'We focus on risk-adjusted return'

How has your strategy changed after the sharp rally?
We constantly review the situation and re-jig our strategies, especially in volatile times such as these. While our longer term strategy is not changed, we are now constantly monitoring the environment for early indicators of a recovery in different pockets. Post the election results, we have seen some events play out faster than we earlier expected. Election results brought about stability in governance and policies which have eluded us in the past decade.

Expectations of lowered country risk, higher foreign capital inflows (both portfolio and FDI) and continued momentum on fiscal and monetary stimulus led to the re-rating of the market ahead of a substantial change in earnings. As evidence of a recovery in select pockets of global and Indian economy comes in, we expect specific sectors and companies to outperform. We have appropriately built our portfolio by deploying large cash in the portfolio.

What's good for investments now?
This is a very interesting question, as we have seen stock prices in several sectors buoy up because of expectations of a recovery.

Typically banking, industrials, consumer finance, realty, metals participate in market recovery. We also expect infrastructure and construction companies to do well. Attractive returns can be made in companies/sectors with higher earnings growth and a likely valuation re-rating over the next two years. Such companies can be found among mid- and small-cap stocks. So, there are many interesting investment opportunities in emerging sectors.

How should one pick mid- and small-caps?
The short answer is: with a lot of caution, and only after deep understanding. This segment of the market can make or mar the most carefully crafted investment strategy. Although both mid-and small-caps indices have doubled from their March lows, they still offer huge values. It is important to gain a perspective on the enormity of the destruction that has happened. BSE Midcaps and Smallcaps fell 75 per cent and 80 per cent respectively from their peak, an event that has no past precedence, and were trading at their pre-April 2005 levels.

There is a clear case for serious investments in select mid and small cap companies. We like to look at leaders in their respective industries or companies possessing unique business models that confer long-term advantages. Companies from infrastructure and construction, T&D, FMCG, food and agriculture, and NBFCs can do well. Investors can further narrow their choices in logistics, CNG, education, healthcare and urban Infrastructure.

Are we in a bull or bear market?
Bear market is passé for now. First, there are signs of stability in select economies of the world including India. While global cues and first quarter results will provide near-term direction, long-term growth depends on broad economic recovery. Second, India has delivered 6.7 per cent GDP growth in one of the worst global economic crisis. Third, we are witnessing positive growth figures and earning upgrades especially for FY11. But by no means does this point to linear gain from current levels.

How should investors tackle the current market situation?
In a liquidity-driven market, stocks run ahead of fundamentals, which may give a temporary high to investors. This gets corrected when liquidity reverses. Although valuations may be ahead of fundamentals at times, the sharp market volatility provides buying opportunities. Investors should selectively build their portfolio during such times.

Valuation of most large-caps is capturing an 18 month forward earnings that doesn’t leave much headroom for upside in the short term unless supported by sharp earnings upgrades.

How do you manage risks in your portfolio?
We are focused on risk adjusted return. This does not allow us to go overboard and compromise on risk. Our sectoral/stock exposure is within prudent norms. Since we started Smart Portfolio, we’ve witnessed situations from extreme pessimism to sharp recovery. We have re-aligned our strategies to reflect the state of the market cycle. If protecting capital was the priority in a bear market, capturing an upside to the market becomes important when a recovery kicks in.

In the bear market, we kept large cash and raised the allocation of defensive/proxy-defensives. Besides this, we also monetised quick gains capitalising on market volatility. As markets turned bullish, we went overweight on ‘recovery stocks’ by reducing cash and going underweight on defensives/proxy-defensives. None of our stocks/sectors have carried disproportionate risk in the portfolio. For us, incremental risks become important as important to measure as the excess returns over the benchmark. This has not only helped us outperform the benchmark but also deliver absolute returns.
 

AMAR AMBANI Vice President (Research), India Infoline
Top Holdings	% of assets	Cost (Rs) Price	Current price (Rs)	Value (Rs lakh)
Reliance Ind Infra	10.68	818.00	992.15	1.59
Indiabulls Real	6.09	197.00	226.25	0.91
Aban Offshore	5.76	823.00	856.35	0.86
Guj St Petronet	4.69	56.00	60.55	0.70
ITC	4.64	188.00	230.00	0.69
Total investments	57.40	-	-	8.53
Cash	42.60	-	-	6.33
Net worth	-	-	-	14.86
Returns (%)	48.60	-	-	-

 

SADANAND SHETTY Vice President, Kotak Securities
Top Holdings	% of assets	Cost (Rs) Price	Current price (Rs)	Value (Rs lakh)
OnMobile Global	6.73	482.00	559.45	0.90
ICICI Bank	6.03	684.00	742.45	0.80
Ranbaxy	5.64	274.00	262.10	0.75
BHEL	5.53	2050.00	2228.00	0.74
Reliance Capital	5.49	838.00	868.85	0.73
Total investments	88.64	-	-	11.78
Cash	11.36	-	-	1.51
Net worth	-	-	-	13.29
Returns (%)	32.92	-	-	-