DSIJ Mindshare

"A financial matrix includes right valuation at the right time" - Dipak Acharya Fund Manager-Equity, Baroda Pioneer Mutual Fund

The key triggers for the markets in the near future could be an easing current account deficit (CAD), and moderation in inflation, says Dipak Acharya, Fund Manager Equity, Baroda Pioneer Mutual Fund, as he narrates his experience in the mutual funds industry, in a conversation with Saikat Mitra

Dipak Acharya
Fund Manager Equity
Baroda Pioneer Mutual Fund

  • Retail Investors should understand that investments should be for a longer period of time. One cannot time the market, but one’s time frame and goal should be clear. Equity Funds give returns, but over a period of time. It is always advisable to invest some savings in equity. Mutual funds are great transparent vehicles.
  • Selection of the right sector drives portfolio performance and 50 per cent of the job is done there. Understanding the sector cycle and sector matrix at grass root levels, and analysing the structural and regulatory impact are a must.
  • Crucial signals which could determine the entry and exit of stocks are based on understanding of the business and the financial matrix. Any divergence could lead to exit from the stock. A financial matrix includes right valuation at the right time.
  • In Q4FY13 and FY13, secular sectors like Consumer, Technology and Healthcare are expected to perform much better than cyclical plays like Metals, Capital Goods, Auto, and Cement. However, corporate profitability is likely to bottom out. In FY14, margins should improve due to lower input costs and lower interest rates. As per consensus, while FY13 PAT growth rate is a mere 5 per cent, it will recover to a double digit in FY14.
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How did you begin your journey in the capital market?

Despite being a cost accountant, my passion for the financial markets led me to start my career two decades ago with the Treasury and Credit Department of Bank of Baroda and thus got the right platform to understand the financial markets. My journey into the fund management industry began in 2003, when I joined Baroda Pioneer Mutual Fund.

Can you describe your investment philosophy for us?

Our investment philosophy endeavours to construct high conviction portfolios with a long-term approach. We identify suitable stocks for portfolio inclusion by focusing on uncovering the best stock ideas.

We work towards building a portfolio that is well-diversified across sectors and based on in-depth research. Our focus is to invest in leaders/potential leaders with a strong business model, revenue visibility and sustainable free cash flow. While our main focus is on large-cap stocks, we also invest in mid-cap companies with a good management track record. We follow the top-down and bottom-up investing approaches and do not take aggressive cash calls.

What was your first big investment idea, and how did you develop it?

One of my first big investment ideas was a sector call on petroleum products and consumer non-durables in 2HFY2007. The petroleum sector outperformed broader indices in 2008 and 2009 and an exposure to consumer non-durables supported our fund’s performance during the market fall in 2008.

What are the most crucial signals, in your view, which would determine the entry and exit points for stocks?

Crucial signals which could determine the entry and exit of stocks are based on understanding of the business and the financial matrix. Any divergence could lead to exit from the stock. A financial matrix includes right valuation at the right time.

Do you meet company managements, and do you constantly remain in touch with them till the idea is a part of your portfolio?

We always meet companies before investing, since it instills confidence in the company’s growth path and gives a clear understanding of the management thought process, vision and mission. We keep in touch with the management on a quarterly basis to understand the developments and direction of the company. We also meet companies which are not in the portfolio, to have a better understanding of peers and the industry.
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Don’t you think that the management will only share the rosy picture? In that case, how does meeting the management really help?

Managements share information depending upon their inherited interest. But it is upon us to identify trigger points and conclude whether the dots are well connected. The other way to look is the recent development in management and to gauge the expectation of investors.

Technical analysis is considered to be a very important and integral part of market success. What is your take on it?

Technical analysis helps in timing entry and exit. It is also the psychological representation of the market and a tool for action.

How do you cope with an investment idea that has gone wrong?

We try to rectify our mistakes by taking a close look for understanding the pattern and to ensure it doesn’t happen again.

How important is the selection of a correct sector for a stock’s performance?

Selection of the right sector drives portfolio performance and 50 per cent of the job is done there. Understanding the sector cycle and sector matrix at grass root levels, and analysing the structural and regulatory impact are a must.

Buy-and-hold, as a concept, is widely preached and followed by fund houses. Is this concept completely foolproof according to you?

Post-global economic crisis, the horizon of portfolio strategy has changed. The legacy portfolio principle of ‘Buy-and-Hold’ strategy has to be adopted well, as the current environment is stressed and the global financial framework is undergoing a structural change.

In developed markets, institutional investors are very active in protecting the interests of minority shareholders. What has the Indian experience been like, and how active are you on this front?

In 2010, SEBI came out with guidelines for proxy voting for mutual funds to protect the interest of minority shareholders. We, as a fund house, actively participate in company meetings and publish details of our voting policy and exercising of voting rights on our website.
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Do you believe that portfolio churning is required to create an alpha?

It is imperative to be active to succeed and create alpha, because being passive can often lead you to success, but not help create alpha.

Likewise, while investing, the returns on your portfolio depend upon the investing strategy chosen - active/passive. Fund Mangers generally use the portfolio churning strategy in range bound markets to create alpha.

Is it possible to recognise a bear market before it is too late?

Not easy, but can be recognised before it is too late. Some structural indicators like savings rate, PMI and GDP growth rate give you a broad sense of the times to come.

What is your take on the overall current macroeconomic scenario of India?

The last couple of quarters have provided some hope – the government pushing for reforms, controlling FY13 fiscal deficit to 5.2 per cent of GDP, and targeting to lower it to 4.8 per cent for FY14.

Meanwhile, easing global commodity prices, mainly oil price, presents an opportunity for some macro variables to self correct. We believe that a few right measures can help limit the downgrades of macro indicators and corporate earnings.

What is your take on the financial performance of India Inc. for the first quarter, and how do you expect it to pan out in FY14?

In Q4FY13 and FY13, secular sectors like Consumer, Technology and Healthcare are expected to perform much better than cyclical plays like Metals, Capital Goods, Auto, and Cement. However, corporate profitability is likely to bottom out. In FY14, margins should improve due to lower input costs and lower interest rates. As per consensus, while FY13 PAT growth rate is a mere 5 per cent, it will recover to a double digit in FY14.
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What are the triggers that you are looking forward to with regard to the markets?

The key triggers could be easing current account deficit (CAD), and moderation in inflation, thus making the RBI continue with an easy monetary policy, resulting in the continuation of reforms and a strong growth-led economy.

What are the sectors that you are currently betting on, and in which areas should investors take caution?

We are positive on IT, thanks to an expected acceleration in corporate spending in developed economies and a weak rupee; and on Pharmaceuticals over strong domestic demand, new launches in developed markets and weak INR. Oil and Gas looks interesting, driven by an expectation of lower subsidies over gradual diesel price increases; and Petrochemicals, driven by positive surprises on refining margins. As the rate easing cycle starts and the economy looks bottomed out, the financial sector looks interesting. We are cautious with respect to Metals, Auto and Real Estate.

What is your take on the maturity level of the Indian Fund management industry?

The industry has entered into a growing phase from an evolution phase in terms of asset classes.

What is the most important advice that you would like to give to retail investors?

Retail Investors should understand that investments should be for a longer period of time. One cannot time the market, but one’s time frame and goal should be clear. Equity Funds give returns, but over a period of time. It is always advisable to invest some savings in equity. Mutual funds are great transparent vehicles. Retail investors should invest through SIPs in MF.

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