‘We are seeing better prospects for IT sector’

“We look for a confluence of superior growth and valuations and rarely limit ourselvesby hard metrics such as price-earnings ratio,” says Swanand Kelkar, Co-Manager, Morgan Stanley Growth Fund , sharing his views on the markets and investment philosophy. Excerpts:

How is Morgan Stanley Growth Fund different from other large-cap funds?

MSGF is a large-cap-oriented fund and is benchmarked against the S&P BSE 100. We have internally defined that at least 80 per cent of the stocks in the portfolio should have a market capitalisation in excess of the smallest market cap stock in BSE 100.

The non-index names that we own would generally be secular stories that we like and have some uniqueness that cannot be replicated by a large-cap stock. For instance, we are positive on regional print media and the largest stock in that space happens to be a mid-cap and so we own it in the portfolio despite not being part of our benchmark. Thus, the fund has core large-cap holdings with some non-index stocks within pre-defined limits.

Are you a value investor?

We define our style as growth investing. We look for a confluence of superior growth, valuations that do not fully capture the growth potential and high quality management teams. We rarely limit ourselves with hard metrics, such as not buying a stock over a certain P/E but what we look for is under-appreciated growth, and in our experience, if you get the earnings upgrade cycle right, a P/E re-rating follows.

Do you churn your portfolio more than peers? What is the average investment horizon for stocks you buy?

We cannot comment on peer’s churn ratios but we have a portfolio turnover of 0.68 as on July 31. We believe this is quite low and is in line with the investment horizon of 12-18 months. I must add that this does not mean that we don’t hold stocks more than 18 months. We have held stocks for much longer durations but 12-18 months is the initial horizon that we consider while investing in a stock.

MSGF has been underweight on consumer stocks and marginally overweight on healthcare. Are you comfortable in betting on cyclical themes at this point in time?

The consumer staples underweight is due to the philosophy mentioned above. We are not able to find enough stocks where earnings trajectory could improve materially versus what the market expects. In that context, the high valuations are difficult to justify for us. Many healthcare stocks, on the other hand, have a superior growth profile and are likely to deliver positive earnings surprises. Hence, despite punchy valuations, we opt to continue our long-standing overweight.

When evaluating cyclical sectors, we like to look for lead indicators or evidence of growth inflections, rather than basing our investment rationale on just hope of the cycle turning around. While we are staying away from public sector banks, industrials and materials, we are seeing some encouraging signs in the consumer discretionary space.

What are the sectors that appear most promising from a one- to two-year perspective?

We are part of the Global Emerging Markets Team and receive valuable macro inputs from our colleagues across the globe. From what we hear from them and also from management commentaries, we are seeing better prospects for IT especially on the enterprise spending side. Also, I think things are looking better for telecom. There are many things at work there: traffic growth is strong, competition is cooling off and data usage is going up. So, from a one- to two-year perspective, IT and telecom appear to be the most promising.

Which sectors, in your opinion, are more vulnerable to earnings downgrades in the medium term?

The supply side of the economy has remained hamstrung for quite a while now. We are seeing no signs of pick-up on the private capital expenditure side while efforts to kick-start infrastructure projects can, at best, be termed a mixed bag. We feel that stocks and sectors leveraged to this part of the economy can see strains. We are also quite worried on companies that have high leverage on their balance sheets, especially, if liquidity were to tighten further. Banks with exposures to such corporates could face some collateral damage.

What is your take on corporate profits? Have they bottomed out?

While the outlook for overall corporate earnings may not be too heartening, given the macro-economic headwinds, as investors, we are looking for pockets of resilience and strength.

The broad index performance, as well as overall market earnings, masks the sharp divergence that lies underneath and there are companies and sectors that are steadily compounding growth while others languish. It might sound like a truism, but the skill is to be on the right side of growth inflections within a broad trend that might seem insipid.

> nalinakanthi.v@thehindu.co.in

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