In an interview with Outlook Money, Vetri Subramaniam Chief Investment Officer, Religare Invesco, shares his views on avoiding stocks and sectors that do not focus on earnings and price momentum
x What’s the secret behind Dynamic Equity’s consistency?
This fund has two characteristics: it has a focused equity portfolio of 15-20 stocks and, it uses asset allocation to create alpha—either through cash holdings and/or index hedges. This reduces its volatility. We are biased towards companies displaying positive earnings and price momentum. That said, the fund’s performance can vary significantly from the benchmark over very short periods—CY13 and CY14 are examples. Nevertheless, due to the focused holdings and asset allocation approach, the strategy has delivered returns higher than the benchmark with significantly lower volatility over longer market cycles. This fund is appropriate for those who want the investment manager to take active asset allocation calls to manage market risk. The consistency is largely the result of staying the course with the strategy.
x What is the stock picking process for this fund?
We are biased to stocks with earnings and price momentum and avoid those which do not exhibit these characteristics. This approach not only allows us to participate effectively in market upsides, but also dampens downside participation. Past data for the fund indicates this pattern. The portfolio is also focused in terms of sector allocation. We do not own stocks from more than 10 sectors in the portfolio. The asset allocation decisions are guided by both valuations as well as our perception of market risk. To manage downside, we use cash or alternatively, index hedges.
x What sectors do you exclude when investing in this fund?
We avoid stocks and sectors that do not focus on earnings and price momentum. Even where we own such stocks or sectors, we limit our exposure to them. The fund has a large-cap bias and we tend to limit mid-cap exposure. The fund also has a high portfolio turnover ratio due to the asset allocation approach—we sometimes scale back holdings in order to raise cash. As stocks start to lose earnings and price momentum, we exit the holdings.
x How different is this fund from Religare Invesco Growth?
Religare Invesco Growth Fund is our flagship diversified fund. Its approach is to manage risk across all parameters in a controlled way, be it in terms of sector allocation vs benchmark; balance between large- and mid-caps; and between growth and value. Also, it does not take asset allocation risk in terms of holding cash and, targets 95 per cent investment in stocks at all times.
x How long is your watch list for the fund?
We have a proprietary stock categorisation process. Only 133 of the total 306 companies in our list are approved for investment. RIEF can buy stocks from this list of 133 and, there, too, we filter for earnings and price momentum.
x Given the run-up in the midcap space, what challenge do you face with more investors getting into this fund?
The fund has a large-cap bias, and mid-caps form a lower proportion of the portfolio. We don’t see that as a constraint. For all strategies, we evaluate capacity, based on portfolio liquidity characteristics. Based on this, we can comfortably manage a much higher AUM under this strategy.
