Last month, Vetri was among the earliest on our site to strike a clearly cautious tone on market valuations, days before the sharp correction began. How does he now read the markets - are they now offering valuation comfort or not quite yet? If FII selling is what's making markets volatile, are large caps a safer place to be in as compared to midcaps or is that theory flawed? What are the key issues in managing large cap funds and how do Vetri and his team handle these issues? Read on as Vetri shares an update on his market perspectives as well as addresses all these issues and more.

WF: A month ago, you cautioned advisors in an interview with us (Click Here) to beware of mean reversion in valuations, which were looking stretched. We are now seeing this mean reversion playing out. Where next for markets? Would you categorize this as a healthy correction in a structural bull market or a trend change to be wary of?

Vetri: The valuation premium has reduced from its recent peak. The market has fallen from its peak by over 10% in terms of price. But in terms of trailing 12-month P/E multiple, the decline is much less since the trailing 12-month EPS itself has dropped about 6% from the end of December. As of 12th May 2015 the market is trading at 16% premium to its long term trailing twelve month P/E. This is certainly more attractive than in recent times but still a bit away from the mean. The mean is merely a numerical value and most of the time the market trades away from it-either higher or lower. But the significance of the mean is that the closer you are to it, the higher is the probability for the returns from the asset class to match their historical patterns

Terms such as healthy correction in a bull market or trend change are merely labels. We believe that investors should look at the entry valuations as the key to determine their return outcomes rather than fixate on labels.

WF: How do you see the currency situation playing out? Memories of 2013 are still fresh in many minds.

Vetri: The CAD is in a fairly stable situation compared to 2013. And the currency has been quite stable relative to other emerging market currencies. However the RBI Real Effective Exchange Rate (REER) value suggests that the currency is trading richer than it should be. So there is a case for the rupee to depreciate from here. As long as it is gradual process and not marked by excessive volatility we would not see it as a worry. It would help maintain the competitiveness of local producers.

WF: Large caps are said to be a relatively safe space to be in during times of market volatility. Is this valid for the current market situation or is an FII led selling spree unlikely to spare large caps as well?

Vetri: FIIs own over 25% of the total market and the data shows that they are heavily invested in stocks across the market cap spectrum. In the hypothetical situation where foreigners were to sell aggressively we would expect both large & midcap stocks to suffer. We think a distinction between large cap and mid cap based on FII ownership is misplaced.

WF: How are you positioning your Business Leaders Fund - your large-cap oriented fund - in terms of sectoral and thematic preferences?

Vetri: The Business Leaders fund invests in companies that are leaders in their respective industries or sub segment within the industry. The fund thus does have a clear large cap bias but there will also be some midcap companies that would fit in the portfolio; being leaders in their respective industries. The Large cap domination is visible in the weighted average market cap of the portfolio, which is only marginally lower than the benchmark index - the CNX Nifty.

Given the potential for a recovery in economic growth over the next few years, we would like to maintain a pro-cyclical exposure in the fund. Currently, our preferred areas based on valuations and growth perspective are consumer discretionary & financials. We presently do not find Industrials very attractive given their elevated valuations. Further the recovery in the investment cycle is likely to be slow. In general, we believe that in the present challenging macro-environment and given the current valuations, the potential to generate the alpha lies in getting the stock selection right. .

WF: What are some of the changes you are making in the fund, arising from the current market volatility?

Vetri: We have made a few changes -but those largely reflect our valuation/growth views. But there aren't any significant shifts in the portfolio.

WF: What in your view is the key investment argument today for a large cap oriented fund?

Vetri: We strongly believe that large cap funds should be the core of any investor's portfolio. Our approach in managing the Religare Invesco Business Leaders fund with the focus on companies that are leaders in their respective industries helps us overcome a key challenge in managing a large cap fund- i.e. is the decay factor. This means that we avoid the large cap companies that can erode shareholder wealth over a period of time and perhaps even reduce to become midcap companies in due course. The frequent changes in the composition of the large cap benchmark indices such as the CNX Nifty factually highlights this risk of decay in companies. Our strategy for this fund thus focuses on the sustainability of the company's fundamentals and the assessment of their ability to maintain their leadership position in its industry.

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