In the fourth Smart Portfolios interview, Anand Agarwal, fund manager, Reliance Money, talks about his investment strategy.

Agarwal, an ardent believer of GARP (growth at a reasonable price), spoke with Rex Cano, about his investment style, preferred sectors and market expectations.

My investment style would be rather very simple; I will invest in stocks, which have the potential to generate good returns in the medium- to long-term. I like to invest in companies which have consistent cash flows and good business potential.

What are the stocks or sectors one should look at in a volatile market?

Among sectors, infrastructure, utilities and aviation should do well over the medium- to long-term. Among utilities, telecom would be the preferred pick given the strong growth in subscriber base over the next couple of years.

Aviation sector is a contra bet as the sector is going through a consolidation phase which would result in better pricing power. Also, falling crude prices would benefit the sector as fuel prices account for a disproportionately high percentage of revenues.

The financial sector should also do well over the longer run as India is an under-penetrated market and less than 2 per cent of India’s population is actively involved in the equity markets.

What’s your view on the rupee depreciation?

One of the major reasons for the rupee depreciation was high crude oil prices, high inflation and the US subprime crisis. Adding to this was the US dollar appreciating by 12-I5 per cent against all the major currencies during this period. We see the rupee consolidating at current levels and gradually appreciating in the medium- to long-term.

Also central banks do not prefer high volatility in currencies as it impacts international trade due to the uncertainties associated with volatile currencies.

Looking at the robust growth of the economy and receding crude prices, there is no reason why the rupee should depreciate against the US dollar over the medium to long term. I do not see the rupee going below the 47-mark. The currency may consolidate at current levels for the near term.

The US economy is facing turbulence and the government has announced a mega bailout plan to strengthen the weakening financial giants. Where do you see the US markets going from here?

Some or the other event which is as big as the current crisis has taken place in the past, it’s happening today and it can happen in the future as well.

However, I believe that we are somewhere in the last phase of the financial crisis, and the proposed bailout package would go a long way in helping clear the financial logjam.

The US economy is currently going through a de-leveraging process and is expected to post below trend growth for the next couple of years. Once the de-leveraging process is over, growth should be back on track.

How long will it take for our markets to stabilise?

For the last six to nine months our markets are swaying to global cues. However, I believe that the India growth story is intact, and a GDP growth rate of 8 per cent can be maintained. Even while the FIIs were pulling out from our markets, FDI inflows remained intact, which is a positive sign. I expect the markets to remain volatile over the next quarter, after which we should see the markets consolidating before moving up. India’s domestic driven economy and low dependence on exports makes it one of the safer places to invest.

Would you prefer portfolio concentration or diversification?

I am definitely not for portfolio concentration but neither do I believe in over-diversification. However, if I like a certain sector I may give more weightage to it in my portfolio. However, I would be dynamic in my approach and look to churn my portfolio at the appropriate time.

What should be an average time horizon for an investment?

Ideally one needs to invest with a horizon of at least one to two years to allow the investment to grow. Also, for investment purpose one should have a clear target in mind based on fundamentals while stop losses are a must in case of trading. However, one should not be too rigid and should adapt based on the underling economic conditions.

With earnings season coming up, what kind of results do you expect from India Inc? What is the likely impact on stock prices?

We do not expect any major surprises from the second quarter results, although there may be some pockets of disappointment. We expect moderate growth in corporate profitability unlike the 20 per cent plus growth witnessed during the last three years. The earnings season would be a more sedate event this quarter.

What kind of returns do you expect at the end of a year in Smart Portfolios?

I would try to generate better than market returns. Given the current market scenario we expect around 15 per cent returns on investment by the end of the year.

What are the qualities that make a good fund manager?

Every fund manager has a different approach. One needs to look at valuations, the future business potential, competition analysis and management competence.

A fund manager should be good at both quantitative as well as qualitative analysis, and should not chase the markets. At the same time he should be quite flexible, and adapt to the changing environment and not be rigid in his approach.

What is your advice to first time investors?

For a new investor this is a very good entry opportunity, and equity as an asset class is the best investment option available. In the current environment even blue chip stocks have been beaten down significantly and are currently trading below their fair valuations given the future growth potential.

Looking at the inherent strength of the economy, we believe that this is just a cyclical slowdown within the longer term structural bull market. With consumption levels rising, we may see the economy growing at 7.5 to 8 per cent which is still very high as compared to the global economic growth.

Hence I feel that the long term structural bull market would resume once the cyclical correction is over, and it’s a good time to gradually build a portfolio over the few months. One can look to invest in sectors such as infrastructure, utilities, financials and also energy.

What are the three most important things that an investor should look at in a company before committing an investment?

First, I would look at the cash flows. Second, the future growth potential of the business and the competition it faces. The last but not the least would be management competence.

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