"We expect the Indian economy to grow at about six per cent for FY14 " - Pankaj Murarka, Senior Fund Manager – Equity, Axis AMC

We expect the Indian economy to grow at about six per cent for FY14 and a recovery in growth from FY15 onwards. Thus, we think that any correction in the equity markets would be a good opportunity to invest into Indian equities from a long-term perspective.

Pankaj Murarka, Senior Fund Manager – Equity, Axis AMC believes that asset allocations should only be made after analysing investment goals and the time horizons for various asset classes like equities, debt and gold, as he shares his investment philosophy in a conversation with Saikat Mitra

Can you describe the Axis MF investment policy for us?

At Axis AMC, our investment philosophy is about owning high quality businesses that can deliver sustainable growth over a medium to long term. We believe that a fundamental investment approach focused on identifying such sustainable businesses while controlling risk is the best way to deliver long-term returns to investors. 

We follow a four-stage equity investment process which starts with identifying the investment universe based on sustainable earnings growth potential, credible management and acceptable liquidity of the company. The fundamentals of these companies are analysed to arrive at their fair value which is then used for a bottom–up, stock–by-stock portfolio construction.

What are the most crucial signals, according to you, which would determine the entry and exit points for stocks?

There might be varied opinion on this. However, our investment process is based on a fundamental ‘fair-value’ based approach to stock selection and this determines the entry and exit points of our holdings.

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

We actively meet managements of various companies and also visit their facilities from time to time. The objective of these meetings is to have a better understanding of their businesses and management strategies. These interactions enable us to have a good judgment about the vision and execution capabilities of the management which plays an important role in our investment decision making.

Don’t you think that the management will only share the rosy picture, and not disclose the negatives? How then do these meetings help?

We follow a multi-pronged approach for understanding and evaluating businesses across various industries. Apart from management meetings, we meet various independent industry experts, regulators, and policy makers to have a holistic view on various companies. In addition to this, we have an experienced team of analysts which have a sound understanding of various industries. Also, we do channel checks with competitors, vendors, customers, etc. All this helps us in evolving an independent view on various companies.

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

As mentioned earlier, our investment philosophy is based on the ‘fair-value’ based approach to stock selection and we do not trade in stocks by using technical analysis.

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

Every investment decision is based on a fundamental thesis that the fund manager/analyst employs. Our investment portfolio is actively reviewed by respective analysts and portfolio managers. In case a business fails to live up to our expectations, corrective portfolio actions are taken as soon as possible.

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

Sector selection is an important factor for a fund’s performance as certain sectors in an economy would be performing well and others won’t. While our portfolios are constructed on a bottoms-up basis, we believe that generally the best performing stocks emerge from sectors that have done well. Thus, sector selection does have a significant impact on portfolio performance.

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

Every fund house has its own unique investment style. At Axis AMC, we think that while investing into stocks, we are buying pieces of business. We believe in investing into high quality businesses which can deliver sustainable growth and owning them for a long period of time. 
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In the 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?

Shareholder activism has been nascent in India, but we are seeing institutional investors voicing their opinions on matters concerning corporate governance and shareholder value creation. These are early days but the trends are encouraging. We do participate and express our opinions at the general body meetings of our companies we are invested in.

Do you believe that portfolio churning is required to create an alpha?

We invest in companies through our robust ‘fair value’ based investment approach. Thus, our investment decisions are based on fundamentals and drive portfolio holdings. Having said that, we believe our portfolio turnover ratios are quite reasonable.

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

Equity markets have a tendency to go through cycles of bull and bear markets. We believe that markets in the long term are driven by corporate earnings growth, which are in turn dependent on GDP growth. We are long-term investors into equities and have a strong framework of managing risk of our portfolios which also include market risks.

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

The Indian economy is challenged and growth has moderated significantly from eight per cent (FY05- FY11) to five per cent in FY13. There are various factors which have contributed to this slow down and we believe that it will take time to fix some of these issues. We expect the economy to grow at about six per cent for FY14 and a better growth trajectory from FY15 onwards will be driven by low interest rates and a stable policy environment.

What is your take on the financial performance of India Inc. for the last quarter of FY13 and how do you expect it to pan out in FY14? 

March 2013 quarter earnings were a disappointment primarily on the growth front for cyclicals like capital goods, infra, cement, utilities and energy. Also, a bleak growth outlook led to negative sentiment and earnings’ downgrades in these sectors. On the other hand, defensives like FMCG, pharma, IT and telecom have done well with margin improvement (led by lower raw material cost) seen in autos and metals. We expect modest improvements in the financial performance of corporate India in FY14.

What are the triggers that you are looking forward to with regard to the markets? 

The markets have rallied well in the last 12 months, partly driven by huge FII inflows. However, like any other stock market, valuations are led by future earnings’ expectations, which are in turn driven by economic growth. We expect the Indian economy to grow at about six per cent for FY14 and recovery in growth from FY15 onwards. Thus, we think that any correction in the equity markets would be a good opportunity to invest into Indian equities from a long-term perspective.

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

We are positive on private banks, consumers and pharma sectors while we remain cautious on PSU banks, infra and capital goods as well as global cyclicals like metals.

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

We always advise retail investors to plan their savings in a holistic manner. Allocations should be made only after analysing their investment goals and time horizons in various asset classes (like equities, debt and gold). Equities especially are a risky asset class and the investment horizon for it should always be medium to long term.