Click here to view presentation of BNP Paribas Focused 25 Equity Fund
WF: Your presentation makes an interesting point about the last 3 years being characterised by strong macros and weak micros while the next 3 years could see the opposite. Why do you believe micros can be strong when macros may weaken - isn't it that micros are normally robust on the back of good macros?
Anand: India has improved its macro fundamentals since the episodes of taper tantrum. Improvements are visible in the macro variables likenarrowing current account and fiscal deficit, curbing high inflation and steady currency. But the micro - be in nominal GDP growth, job creation, private sector investments, credit growth and most importantly the equityearnings growth has been subdued.
We think going forward the fiscal stimulus in terms of farm loan waiver, seventh pay commission, housing loan subsidy and other fiscal spending towards infrastructure and social sectors will provide requisite fillip to the economy.When we are saying macro deterioration,we mean all these measureswill put some burden on government finances and may weaken few macro variables like consolidated fiscal deficit and would take inflation back toward 5-6% levels, leading to future interest rate hikes rather than cuts.If the fiscal stimulus can provide quicker boost in terms of improving business sentiment, confidence and create jobs all thisaugurs well for nominal GDP growth, higher sales and higher profits for corporates.
WF: Your presentation has a slide which shows the wide earnings dispersion among Nifty 50 stocks - which offers good bottom-up stock picking opportunities. Do you expect this dispersion to continue in the coming years? Which sectors are likely to outperform market on earnings growth going forward?
Anand: Yes we think dispersion will continue and believe companies which are posed towards the domestic side of economy would fare better than the export oriented. The recovery hereon is expected to be gradual and may not benefit all the sectors of the economy equally. Structural opportunities likefinancialization of savings benefitting banks improve their CASA and NIMs and technology innovation in the retail banking and NBFC sector to bring in operating leverage benefit. Rise in fiscal spending by government in terms of pay commission and farm loan waiver could drive consumption and help the rural economy recover benefitting the consumer facingbusinesses. While it is too early to comment on GST collections, we believe growing tax compliance and more players coming under tax ambit would be good for organized players to gain market share.
WF: What risk control measures have you put in place in this high conviction, big bets oriented fund?
Anand: Whilst there is high concentration in terms of bet size and number of stocks, the fund will be a multi cap strategy without any sector bias. We will invest minimum 65% of equity assets in the large cap names from the Nifty 100 by market capitalization and rest in the fast growing small and mid-cap companies. Our endeavour will be to assign minimum 2-3% weightage to each stock and up to maximum 10% weight.
WF: Is the broad 65-35 large cap to midcap ratio likely to remain in this range through market cycles or do you expect to move this tactically based on market opportunities?
Anand: We believe large cap add stability to the fund performanceand we intend tomaintain minimum of 65% large cap names as explained above throughout the fund life cycle while midcap allocations may alter depending on the market conditions.
WF: Many leading advisors have tactically advised clients to underweight equity allocation due to rich valuations (Sensex & Nifty are at 24 and 25 PE on trailing basis) - either by redeeming equity funds or switching to hybrids. In the context of valuation concerns and fears of a sharp mean reverting correction, how are you planning to structure your initial portfolio?
Anand: We are not in the camp of mean reverting and believe the companies with sound business fundamentals and strong moat will continue to do well even if their valuations are rich. High valuations are not deterrent to our portfolio building, as a philosophy we are growth investors but would remain cognizant of the price we pay.
WF: BNP Paribas MF has demonstrated an excellent track record of alpha generation through bottom-up stock picking - which makes a high conviction, big bets oriented fund from your fund house a very interesting proposition. What alpha would you be targeting vs market on a Y-o-Y basis in this fund?
Anand: At BNP, we follow an investment philosophy called BMV, which stands for Business - Management and Valuation. We as a team have stuck to this philosophy and focused on identifying superior and sustainable earnings growth companies. We endeavour to continue the philosophy for our new BNP Paribas Focused 25 Equity Fund as well.
Click here to view presentation of BNP Paribas Focused 25 Equity Fund
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