Tata Mutual Fund’s Senior Equity Fund Manager Rupesh Patel believes that the economic recovery may still take six months. The slowdown in the overall economy has been a major concern for most of the sectors.
In a candid chat with Moneycontrol, Patel said, “the economic recovery could be one-two quarters away but the valuation range (of companies) is more palatable now after the corporate tax cut against long term averages.”
He further expects the core earnings growth to be at 10-12 percent over the two-three years, higher than the normalised nominal GDP growth of 9-10 percent.
On November 28, benchmark equity indices, BSE Sensex and NSE Nifty, scaled fresh all-time highs. The 30-share Sensex hit a fresh record high of 41,163.79, while the 50-share Nifty index touched a high of 12,138.
Speaking about the investment strategy in equity schemes, Patel said that, while the bellwether index had touched record highs, the fund house was seeing a disparity between the broader markets and the benchmark indices.
At such times, the fund house prefers adopting the Growth at Reasonable Price (GARP) investment strategy for making investments. Patel expects GARP to help yield above-average performance over the medium term.
So, while the fund house will target companies with a good runway for growth, they will also keep an eye on sectors or companies that are going through an earnings upgrade cycle.
Earnings upgrade provides the necessary valuation cushion in the investment framework. In addition, unlike deep value investing, the GARP philosophy focuses on the value segment only if there are visible catalysts for re-rating over the next 6-12 months.
The fund house recommends investors to continue with their investments in mutual funds with a medium to long term horizon.
Patel feels that the economic recovery may gain traction and markets will become more broad-based, and investors’ portfolios will start reflecting better traction in terms of returns.
On an average, Tata Mutual Fund’s equity schemes have 5-6 percent cash levels to meet the liquidity requirements.
Patel pointed out that sectors that would see large earnings upgrade would do well in the coming time.
Patel manages Tata Focused Equity Fund, which was launched recently and has the mandate to invest in a concentrated portfolio of up to 30 stocks. The fund's portfolio would include a mix of large-, mid- and small-cap stocks.
For this scheme, the fund house will be looking at investments in companies with a long runway for growth such as banks that will be benefiting from normalization of credit costs.
It will also look at select NBFCs, companies that are facing cyclical challenges and the ones that are well-placed structurally on account of their business model, healthy balance sheet and competent management team are examples of some of the pockets we are evaluating for constructing the portfolio.
When asked about the sectors that the fund manager will avoid investing in, Patel said, “Generally, we desist from investing in companies that have a history of capital mis-allocations or where we have discomfort with the management quality in general.”