Amit Ganatra, Fund Manager, Invesco Mutual Fund
, has over 14 years’ experience in equity research. In his last assignment, Amit was working with DBS Cholamandalam Mutual Fund covering banking, property and construction sectors. Prior to DBS Cholamandalam Mutual Fund, he was working with Fidelity as sector specialist covering the banking sector. Amit holds a Commerce degree and is a Charted Accountant. He is also a Chartered Financial Analyst from AIMR.
What investment strategies have you adopted to invest in equity market?
Our investment strategy largely reflects our bottom-up conviction on specific companies and is mandate specific. Some of the strategies also use top down approach.
Our stock selection is purely guided by our in-house investment process, which by itself, is quite exhaustive to include thoroughly well-researched stocks.
Your fund, Invesco India Contra Fund, has consistently outperformed its benchmark and the category returns. What is the recipe of this consistent performance?
Invesco India Contra Fund’s performance is largely attributed to its stock selection, which is coherent with its investment strategy i.e. to invest in stocks of:
Companies that are in turnaround phase
Companies trading below their intrinsic values
‘Growth’ companies trading at de-rated valuations.
DISCLAIMER: The views are expressed by Mr. Amit Ganatra, Fund Manager, at Invesco Asset Management (India) Private Limited. The sectors referred herein should not be construed as recommendations from Invesco Asset Management (India) Pvt. Ltd. The portfolio may or may not have any present or future positions in these sectors or in any other schemes offered by Invesco Mutual Fund. The views and opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The reference to the Scheme mentioned herein is only in context with the question asked and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any Scheme or to adopt any investment strategy. The views and opinions are rendered as of the date and may change without notice. The recipient should exercise due caution and/or seek appropriate professional advice before making any decision or entering any financial obligation based on information, statement or opinion which is expressed herein. Invesco Mutual Fund/ Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.
Going by the historic trend, the fund has benefitted from turnaround in the performances of its key investee companies and has also had meaningful alpha generation from valuation opportunities in select companies. This strategy has helped the long-term investors of Contra Fund to gain from both the Earnings Growth as well as P/E re-rating.
Invesco India Contra Fund being “Value” biased strategy provides exposure to potential earnings recovery at lower valuation multiples and thus has an attractive “Risk Reward”.
What is your investment philosophy? How do you select stocks?
Our stock selection is strictly driven by our in-house investment process. The process, after thorough due diligence, categorizes select stocks (from our in-house investment universe) as being eligible for investment. The fund managers can choose their preferences from the stocks thus categorized.
Equity market has corrected by ~10%, do you believe that valuations are reasonable now?
Market valuation, despite recent correction, is on a higher side. The Price to Earnings (P/E) multiple continues to be at premium to the long-term average. But having said that, the P/E multiple also looks optically high because of the depressed earnings cycle. There still are valuation challenges in specific pockets in the Midcap and Smallcap space that could compromise future returns.
Which sectors are you expecting to outperform in 2018-19?
There is, presently, an emerging evidence in the market regarding strengthening of pro-cyclical stance. We believe that cyclicals with comfortable balance sheets and attractive valuations and companies with strong franchise value but presently facing growth headwinds could do well hereon. Our cyclical over-weights in Invesco India Contra Fund include Industrials and Consumer Discretionary sectors.
Besides, we have also increased our exposure, and, are overweight in Information Technology and Healthcare sectors, these being presently attractive from valuation perspective. Moreover, being export oriented, these sectors are a natural hedge to currency risk.
We have seen that you have increased allocation to Largecap stocks to ~68% in February 2018 from ~50% in February 2017. Does that mean you believe that midcap and smallcap stocks are overvalued?
Invesco India Contra Fund is a multicap fund with ‘value’ bias and has flexibility to move across market capitalizations. Valuation is thus a key determining factor for Capitalisation bias for this fund. To retrospect, in the year 2013, when midcaps were cheaper vis-à-vis largecaps, Contra fund’s portfolio was relatively more inclined towards midcaps. Over past few years, however, valuations in the midcap segment have become expensive, making a case for the Contra fund to shift allocation in favor of largecaps, aligned to the funds’ investment strategy. This is also reflected in the weighted average market capitalization of the fund portfolio that has risen from say ~Rs44,000 crore in June 2013 to ~Rs90,000 crore in Feb 2017 and further to ~Rs1,53,000 crore in Feb 2018.
Yields have been rising, crude oil prices are near $70 and inflation is also expected to harden. Do you believe all these factors pose significant risk to the current bull market?
In the past when interest rates were lower, higher (P/E) multiples for markets were being justified and to that extent if interest rates rise, multiples should normalize.
However, as far as commodity prices are concerned, contrasting the popular perception, a recovery in commodity prices (including oil) is generally a positive catalyst for corporate earnings recovery. This is because strength in commodity prices is usually an outcome of strength in global growth, which in turn feeds into higher economic activity and hence, eventually, fuels the earnings cycle. Thus, while rising interest rates do make case for normalization of P/E multiples, rising commodity prices generally support the earnings cycle with a lag.
As far as inflation is concerned, while higher commodity prices pose a threat, the same is presently showing an easing trend, led by moderation in vegetable prices. The RBI too has taken cognizance of softening prices, and accordingly, has revised downwards its FY 2019 inflation forecast to range between 4.7-5.1% in H12018-19 vs. its earlier projection of 5.1-5.6% for the period.
In a nutshell, inflation even after factoring into higher commodity prices is in a comfortable zone, higher interest rates pose a risk to P/E multiples and higher commodity prices can act as a positive catalyst for our earnings recovery.