Exclusive: Fund Manager Interview of ITI Mutual Fund

ITI Mutual Fund is the newest Fund House around but with experienced Fund Managers to their credit.

With 3 schemes already launched, their Arbitrage Fund NFO opens on the 20th of August 2019 and closes on the 3rd of September 2019.

Sreenivas Reddy from The Mutual Fund Guide sat down with the CEO & CIO, ITI Mutual Fund, Mr. George Joseph for a brief interview.

Q) What would be your advice to investors looking at the current market scenario?

A) The current market scenario appears to be not very encouraging with sharp fall in equity markets, weak economic data, not so encouraging corporate results and management commentary. However, we see many silver linings among the dark clouds.

Despite the recent weak growth, India’s long term growth outlook remains strong. Market valuations are near longer term average, in fact many sectors and stocks are trading below their long term valuation multiples, interest rates are declining, liquidity is improving, oil prices are stable. So conditions for economic recovery are there. 

The pace and timing of improvement is not certain but improvement is bound to happen.  We feel investors who use this volatility to increase their equity exposure in a gradual manner, with a three year plus time horizon, will reap a handsome reward.

Q) What is your outlook on the Indian economy and equity markets at the moment?

A) The Indian economy is structurally very strong. We are a balanced economy with three legs of growth domestic consumption, domestic investments and exports, without being overly dependent on any one of them.  Our demography (proportion of working population to total population ) is among the best in all major economies.  

Macro economic indicators such as inflation, current account and fiscal deficit are in control. The recent slowdown is more cyclical in nature. Government has introduced difficult reform measures such as GST.,RERA and IBC which have long term positive implications for the economy.  We feel Indian GDP, from current level of ~ USD 2.7 trillion can cross USD 10 trillion in the decade or so.  

Also, currently Indian corporate profits as a % of GDP are 2.5%, a level seen in 2003. As corporate profits normalize in this cycle and also as the size of GDP grows, investors in Indian equities will earn handsome returns.

Q) ITI has launched the Multi Cap Fund in May 19 and the Tax Saving Fund in July 19, do you feel launching these schemes when the markets are witnessing a major correction would give you an added advantage?

A) The market is not in a euphoric zone as was the case in December 2017. Investors expectations are more moderate. Valuations have corrected, more particularly in the broader market. 

As stated earlier, many sectors and stocks are trading at or below long term valuation multiples, thus giving more opportunities for bottom up stock picking. Thus, times are certainly interesting to invest as long as one keeps a long term horizon and keeps a focus on quality and cash flows.

Q) What sectors do you see picking up pace in the near future?

A) We are very bullish on the insurance and AMC businesses within the BFSI space. Also, we feel corporate banks will see good earnings recovery as the large corporate NPA cycle is coming to an end. 

We also feel that investment cycle in India will revive in the next three years, after a lull of over seven years and we are selectively adding stocks exposed to the investment recovery. Pharma is another sector that we are bullish on as the US generic prices are stabilizing and Indian domestic pharma business remains strong. 

We are also adding stocks in the auto sector as valuations already reflect a large part of the sector downturn.

Q) ITI Multi Cap has been able to manage the slowdown better compared to other seasoned Multi Caps since its launch, what has worked for you in that aspect?

A) We stuck to our SQL investment philosophy during our portfolio construction. Our focus on quality of stocks in the portfolio and our call of not taking a large weight in mid and small cap stocks despite the general bullishness around them post the election results paid us well during this downturn. 

Among sectors, our call on being overweight in insurance and asset management companies within financials and avoiding banks with weaker credit quality helped us. 

Our overweights in pharma , capital goods and consumer sectors and buying auto stocks in the correction also helped us outperform. In line with our SQL philosophy, we stuck to quality, did not overpay for it and also maintained a low leveraged stocks portfolio.

Q) Tell us a bit more about your strategy for your ELSS Fund

A) ITI Long Term Equity Fund will be investing across market capitalisations. As a discipline, we will have at least 90% exposure to equities at any point of time and generally prefers not to take cash calls. Typical portfolio will include 40-70 stocks. 

The portfolio will be having a bunch of companies that meet the 'SQL' investment philosophy. More than 80% of the fund will always be in core set of companies and upto 20% of the fund is expected to be in tactical stocks. 

Core set of companies are strong and sustainable businesses with competitive advantages in their respective fields, while the tactical allocation will be towards good companies with significant upside potential but going through temporary problems and at the same time trading at beaten down prices.

The fund will also try to take advantage of the three year lock-in-period, by having a longer tail of mid/small cap companies which can potentially give higher returns over longer term.

Q) Tell us a bit more about your ‘SQL’ philosophy

A) ITI Mutual Fund follows the fund house core investment philosophy ‘SQL’ (S: Margin of Safety, Q: Quality of the business and L: Low Leverage).

Margin of safety is the fair value of business minus the current share price. We feel, buying stocks with good upside and less of downside is critical for a good investment experience. 

Quality companies with strong competitive advantages have been long-term wealth creators and therefore focusing on good quality companies is a must to protect the downside and also to create a good compounding experience.

We analyse the industry structure, promoters’ credibility, business fundamentals, management track record, growth ambitions and balance sheet strength to evaluate the company’s health. Lastly, the fund house analyses the company’s leverage situation and prefers low leverage companies for investments. 

High financial leverage significantly reduces a business’s ability to withstand cyclical downturn. Low leverage companies are generally cash rich and are able to channelise their cashflows to grow the business successfully.

Q) What would be your advice to investors looking at your Multi Cap Fund?

A) Multi Cap fund is well positioned with a bunch of very good quality stocks which fits into our SQL investment philosophy, where our conviction levels are very high and can potentially deliver good compounding experience for investors. 

Currently we have positioned the fund with more of Large Cap stock exposures and as and when we see there is an opportunity in the market to increase mid and small cap exposure we may do that, at that point of time. 

So our advice to investors is to look at ITI Multi Cap fund as a one stop solution to create long term wealth within the diversified equity category, which has an in-built feature to manage the risk in the fund efficiently.

Market valuations are coming nearer to long term averages and many sectors / stocks are now available at or below long term averages, increasing the opportunities for bottom up stock picking. Interest rates are low, monsoon has improved, oil prices are stable and valuations look interesting.  

Thus, these are very good times to increase exposure to equity in a systematic manner and take advantage of the volatility in the markets. We are more constructive on the equity markets now than when we launched our multi cap fund.

Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  

Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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