Dhawal is the Head of the Equity Investments Team at RAMS and Portfolio Manager of the IEGF LT since August 1, 2010. With over 19 years of experience in Indian equities he is a well-known name in the industry. He joined RAMS in March 2010 from Deutsche Asset Management (Asia), Singapore where he managed a US$600 million long-only India dedicated equity portfolio. Prior to Deutsche, Dhawal managed India equity funds at HDFC Asset Management as a Senior Fund Manager handling six equity mandates totaling US$600 million. He spent over five years at Alliance Bernstein doing Asia ex-Japan, Hong Kong, Singapore research on commodities and discretionary consumer sectors. He also managed India-dedicated money for Alliance totaling US$150 million. He has consistent and impressive track record in terms of beating benchmark and top quartile performance among peers. Dhawal has extensive sell-side experience too with marquee firms like IDFC, UBS Securities, UTI Securities and ASK-Raymond James. He covered the cement, metals, autos, chemicals, engineering and capital goods, paper and conglomerate sectors as a sell-side analyst. Dhawal is a Mathematics graduate from the University of Mumbai. He has an accounting qualification (The ICWAI) and holds an MBA in Finance from IIM, Kolkata. He is also a CFA charter holder since 2001.
- How did your fund perform in 2012 and how did you cope with the often sharp market movements during the year?
- Many Indian funds that are domiciled in USD have suffered losses due to currency movements during the last two years. How did these movements effect your fund and what steps have you taken to mitigate this risk?
- How is the India Growth Equity Fund different from other funds that trade Indian equities? What sort of an edge does this fund offer to its investors?
- Could you tell us about the research and analysis that you perform on stocks, before actually investing in them?
- On an average, how many positions do you hold at any given point in time? How are these positions rebalanced and how often?
- How flexible is your fund in terms of its sector-wise diversification? Do you have any cap or restrictions in place in terms of your exposure to each sector?
- What risk management tools do you have in place that help you safeguard your fund’s investments? Have these changed over the years to implement key lessons from the financial crisis?
- What classes of investors (fund of funds, high net worth clients, institutions, etc.) is your fund targeted towards? And, what are the types of investors that have shown interest in your fund so far?
- Investors have not been that forthcoming with allocations over the last two years, how has your fund fared in this environment? Can you provide a broad breakdown of your current investor base i.e. region-wise, and by type?
- The Indian government has unveiled various economic reforms over the last few months, how do you expect these to impact the market in the longer term?
- Could you give us your medium term outlook for the Indian equity markets? Do you foresee any movements in the market, in the near term that might work in your favour?
The Fund was up 24.6% in CY12. We try and manage market volatility through a two-pronged strategy. Firstly, the stocks that we buy are inherently high quality and typically low beta stocks. We therefore tend to outperform the market significantly during a downturn. Secondly, we vary our cash holdings in the portfolio – for example during 2012 we had cash holdings as high as 36% and as low as 3%. Our cash calls however are not so much about trying to time the market but more about maintaining our discipline on selling stocks when they attain their target price and on actively looking for stocks that can generate 25 to 30% annual return.
The INR performance has impacted our performance as well, both in 2011 and in 2012 when the currency depreciated against the USD. Given the high costs of hedging the currency (6 to 7%), it is difficult to justify hedging the full portfolio. Nonetheless, some of the steps that we have taken to partially hedge the portfolio are: investing in USD denominated ADR/GDRs whenever possible and keeping cash balance in USD.
Most of the traditional India dedicated funds either offer you a long only benchmarked return or a conventional long/short strategy. In IEGF we target absolute returns to clients in the long term through a long-biased strategy.
Our edge is our own proprietary research on mid/small caps in India. Our parent, Reliance Capital Asset Management, is known for its research into mid and small caps and we are also dedicated to this strategy.
We follow a fundamental ‘bottom-up’ stock picking strategy. We perform detailed and rigorous fundamental research on all stocks in our universe. Besides the normal financial and peer group analysis we put a lot of emphasis on quality of management. In a country like India where companies are predominately promoter-led, we feel it is necessary to gauge the promoter capability, experience and strategy before committing oneself. How the management/promoter has fared on corporate governance issues is a key parameter for us. We also focus a lot on valuation; we are unlikely to pay a very high premium for a quality investment. The objective is to identify the ‘right business at the right valuation’.
We believe in having a concentrated portfolio – typically we own about 20 positions and most of the holdings would be around 4 to 7% of the fund. There is no pre-determined re-balancing strategy. Our re-balancing actions are purely a function of our view on the stock at that point of time.
The fund is very flexible in terms of sector-wise diversification. For example, there are currently two sectors make up 57% of the portfolio. We do have an internal limit of restricting single sector exposure to 40% and single stock exposure to 10% of the portfolio.
We believe that primary risk control is achieved by the quality of company that we have invested into. There is therefore a thorough analysis of the stocks that we invest in and on this issue we put specific focus on corporate governance issues and quality of management. One of the added metrics that we now look at post the 2008 crisis is liquidity. We are now much less tolerant of illiquid, small cap stocks than before and the focus is on having as liquid a portfolio as possible without diluting the kind of stocks that we want to invest in and without diluting the mandate of the fund.
Our current investors are a mix of endowment funds and some family offices. The Fund will appeal to investors looking for long term exposure to India. Typically we would think that endowments, pensions, other institutional investors and family offices are our targeted investors.
It has been a difficult environment for single country focused equity funds and our experience has not been very different in that regard. Most of our current investors are from the United States.
The current wave of reforms is very favourable for the Indian economy and for the equity markets in the long term. The immediate positive impact is the likely averting of a sovereign rating downgrade by S&P. Longer term; these reforms will re-install fiscal discipline, accelerate GDP growth, propel investments and lower interest rates.
Our medium term outlook for the market is positive. GDP growth seems to have bottomed out, inflation and interest rates are clearly headed southwards, corporate earnings seem to be recovering and the government is unleashing policy reforms – we believe that these factors will keep the momentum going in the near to medium term. Volatility however, will continue to be high – driven by news flow from domestic as well as regional/global markets. The one risk to watch out for in India is political uncertainty – general elections are due in mid-2014 and that event will impact markets over this period.
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