, we have regained.
How do you track small-sized companies in which your micro-cap fund invests?
As per definition, micro-cap firms are those that are below the top 300 as per market capitalization. The smaller the firm, higher the risk. That’s where the fund management experience comes in. We keep a track of the company’s management and are generally conservative about new management, allowing them some time to build their reputation.
Any instance where you exercised your discretion despite attractive numbers?
At one point in time, we were bullish on the education space. Over time, we realized that the business became very tender-driven, because government schools were trying to get low-cost education material through tenders. Competition went up and margins got affected. Then we found out that there were certain risks in accounting practices followed by one such company (in which we had an exposure). So, we exited the space.
Recently some scams came to light in the finance sector. We had some exposure but we were unaware that an inquiry would be ordered into them. We exited when we found out.
What is the future of infrastructure funds? They didn’t do well last year.
We are positive on the infrastructure sector because of India’s long-term growth story. The consumption story (as is the case now) can’t go on without the investment story (which leads to infrastructure). Growth led by consumption, without investment, will lead India to import heavily and this leads to structural problems in the economy. It also leads to inflation.
For a few reasons, the momentum in investments that we saw between 2004 and 2007 (where investments were major driver of India’s gross domestic product) is missing. We are now seeing consumption as a major driver.
Do you see infrastructure funds improving in 2011?
People are still recovering from the shock of 2008. A large section of investment community is in dilemma as to whether this is the right time to add capacity given uncertainties in the global economy. Also, clarity is required in government policies, especially on the environment front. The government is trying to balance environmental concerns with business concerns. That has led to some slow down. Difficulties in land acquisition as well as rise in land prices have stalled projects. India also needs a proper mining policy. Once these laws are enacted, we will see things getting back to shape.
Your concerns for 2011?
Risks have gone up. Inflation remains a worry on account of high oil and metal prices and also food inflation. High inflation can threaten consumption and hurt margins of companies because input costs tend to go up. A high turnover can be blunted by high margins.
The political scene is also a concern in view of recent scams. Then, the European situation deteriorated in the second half of 2010. More and more countries seem to be unable to repay their obligations. While the government is printing money and stabilizing things, we don’t know how long this can continue.
Have you positioned your portfolio accordingly?
It would be a healthy mix of cyclical stocks and those that are structurally good and defensive. We are overweight on consumption and positive on investment theme. We prefer companies that are capital goods providers (Siemens, ABB, Areva, Thermax, Alston, etc) rather than infrastructure owners (GVK, GMR, Reliance Infra, etc). We also like information technology, metals and commodities. We are bullish on the agriculture space. Food inflation is a structural issue and therefore the government’s focus will be on agriculture productivity to tackle inflation. At the same time, purchasing power of rural areas has also improved.
Kayezad E. Adajania