Our stocks represent attractive risk-reward payoff

The fund typically invests about 50 per cent of the assets in a portfolio of attractive mid-caps stocks

Our stocks represent attractive risk-reward payoff
Outlook Money interview with Vetri Subramaniam, Chief Investment Officer, Religa
OLM Desk - 22 December 2015

In interview with Outlook Money Vetri Subramaniam, Chief Investment Officer, Religare Invesco Mutual Fund and Vinay Paharia, Fund Manager, Equity, Religare Invesco Mutual Fund, Religare Invesco Tax plan speaks about Religare mutual funds.

1. What is the composition of the fund and its stock selection?

The fund is well diversified across stocks and sectors. It is also well distributed across market caps with a significant mid-cap bias.

2. What is the investment universe for this fund?

The investment universe for the fund consists of the unique names in the BSE 200 Index, CNX MidCap Index and three sector indices along with some select bottom-up stock ideas. The total universe of stocks for the fund house as on September 30, 2015, was 293 stocks. The investment universe for the fund is the same as that of the fund house.

3. Does the three year lock-in help when managing this fund?

Yes. The fund typically invests about 50 per cent of the assets in a portfolio of attractive mid-caps stocks. This is possible because the three-year lock-in provides us with the flexibility, thereby enhancing the prospects for the fund.

4. How can a stock to enter this fund?

We only invest in companies that meet the stock selection principles as laid out in our investment process. We look at both qualitative and quantitative factors. A key quantitative parameter which we tend to follow is Return on Capital (RoC). We tend to buy into companies which have demonstrated long-term return on equity significantly higher than the cost of equity which we have internally set at 15 per cent. We emphasise on the trends and patterns discerned from historical performance and less on forecasts. A corollary of high Return is Equity (RoE) is that the company should have less leverage on its balance sheet. This scenario is also a result of high RoC. If you have high RoC, the business would automatically generate high cash flow and as a result of that the company tends to have lower leverage. In case of the qualitative parameters, we tend to look at management quality, the company’s business model and the competitive advantages that it possesses.

And what has happened in the past is often a good indicator of these qualitative parameters. The annual report and the disclosures therein also enable us to gauge the quality of the management.

Last but not least, valuations play a key role in buying a stock. Valuation is not just a single number but also has to be looked at from the prism of quality and potential growth. In this context we are guided more by sustainable growth than just an extrapolation of what has been achieved in recent years. Companies that don't meet our stock selection principles are avoided. Religare Invesco Tax Plan is guided solely by bottom-up stock selection.

5. What is the average holding period of stocks in this fund?

Our portfolio turnover ratio has ranged between 40 and 50 per cent, implying that on an average, stocks remain in the fund for over two years.

6. What should an investor expect when investing in this fund?

The fund invests in a diversified portfolio of stocks which represent attractive risk-reward payoff. Hence, an investor should expect the fund to outperform its benchmark over long periods of time.

7. What will you attribute the relatively superior performance of your fund to in recent years?

The fund’s outperformance was driven mainly by its superior stock selection skills. The performance was mainly driven by overweight positions in HPCL, Maruti Suzuki, Dish TV, Divi’s Labs and BPCL. The performance was partially hurt by overweight positions in Federal Bank, Infosys, Coromandel International, Jindal Steel and Tech Mahindra.

8. What is an ideal portfolio size for this fund?

The fund typically invests in 40-50 stocks.