We have to wait a little longer but there are companies at reasonable valuations
Taher Badshah of Invesco Asset Management (India), on how he formulates new investment ideas in the current market, how he manages the funds, stocks he’d avoid, and more
-k7S--621x414@LiveMint.jpg "Taher Badshah, chief investment officer-equities at Invesco Asset Management (India) Ltd")
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As equity markets keep soaring and inflows keep coming into equity mutual funds, fund managers are kept on their toes, constantly looking for new ideas to invest in. But are they finding new ideas in these markets? Mint spoke to Taher Badshah to find out as to what he is doing. Badshah, who joined the firm in January 2017 after heading the equities fund management at Motilal Oswal Asset Management Co Ltd for nearly six and half years, told us that his equity funds aren’t large (the firm’s largest equity fund is less than Rs700 crore) yet, as some of his competitors’, and so they are nimble enough.
When equity market appears to be over-heated, like in current times, do you get enough investment ideas?
Ideas are there. The final stumbling block is the valuations in many of these companies, some whose valuations have reached a point of no return. If somebody had taken a 2-year call a year back, that fund manager or analyst is now forced to take a 3-year or a 4-year call on that same company, to justify and make an investment case out of it. The margin of safety has gone down. But it’s okay; it’s just that the search for companies has become difficult.
The good part is that different kinds of businesses are showcasing themselves. Some of the older groups, for instance, have been trying to get their acts together and come back to relevance.
Also, not every sector or company is in high-valuation territory. If we can figure out such spaces, there could be contrarian opportunities. We have to just wait a little longer but there are still companies available at reasonable valuations. For others where valuations are high, you don’t have a choice but to wait for a correction. On an average, it is not very difficult to find 2-3 ideas a month.
At a time when investors are investing so much in equity funds, how much of a challenge is it to deploy? Is there enough depth in the market?
While fund managers have to deploy the money, it’s still better to hold cash a bit and not go on a blind chase. We can hold up to 10% cash; on an average, schemes are holding close to 3-4% cash at these levels. If situation arises, we can still increase our cash levels.
Fund’s size also matters. I recently saw a portfolio that has around 90 stocks and the largest holding itself was an underweight position (percentage holding of a stock in its portfolio is less than what it is in the scheme’s benchmark index). After the 10th position in that same fund, all stocks’ holdings were less than 1%. In some schemes, where there are significant flows, this is the outcome. In other funds where there are inflows, those funds focus everything at around 20-25 stocks, though this variety is a small population.
We have taken a slightly middle ground. We are not very concentrated, not overly diversified. We hold around 20-42 stocks in our portfolios; say 30 stocks on an average per portfolio.
If I have to generate, say, 7-10 new ideas a year, it is not such a big challenge. Some of these ideas can also be replicated in other schemes. I don’t need to come up with new ideas separately for all portfolios. We have about 10 strategies and our investment universe has around 135 stocks. Taking an average of 30 stocks per fund, we should be managing 300 stocks across all portfolios. But we are currently holding 135 stocks. So, there is a fairly decent bit of overlap.
Which pockets are overvalued in these markets, that as a fund manager you would want to stay away?
It’s more stock-specific than sector-specific. There are very few sectors that are outright cheap. There are some sectors wherein a few stocks are cheap, while many others are expensive and then there are those spaces where probably most stocks are expensive.
Look at the automobile sector. The large-cap companies are available at a fairly decent valuation but the mid-caps have become pretty expensive. Mid-cap companies like Eicher Motors Ltd, Ashok Leyland Ltd, Escorts Ltd; some of them are available at about 15% premium to the large-cap companies like Tata Motors Ltd or Hero MotoCorp Ltd or Bajaj Auto Ltd. Except, of course, Maruti Suzuki India Ltd, which is a large-cap company and is getting valuations similar to some of the mid-cap companies in that sector. By and large, the mid-cap companies in auto sector have become more expensive.
Take the oil and gas sector. Utility companies like Petronet LNG Ltd / Indraprastha Gas Ltd have become a little more expensive than some of the downstream oil marketing firms. They have a growth element that is a little more sustainable and that is why their valuations have gone up.
The consumer discretionary space is quite expensive, like consumer durables. Companies like Whirlpool Corp. and Voltas Ltd have decent longevity and are well-positioned and may merit such high valuations, but then there is the sub-segment of building materials, for example, which appears quite overvalued. Most companies in the fast-moving consumer goods space have become expensive with their price-earnings (P-E) multiples at 40 times. But I don’t see their earnings growth to be as strong as before.
If I buy a company at, say, a 40 times price-earnings ratio, its earnings growth should be at least 15-20%. But, at current market levels of such companies that come with a 40 times price-earnings ratio, they offer less than 10% earnings growth from these levels.
Private-sector banks, too, are not necessarily cheap, as is a large part of non-banking finance companies.
But most fund houses hold banks at around 30-35% weightages in their portfolios because their benchmark indices also hold as much. So, can you hold underweight positions in sectors if you think banks are expensive?
I can own sector underweights, but we don’t own any underweight position in any stock. As a matter of strategy, if any of our own schemes own 30 stocks, each and every position has to be an overweight. Otherwise, we do not buy a stock; in that fund at least. For instance, if I like ICICI Bank Ltd, but in the benchmark index, ICICI Bank has a 7-8% weightage, then I must buy at least 7% of ICICI Bank Ltd.
Hypothetically, if I feel that corporate banks are doing well, instead for buying ICICI Bank, which is 7% in the index, I might buy an Axis Bank Ltd or Yes Bank Ltd and hold the same at about 5% of my fund’s corpus, as against the 2-3% weight it has in the index. It helps me generate some alpha. An underweight position in a stock doesn’t help me in generating an alpha.
You manage a contra fund, called Invesco India Contra Fund (IICF). Since we talked about valuations and how you have been searching for decently valued companies in these markets, as opposed to going for highly-valued ones, is the gap between your diversified funds and IICF narrowing? Or can IICF still follow a contrarian strategy and your diversified funds retaining their own identities?
Our diversified funds’ portfolios follow a growth-oriented strategy. The average valuations of our diversified equity funds would be in line with those of the broad indices. If the markets’ P-E multiple is 20, then our portfolios’ multiple would be around 21-22 times roughly. Some of the holdings might be at higher P-E multiples, but those are challenges that come with the current market levels.
The IICF is, by itself, cheaper than the market, although the gap has narrowed in the last 1 year. In this fund, we don’t necessarily buy shares of companies that are absolutely cheap, but we do avoid those that are expensive.
What is your advice for investors, whose systematic investment plans (SIP) are going on, at the moment?
Don’t stop or cut your SIP right now. You may want to go slow on your lump sum allocations, if at all. This is a healthy bull market, but not a frothy one. Maybe, some areas have turned frothy, but certainly not everything. We have not reached those proportions. Nor are we at a stage where we foresee an economic crisis in near future.
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