Stay invested in companies that can deliver strong earnings recovery: ICICI Mutual Fund

Indian equity markets have turned volatile after scaling dizzy highs. Is it time for investors to restructure their portfolios? Anish Tawakley, senior fund manager, ICICI Prudential Mutual Fund gives his views on the markets, shares insights on asset allocation and highlights the risks associated with the nascent economic recovery. With over two decades of experience in equity markets, he is the guiding force for a team of investment analysts.

In a conversation with Vatsala Kamat, he talks about the business cycles in some of the sectors, his stock picking strategies and the different approaches taken in managing the asset management company’s Bluechip Fund and Business Cycle Fund.

Indian equity markets are rising, but there is heavy intermittent volatility lately. How do you read these events?
India seems well placed, when it comes to economy and policy. Rates are supporting fiscal policy. Real estate prices have corrected, paving the way for construction activity to restart, which is a big driver for the economy. Thus, corporate earnings are likely to rebound. We believe that one must stay invested in the earnings recovery theme right now, rather than on the multiple expansion theme. However, we must be mindful about fund flows. US bond yields are likely to rise, as the economy there is recovering well and the bond market is sure to price that in. Therefore, the idea is to stay invested in companies that can deliver strong earnings recovery.

How different are the investment strategies for the Bluechip Fund and the Business Cycle Fund?

The two schemes follow very different strategies. ICICI Prudential Bluechip Fund is a large-cap equity scheme that focuses on stocks in which the fund manager has high conviction. The investment universe is the top 100 stocks by market capitalisation. Here, we do not take big sector bets. The portfolio is aligned with the benchmark indices. Alpha creation is through stock selection.

The strategy is the opposite in the Business Cycle Fund. Being a thematic fund, which is flexi-cap in nature, sector selection is the primary driver for alpha creation. The portfolio will consist of three to five sectors within an overarching view of the stage of economic cycle. But, we diversify as much as possible within the sector.

Which sectors fit into your cyclical theme and how are they poised at this point in Indian markets?

While multiples are rich in the cyclical sectors now, earnings are depressed. In sectors such as capital goods, auto and corporate banks, earnings are depressed or at the cyclical bottom. For instance, in capital goods and corporate banks, the earnings trough looks to be deeper. But, in FMCG, margins are at cyclical peaks and multiples are high. So, margins will have to revert to the mean.

As a fund manager, what call do you take when you face such dizzy price-to-earnings (PE) multiples, with frontline stocks having rallied substantially?

In Bluechip, where the investment level is always above 90 percent, we do not take major cash calls. In any sector, large companies benefit from economies of scale. So, we believe it is better to opt for high-quality companies, even though the multiples tend to be rich. For any company to be a part of this portfolio, the following three requirements have to be met:
- Should be an industry leader or among the top two or three players in its industry
- Should have a track record of profitability
- Should have compounding potential

If I have Rs 10 lakh to invest now in equity markets, what are the options available?

We keep emphasizing the need for investors maintaining a balanced asset allocation towards both equities and debt, based on one’s risk profile and relative valuations of different asset classes.

In the present environment, the investor must create a portfolio with the aim of benefitting from fast-changing macros and to manage volatility. To begin with, invest in asset allocation schemes that help make the most in volatile market conditions. For those seeking to make equity allocation, the business cycle fund can be considered, as the fund has the ability to be aggressive or defensive, depending on where we are in an economic cycle.