Fund Focus: Invesco India Dynamic Equity Fund

We are at 25% cash in the fund now

Taher Badshah, CIO - Equity, Invesco MF

16th August 2017

In a nutshell

Invesco India Dynamic Equity Fund uses cash allocations to fine tune equity exposure in response to market valuations and yield gap, thus lending stability in times of overvaluation while getting fully allocated to equity when valuations warrant. Currently, the fund is running with 25% cash allocation - up from the 15% levels of early 2017. While a little cautious on the near term, Taher is optimistic about long term prospects of markets, especially large caps.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: The surge in markets in CY17 and the recent wobble are raising fears that we are on our way to making a bull market top for this cycle shortly. How do you read market action and what is your 12-18-month outlook for markets from here on?

Taher: The recent sharp and unidirectional move of the market since the start of 2017 (Nifty up 20% since then) puts the market at slightly elevated levels on valuations,relative to the underlying growth from the perspective of the next 6-12 months. While the medium-term outlook for the market remains healthy given that macro-economic parameters remain supportive for eventual recovery in earnings, near-term volatility and corrections cannot be ruled out. We remain optimistic about markets over the next two years but see relative, more attractive opportunities in the large cap space versus the midcaps.

WF: What is the level of cash you are holding in your Dynamic Equity Fund and how has that moved over the last 18 months - since the correction in early 2016 to the current new market highs?

Taher: Cash allocation and equity market valuation (Price to Earnings Ratio - PE) share a direct relationship as far as Invesco India Dynamic Equity Fund is concerned. Thus, if valuations go up, the cash levels in the fund will also go up and vice-versa. Currently the fund holds cash to the extent of 25%. In fact, the fund has built-up its cash levels, from about 18-20% in early 2016,when the market PE was relatively lowto about 27-30% through the rally that followed thereafter until Nov 2016. Thereafter, during themarket correction that followed demonetisation, the fund cash levels were once again brought downto levels closer to 15-16% i.e. in early 2017. But presently, in the wake of the rising valuations, the fund has again moved up its cash allocation to about 25%.

WF: What parameters influence/decide your cash levels?

Taher: The cash vs equity allocation for Invesco India Dynamic Equity Fund is based on a combination of two parameters, namely, absolute PE multiple of the market and the Equity Risk Premium, which is essentially the difference between the equity market earnings yield and the bond yield.

WF: Within the equity allocation, in what ways has portfolio strategy/sector composition changed over the last 18 months, reflecting the journey from the 1Q16 uncertain environment to the 2Q17 bullish scenario?

Taher: The equity allocation of the fund reflects our view of the market over the ensuing 18-24 months at any point in time and leans towards sectors or stocks where we see the possibility of earnings acceleration. Our pro-cyclical stance on the economy led to our allocations in sectors such as financials, utilities and consumer discretionary rise significantly between early 2016 and today. Also, we have moved healthcare to a significant underweight currently vs an overweight stance in early 2016 and have alsoincreased our underweight in IT services. We have broadly maintained underweight position in sectors such as IT services, industrials and consumer staples.

WF: Which sectors/segments of the market genuinely offer good value in your view today?

Taher: We believe that today it is the consumer discretionary, select financials, oil & gas and select utilities that offer decent value relative to the market and/or their own underlying growth.

WF: Why do you choose to remain in cash for the non-equity component when you could have aspired for slightly better yields with an accrual strategy in short and medium term papers?

Taher: The product's basic investment mandate is to generate alpha through dynamic allocation between cash and equities such that the downside of the market can be significantly protected while the upside from a rising market can be adequately captured. Additionally, the focus is on running a high-conviction bottom-up constructed portfolio to enhance alpha opportunity. The cash is typically deployed in very low-risk options since the fund chooses to de-emphasise maximising returns from this component of the portfolio.

DISCLAIMER: The views are expressed by Mr. Taher Badshah, Chief Investment Officer, Equities, at Invesco Asset Management (India) Private Limited. The sectors referred herein should not be construed as recommendations from Invesco Asset Management (India) Pvt. Ltd. The portfolio may or may not have any present or future positions in these sectors or in any other schemes offered by Invesco Mutual Fund. The views and opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The reference to the Scheme mentioned herein is only in context with the question asked and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any Scheme or to adopt any investment strategy. The views and opinions are rendered as of the date and may change without notice. The recipient should exercise due caution and/or seek appropriate professional advice before making any decision or entering any financial obligation based on information, statement or opinion which is expressed herein. Invesco Mutual Fund/ Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.

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