In the second of the series of Smart Portfolios interviews, Sadanand Shetty, vice president, Kotak Securities talks about his investment ideas.
In Smart Portfolios, Shetty follows a mixed style of investing across market caps. He spoke with Rex Cano and Ram Prasad Sahu on how to build a sound portfolio in a volatile and challenging market, investment strategy and strong sectors going ahead.
What will be your investment style in Smart Portfolios?
In a volatile and challenging market like this, we will build the portfolio judiciously. Our style will reflect the underlying market environment. A high level of cash in the portfolio shows our cautious approach in building the portfolio at current market levels.
At the same time we will look at absolute return opportunities across market caps. We believe that there are opportunities even in challenging markets like this. A reasonable amount of portfolio reshuffling may be required to benefit from volatility.
What are the stocks or sectors one should look at in the market right now and what should the investment strategy be?
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Investment strategies are dependent on objectives of the portfolio. Invest in the companies those have visibility and sustained earnings growth.
In a volatile market like this, one should allocate equity assets into defensive secular growth companies. Bet on the managements with demonstrated track record. In a volatile market, it helps to diversify. Diversification not only reduces risk but also helps in optimising returns on a risk-adjusted basis.
How can one counter market volatility?
Cash plays an effective hedge to beat market volatility. Cash also gives an opportunity to enter the stocks at lower price points in volatile markets. Defensive stocks tend to be less volatile in such periods.
Healthcare and FMCG sectors have been the biggest outperformers since the market fell in early January. In many cases companies from these sectors have delivered absolute returns. One can avoid investing in over-owned sectors as volatility tends to be high. We are witnessing currently high volatility in banking and real estate sectors.
Would you prefer portfolio concentration or diversification?
Our past experiences show us that concentrated portfolios do well in secular bull markets where we see more number of stocks advance than decline. Diversification is a good hedge in volatile markets. It’s prudent to spread your risk across companies particularly in challenging markets like this.
We will have a well spread balanced portfolio that will straddle across 18 to 20 companies with diversified sector exposure. We will also have caps on exposure with respect to stocks and sectors within portfolio. Portfolio management is not about Twenty20 cricket match, it’s about five-day test matches.
Should one invest in interest rate sensitive sectors?
The general trend indicates that interest rates are peaking over the next quarter. As equity market tends to discount events ahead of time, investors can judiciously position their investments in these sectors.
Which sectors will do well in the next three or four years?
Sectors such as infrastructure, capital goods, domestic consumption that have led the Indian growth story will continue to play a dominant and meaningful role in the coming years. What we are also most excited about are the specific opportunities that we are witnessing in emerging industries.
For example, logistics, CNG, urban infrastructure, digital media, mobile value added services, agriculture and micro finance. One can play the upside of these industries through leaders of respective industries with demonstrated capabilities.
What’s an ideal time horizon for investments? When according to you is it time to churn?
Size, scale and growth of the businesses are built over a period of time. Stock prices reflect the underlying growth of those businesses. Churn is a function of price objective. If stock prices move above fair value of the business one can look at booking profits.
Churn also happens whenever the underlying assumption for the company goes wrong, thus limiting the scope for potential loss in the stock. Optimal returns in equities happen over longer periods of time.
What kind of returns do you expect? Where do you see the Sensex after a year?
Generally, the broad market (Sensex) reflects the performance of the underlying economy and corporate profitability. Our belief is that we will be better off after a year hence in terms of most economic and political parameters, whether it’s interest rate, inflation or corporate profitability. If corporate profits grow at 15 per cent during this period, the Sensex returns should be ahead of that.
What are the qualities of a good fund manager?
One of the most important qualities of a manager is the conviction to follow his or her investment strategy. Managers should stick to their knitting regardless of the state of the stock market or their mandate's short-term performance ranking.
A long history allows us to dissect the decisions the manager has made at different times to discern whether his thought process was consistent with stated philosophy.
Any particular strategy or suggestion for first-time investors?
The volatile and dynamic nature of today’s equity market has made investments a full time job. There are so many variables that are impacting the markets today.
Right from crude oil prices, inflation, interest rates and conflicts in West Asia. I really doubt if a first time investor has the capability and bandwidth to evaluate all these factors while investing unlike a professional portfolio manager would have. Investment is also about risk management.
What is the extent of risk a portfolio bears to get the defined return? Prudent portfolio management is also about optimal stock and sector allocation. An optimal portfolio return will include all these factors in portfolio construction. First time investors can explore the mutual fund or portfolio management schemes to start with.
What are the three most important attributes to look in a company before committing an investment?
The quality of management, the size of business opportunity and balance sheet strength remains the key factors. Investors should know how to value the businesses in different market cycles. In a liquidity driven bull market, even blue chips tend to tread at substantial premium to their fair value.
