A rough patch notwithstanding, SBI Magnum TaxGain’s fund manager Dinesh Balachandran is confident that its focus on quality stocks and long-term orientation will help the scheme bounce back in days to come. In this interview he details the investment strategy of the fund.
Could you elaborate on this fund’s investment strategy?
This fund is primarily large-cap oriented with a roughly 75:25 mix between large and mid-cap stocks. The investment strategy of the fund revolves around finding quality companies where there is positive change at the margin. SBI Tax Gain fund was started in 1993 and has experienced several cycles of bullish/bearish markets. The fund has outperformed its benchmark across various phases of the market.
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What is the USP of this fund?
SBI Tax Gain fund is primarily focused on investing in quality companies which meet minimum thresholds in terms of robustness of business model, corporate governance and management quality. Within that particular set, the fund now has a value bias where we look for companies that offer more margin of safety in terms of valuations. To further narrow down the company list, the fund looks for companies where there is positive change at the margin in terms of business fundamentals.
Which are the sectors and stocks you are betting on? Which are the ones you look to avoid?
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The fund is primarily bottom-up oriented and does not take big sector bets. The top positive active weight holdings are SBI, CESC, Mahindra Finance while top active underweight positions are TCS, HDFC, ITC.
What is your outlook for the next financial year?
We expect corporate earnings growth to pick up next year as the effects of demonetization fade away and the rural economy makes a comeback after a sluggish two year period. However, stock market valuations have moved up sharply in anticipation of this growth and in many cases have probably outpaced the expected improvement. It has hence become even more critical to do rigorous bottom-up stock selection to deliver good returns.
While SBI Magnum TaxGain's five-year returns are robust, the performance seems to have slipped in recent times, with the fund underperforming its benchmark in the last one-year period. What are the reasons for the same?
The fund has traditionally focused on investing in high quality companies which ensures outperformance over a longer time period. However, these companies have underperformed the broader market over the last year on the back of expensive valuations.
What is your strategy to regain the performance levels you had achieved five years ago?
The market goes through short-term phases where high quality companies underperform even though they end up outperforming over a longer time horizon. While these stocks are still expensive, the extent has significantly diminished on the back of correction in price/time. We are confident that the same strategy that has been employed till now will result in the fund outperforming its benchmark going forward.
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Dinesh Balachandran is Fund Manager, SBI Magnum TaxGain
