Excerpts from the interview:

JM Hi Fi Fund’s performance has picked up pace over the past six months, outperforming the bellwether indices. What’s behind this performance?

JM Hi Fi Fund focuses on the housing, infrastructure and financial services sectors. These sectors underperformed during the early part of 2007 because of interest rate concerns, in general, and, more specifically, following some changes announced in the Budget for the construction sector. However, over the past six months, we have seen interest rate concerns receding, as a result of which these sectors started outperforming.

We followed a strategy of picking companies where growth visibility was strong and valuations reasonable; more importantly, we held on or added stocks from these sectors even when they were out of favour. Our conviction and stock picks helped the portfolio outperform.

Despite being a theme fund focused on housing and infrastructure, JM Hi Fi actually has a very diversified portfolio with exposure to sectors such as capital goods, cement, steel and construction, with a relatively low exposure to pure realty plays. In fact, leading stocks in the space such as DLF, Unitech etc do not figure in the recent portfolio. Any specific reason for this?

As mentioned, the universe for JM Hi Fi Fund is fairly diversified and comprises infrastructure, housing and financial services. Our strategy of picking stocks is based on the growth and valuations. There is no fixed percentage of the portfolio to be allocated to a particular sector; the allocation to these sectors is done on a dynamic basis depending on the growth prospects and relative attractiveness.

Realty stocks have been strongly re-rated over the past month. What are the factors that contributed to this re-rating? In your view, are current valuations for leading players justified?

Realty, housing and financial services sectors are interest rate-sensitive sectors. These sectors have been re-rated primarily on expectations that interest rates have peaked. Also, for realty companies, the positive factor has been the stability in the real estate prices (+/-10-15 per cent) when most people expected a crash in prices across the country. This has helped the re-rating process.

We believe that, as interest rates come down, the real estate sector will do well and as the economy grows at 9 per cent plus, the demand for real-estate will continue to be buoyant. Sector fundamentals have also changed positively over the past year, with more institutional and banking money flowing in, increased presence of organised players, emergence of pan-India companies and FDI flows into real-estate. We are optimistic on the prospects of the real-estate sector in the long term.

How are infrastructure/real-estate companies addressing their fund requirements after the recent controls on overseas fund raising?

The capital requirement of the sector will continue to be high given strong growth opportunities. A buoyant capital market means that fund requirements are met by way of equity, quasi-equity and debt from all classes of investors — private equity funds, institutional funds and real-estate funds.

Since the fund’s focus is on rate-sensitive sectors, what is your view on interest rates in the domestic context. It appears that interest rates may be on hold for some time to come, but will they really decline? If so, when?

The RBI is close to the end of a interest rate tightening cycle; it may hike the short-term benchmark rates by another 25 basis points from the present levels and they are likely to remain on hold for some time thereafter.

The central bank’s focus has shifted from growth to targeting inflation and liquidity management. Domestic interest rates are likely to stabilise and remain range-bound over the coming months on the back of mixed economic data. However, interest rates should start declining from the beginning of the next fiscal.

JM Hi Fi has consistently been high on cash (12-15 per cent debt/cash in recent months). Is this on account of concerns about market valuations?

The momentum of the current rally has been very strong. We have booked profits in some of our positions; we will deploy the cash as and when the stocks in our watch list are at comfortable valuations.

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