The Hindu Business Line : `The diversified strategy has worked quite well'

Mr Sandeep Kothari manages Fidelity Equity and Fidelity Tax Advantage, among the top performing funds over the past year. In an interview with Business Line, he takes us through the research process at Fidelity International.

Could you take us through the investment process at Fidelity? How big is your research team?

We have six analysts based out of Mumbai. We have three in Hong Kong, who are regional analysts but also track Indian sectors. We have 12 sector specialists in Delhi out of which two are dedicated to India. These are support analysts who help us build models, do some preliminary work on companies etc. And we have access to the global research.

Each analyst is given a few sectors and they build up models. We meet management, distributors, competitors, understand the valuation framework of how that industry should work, (assess) what is the benchmarking, what margins these companies make, balance sheet strengths, how should we value these companies. How have they been valued in the past, and if it is to be different in the future what is the upside/downside risk/ reward for the company. Is it better compared to the rest?

Ultimately it is the portfolio manager's call. The analyst's job is to recommend. We keep meeting companies. We have wonderful people at Delhi who have become extremely good at building models, doing the basic groundwork, going through transcripts of conference calls, etc. We have a huge library at Hong Kong, where we have access to international broking, sell- side research, company presentations and so on. We collate data, go meet the company and keep updating.

How many stocks would typically be in your coverage universe?

We would have modelled more than 350 companies. We actively update maybe 200. We are constantly looking for ideas, what makes sense, what does not, what we should continue to cover- maybe it is a bad time for the cycle, but the opportunity could arise sometime. So once we notice something, we have a model ready.

We are not building the wheel from scratch and it becomes easy. There are 5,000 companies and so many new sectors. It is how smartly you can work given the resources and we think through where we should focus our energies and where we should not, because we cannot track 5,000 companies.

Your portfolios have a large-cap bias although you follow flexi-cap, unrestricted investment strategy. Have you consciously favoured large-caps?

It all depends upon that point in time. If in a volatile market, I have a large-cap that is liquid and gives me a 25 per cent return, I will choose that stock versus a mid-cap that could give 35 per cent return. But if a mid-cap stock can give me 100 per cent return, I am willing to take that liquidity risk and am prepared to lose even 20 per cent.

It is not just about volatile markets. It is a much easier decision to choose a stock that gives similar returns without the liquidity risk.

Your portfolios are quite diversified with about 70-80 stocks. But some fund managers contend that focused bets on 6-7 stocks drive strong outperformance. What is your view on this?

It depends upon the mandate of the fund. Ours is a diversified portfolio. If you look at our funds, you will not see a significant sector bet. But within each sector you might see certain stock- specific bets.

What one is trying to weigh is the risk-return trade-off and that is a function of the market as well. The market has been volatile. So the diversified strategy has worked well.

If tomorrow, there are some high conviction ideas, one might be willing to take a bet and go 6-8 per cent, yes. But the mandate of the portfolio is that it should be diversified and 60-80 stocks are what one is comfortable with.

Constructing a portfolio is a work in progress. We may like a stock but there may be no liquidity.

Or you may buy a stock and it runs up, but you do not sell and buy it back because you want to build a position; there might be market volatility, which could allow you to buy more (at lower levels). So sometimes you might see that tail building there.

The core of the portfolio, which is going to deliver performance, is those 60-75 stocks. But there is no constraint mentally on taking a bet above 5 per cent. It is just looking at the availability of ideas, market scenario and the mandate of the portfolio.

More Stories on : Interview | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page