Investment Outlook , Published Jan 18, 2018
Our expectation last year that 2017 will have wider performance dispersion amongst funds, proved to be accurate. As markets marched on ahead of earnings, valuation caused discomfort amongst value conscious fund managers. Ballooning fund sizes did not help either. Consequently, we saw half our large-cap fund universe underperforming the index.
As SEBI tries to bring uniformity in how funds are categorized, the dispersion should reduce, but the margin of outperformance over the index may also reduce. Going forward, time horizon and patience will be key to generating returns – of course, the seat belt needs to be tightened too, as there will be volatility along the way.
Our routes-to-market recommendations this year, represent a core allocation idea i.e. Sanctum Indian Titans (Discretionary Portfolio Strategy) and two tactical, out-of-the-box ideas, from the mutual fund space viz. Invesco Contra Fund and L&T Business Cycle Funds. When one evaluates out-of-the-box ideas it is important to set aside past performance and take a forward-looking view instead, which is what we are attempting to do this year.
Sanctum Indian Titans
As a route-to-market, we continue to recommend an allocation for this strategy managed by Sanctum as a part of the core portfolio. The strategy predominantly invests in companies with proven growth record that will continue to benefit from the structural growth drivers. A complementing albeit smaller allocation is made to emerging growth stories. The strategy, since the launch of our portfolio management services, has delivered a robust performance and makes a case for a long-term allocation in the client’s core portfolios.
For tactical allocation this year we make a case for two under-rated funds. The common thread that we have run through the Investment Outlook hitherto is to look beyond past performance and focus on hypotheses of the funds, their relevance to the current market environment and their manager selection. Our experience shows that this method has thus far held us in good stead.
Invesco India Contra Fund
This multi-cap fund has a value bias and invests predominantly in companies that are trading below their fundamental value. It also carries allocation to cyclicals and some companies in a turnaround phase. The fund then intends to hold these stocks until the hypothesis plays out.
L&T Business Cycles Fund
In line with the name of the fund, the manager tends to invest in cyclicals when the economy is in the recovery or growth phases and switch to defensives during an economic slowdown. While the sectoral allocation is linked to the economic cycle, the manager then selects stocks on a bottom-up basis. With the current pro-cycle approach, we believe the fund is well positioned to deliver alpha to investors over the next 3-5 years.
Investment Outlook 2018