What investment approach is adopted by Invesco India Tax Plan?
The fund is primarily driven by bottom-up stock selection with an overlay of top down views and valuations to construct the Fund’s portfolio. The portfolio typically has 45-50 stocks and is always well diversified to protect against extreme bottom-up driven outcomes. Our investors are committed for 3 years. Therefore, our approach is to be patient and invest a significant proportion of fund assets in smaller and often younger companies where we can benefit from growth.
What is the composition of the fund and stock selection?
We invest based on our proprietary stock categorisation system, which serves as the primary tool for stock selection. Overall, our preference is for companies that demonstrate a healthy return on equity- this is evaluated over a business cycle where appropriate. Sustainability of growth, cash flows, strength of the business model and balance sheet are other important factors along with valuation. This fund owns some of the best ideas of our fund house across the market cap spectrum. Our willingness to be patient with our holdings is what has aided the returns from stock selection.
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What kind of stocks and sectors do you avoid?
The avoid lists is evolved from both quantitative as well as qualitative factors. Qualitative factors are basically companies that have low returns on capital on a structural basis and/or companies where management actions are a concern. We also stay away from companies, which don’t have a very sustainable growth path. We prefer not getting into companies where there are some concerns on balance sheets. Given the current economic situation, we also believe that, one should stay away from companies that have weak balance sheet or weak cash flows. In the fund, sector allocation is a result of stock selection. Thus, the avoid list of sectors evolves from the avoid list of stocks.
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What bets have worked in the past one year?
A common thread in most of the good performers was good underlying business quality, consistent financial performance, and reasonable valuations when we invested in them. Also not owning companies, which had poor balance sheets added to our overall performance.
How do you see the Corporate earnings and where the growth will come from?
Earnings for the 3QFY17 reporting season so far has been ahead of expectations (10.5 per cent YoY actual PAT growth vs 5.7 per cent YoY expectations). Corporate commentary has been fairly balanced and although it may be early to give a resounding verdict given many companies yet to report, the extent of growth downturn due to demonetisation appears less hostile than anticipated.
Notwithstanding near-term disruption due to demonetisation, levers to support long term earnings recovery continue to remain intact. Currently, many industries are struggling from lower capacity utilisation and high interest rates. As and when the economy moves to the higher gear, there will be scope for profits to recover to historical averages driven by levers of higher capacity utilisation and lower financial leverage, albeit negated to some extent by normalisation of gross margins.
Who should invest in this fund? And what should an investor expect when investing in this fund?
Investors should take a balanced view of asset allocation, invest for the long term, and give importance to valuations while investing. Investing through Systematic Investment Plan is suitable for investors with a longer term investment horizon.
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Vinay Paharia is Fund Manager, Invesco Mutual Fund
