Cash calls don't add value if you're bullish for long-term: Anup Maheshwari

Small caps underperformed large caps last year hence they are a bit more attractive this time. But investors should prefer flexi cap schemes as they give complete control in the hands of fund managers to shift investments across market caps based on the market situation, says Anup Maheshwari, Co-Founder & CIO, IIFL Asset Management in an interview with Abhishek Kumar. Edited excerpts:

Q4 earnings have started to come in. What initial trend are you seeing?

There is no particular trend as such. The cyclicality in earnings of certain businesses makes it difficult to gauge the overall direction. Information Technology (IT), which has a 12 per cent weight in the index, has had a poor start and the sector is seeing downgrades. On the other hand, financials, which have 32 per cent weight, seem steady. They continue to see good growth and there is no concern on the asset quality side. 
 

Have you made any strategic shift in your fund portfolios? What is the cash position in schemes?

We don't hold cash. If you are fundamentally positive in the long run, then holding cash doesn't really add much value. What matters is where you are invested in. At the sectoral level, we are marginally overweight on financials and underweight on IT. Pharma is one sector that interests us since the valuations are attractive. Unfortunately, there is no obvious reason to own pharma as yet, as the sector is plagued by pricing challenges faced by these companies, particularly in the US. Industrials, as a sector, are positive, but valuations are very rich. Consumer discretionary has underperformed massively and there could be good ideas in that space. Staples, we’ve been underweight only because of valuations though there are some good companies here. Beyond that, stock selection has been very company-specific. There are ideas out there and the key is to identify good companies that are going through a slightly rough patch. 

Small cap funds were investors’ favourite last year. Is there comparatively higher value in the small cap space?

Given the small caps’ underperformance vis-a-vis large caps last year, they are at a slightly better position valuation wise. But, it's not like they are available at a deep discount. It is also true that in small caps there is always a scope to find interesting ideas at the right valuations. However, right now investors should prefer flexi cap schemes, given that fund managers have the flexibility to invest in the right companies, irrespective of the market capitalisation. Having said that, small cap funds do have their own merits and they make sense when the investor has a longer investment horizon.

Do you see debt AIFs benefiting from the change in debt MF taxation? And, are you looking at a new tax efficient lower risk product on the MF side?

The change in debt MF taxation is definitely a positive for AIFs. They are now at an equal footing from the taxation point of view. Structured credit business is expected to grow quite rapidly. Coming to the launch of new products on the MF side, since we have limited MF offerings, the categories are open for us to design new products. We are planning a differentiated product on the hybrid side.

What is your stock selection process?

The selection is based on two key parameters - return on equity (ROE) and the earnings growth. Companies that have consistently delivered ROE and earnings growth of over 15 per cent are in the top quadrant (secular) and ones that consistently fail to do so fall in the lowest quadrant which are value traps.

Stocks are segregated into two more pockets-defensives and cyclicals. Exposure to these stocks keeps rotating depending on the economic condition. We maintain an overweight position in 'secular' stocks. This allows us to capture long-term secular themes.