Our focus is on the high-quality part of the market towards our deliverable of preservation of capital, and thus we were able to avoid all of these stocks, Prateek Agrawal, Business Head & CIO, ASK Investment Managers, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpt:
ASK India Select portfolio with an AUM of nearly Rs 4000 cr outperformed Nifty50 in 2019 despite global and domestic headwinds. ASK IEP with an AUM of more than 10,000 cr also gave more than 12% return in the same period. How did you manage to outperform in an uncertain market in 2019?
At ASK we focus on high-quality businesses that have good growth potential. In calendar 2019, with the uncertainty on growth and with strong reform momentum, we saw larger, richer and more compliant businesses do better than others.
Our natural investing style was thus well suited for the kind of market we saw in 2019. The year also saw a cut in a corporate tax cut in the month of September 2019.
We had expected it to happen over a longer period of time as indicated by the Finance Minister and were pleasantly surprised. Our portfolios, which comprise mostly full tax-paying firms, benefitted from tax cuts and that aided our outperformance.
In terms of big sector calls, we spotted the opportunity in Indian Life and the general Insurance space and the mutual fund (MF) space. We took exposure early in these spaces. This was one of the best performing space of last year and helped us get ‘Alpha’.
We have a strong focus on the high-quality part of the market towards our deliverable of preservation of capital, and thus we were able to avoid all of these stocks. In fact, these stocks were not even part of our universe. Avoiding mistakes did lead to better overall performance for our clients.
Q) What are your expectations from the Budget 2020 with respect to the PMS industry, markets?
A) In FY20 there has been an economic slowdown and tax collections have been soft. Disinvestments have also been significantly lower than the target.
It is probable that we start FY21 with a fiscal deficit of close to 4 percent and with an economy that is just beginning to recover. In this backdrop, we do expect that the fiscal deficit target for FY21 would remain higher than 3.5 percent.
Given the economic slowdown, this level of the deficit should be accepted by the financial markets. While the deficit percentage would be high, we do expect the government to cut personal tax rates after the cut in corporate tax rates.
The lowering of personal taxes would improve household savings. This should also help consumption and industries like automobiles and real estate which have a great multiplier effect on the economy and are currently not in a good state while these sectors have been helped from lower interest rate environments.
Over a period of time, we have seen markets develop for infrastructure assets. Sale of toll roads through INVITS is now a success story. Given the stress in government finances, we do expect the BOT mode of financing to come back.
This would seem to be much less risky as compared to last time and could prove to be a win-win. We do expect that the Budget would indicate infrastructure development with a reintroduction of the BOT model.
The PMS industry/AIF industry would get a boost if taxation for the AIFs is clarified. Any reduction in capital gains tax for the HNIs would benefit the capital market industry and its participants.
This would also aid buoyancy in the capital markets and would help asset managers both MFs and Life insurance companies. It would also enable higher equity raise and reduce the stress on corporate India and spur growth.
It may help the government raise money through disinvestment at better valuations. The stock market valuations are important for India.
We are a current account deficit country and have to sell assets continuously to foreigners (FDI or FII) to fund the deficit (or borrow).
Lower taxation of capital markets assist in building up risk capital in the country which is necessary as India is a poor country and needs to build itself up in a sustainable manner.
The amount of tax collected under capital gains taxation, both short and long term is not very large and we should look in the merit of keeping the tax vs the benefits derived from not having it.
What is the target you are penciling in for markets for 2020?
Valuations in the Indian market are not cheap. Earnings growth though should pick up as we go deeper into the year, aided by the gradual recovery of the economy and the low base effect. Margins of India Inc. should be expected to bounce back.
Tax rates have been reduced and better transmission of lower interest rates seems possible. As growth in the economy picks up, we do expect operating profit margins to improve as well.
Assuming some correction in valuations and improvement in growth scenario as we progress during the year, we do expect large-cap indices to deliver returns in the range of 10-15 percent.
Returns would be aided by strong FII flows on higher India weightage in the global indices as FII limits have been opened up by merging of FII and FDI and NRI limits.
Which are the sectors that are likely to hog the limelight in 2020?
We do expect the sectors that performed well in 2019 to continue to do well in 2020 with some valuation corrections. We are particularly positive on the financial sector.
Businesses with fixed-rate loans should benefit strongly from lower interest rates. Strong growth in surviving entities among new private sector banks, microfinance institutions, consumer durable loans, gold and personal loan NBFCs and from insurance companies (helped with low penetration) should aid strong performance.
Among new sectors, we do expect pharmaceuticals to deliver better performance. The story here has changed to favour companies deriving a larger part of their profits from the domestic business. Some of the MNC pharma companies are bringing in patented molecules in the listed companies. This is positive.
In the real estate market once again, like the NBFC space, the survivors may see strong traction in sales aided by limited choice with the home buyer and lower interest rates.
We continue to remain negative on the CV space in autos where numbers could remain stressed on account of an increase in prices.
As a fund manager, how do you pick and choose stocks for investment?
Our key deliverable to our clients is the preservation of capital and growth of capital. Towards this objective, we invest in high-quality businesses that are able to deliver compounded growth over a period of time.
Our key belief is that as a company compounds its earnings/ cash flows, the value of the business is increasing which the market would price in over a period of time. This thought has been converted into a well-defined filtration process.
We typically focus on businesses with good management and with over 20 percent business ROCE, and with a potential to grow over 15 percent compounded over the next few years.
We keep being with the business till the growth story continues and valuations are justifiable. In the event of an issue on growth, we do try and see if the issue is of a temporary nature or is more permanent and then decide accordingly.
2020 also marks an end to the decade, and you have been there in the business for almost the same period. How has the journey been?
In the PMS industry, we have done well. From around Rs 1,200 cr of assets under management/ advisory at the beginning of the decade, we are now managing/ advising close to Rs 25,000 cr of assets.
We are probably the only exponent of team-based investing in India which we believe is important to minimise mistakes in a concentrated portfolio.
We have formulated filters to aid the investment team and keep the discipline of investing. Moreover, we have an independent risk process to monitor portfolio risk, liquidity risk and ensuring compliance with what we have communicated to the IC.
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