Fund Focus: Canara Robeco Equity Diversified Fund

Compounders help drive sharp performance turnaround

Ravi Gopalakrishnan, Head - Equities, Canara Robeco MF

20th Sep 2017

In a nutshell

Canara Robeco's Equity Diversified Fund has shaken off a relatively weak string of performances to drive into top quartile this year, on the back of a three pronged strategy, led by a sharp focus on compounders, a reduction in the tail of the fund and greater emphasis on value migration. Ravi takes us through what went into the sharp performance turnaround and also discusses current portfolio positioning and strategy.

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: Fund performance has shown a welcome bounce-back after a protracted period of relative underperformance vs peers. What's changed and what should give us confidence that this change is sustainable going forward?

Ravi: Three key things have been changed in portfolio strategy,

1) Emphasis on compounders (businesses with visibility on earnings and some form of competitive advantage),

2) Reduction in number of stocks from ~70 to ~50, which has resulted in exclusion of low conviction ideas and

3)Emphasis on themes like market share gains/Value migration and Balance sheet repairs.

Given that medium to long term returns is a function of underlying earnings growth - holding compounders as majority part of portfolio should bring in sustainable performance in our opinion.

WF: What does your attribution analysis suggest as key alpha contributors for your YTD2017 performance? What specific sector/stock changes were made that helped you turn around performance?

Ravi: Key changes which have helped improve the performance were an overweight position in Auto&Auto Ancillaries, our holdings in Pvt Banks, NBFCs, Insurance, Cement, select FMCG and gas distribution companies, select export plays in textile, industrial etc. Sizable underweight positions in IT, Pharma and Telecom have also helped.

WF: Does your fund mandate certain proportions to be invested in different market cap segments or is it a go anywhere mandate across cap sizes and sectors?

Ravi: The fund is market cap agnostic and based on bottom-up opportunities it can have a sizeable allocation to mid and small cap companies, but the endeavour at all times will be to have a predominant (>50%) allocation to large caps.

WF: Which sectors and themes are you significantly overweight on and why?

Ravi: Pvt sector banks, NBFCs, Insurance,- Market share gains from public sector banks, beneficiaries of transformation from physical to financial savings, better capital adequacy which will help them to capture further market share if the credit cycle turns.

Auto/Auto ancillaries - Secular discretionary(and aspirational) consumption increase fuelled by availability of relatively easy financing. We are participating in companies gaining market share with either product differentiation or having distribution as their strength.

Cement/Speciality Chemicals - We believe that cost leaders will continue to gain market share in sectors like Cement. In Specialty chemicals, several product supplies are shifting to India from China. Both sectors are expected to witness operating leverage benefits as the utilisation improves.

Logistics - One of the biggest beneficiaries of unorganised to organised shift due to GST. Also, road to rail shift in market share.

WF: What is your 12-18 month call on markets and what do you see as the key drivers going forward?

Ravi: We see markets delivering decent returns over next 18-24months

Key drivers for market going forward:

1. Corporate earnings revival through a) Increase in Tax/GDP (due to GST) driving public capex which will be followed by private capex in FY20/21, b) Listed companies benefitting as unorganised to organised theme plays out, c) Peaking of GNPA in the system which will revive credit cycle in FY19/FY20. d) Lower interest rates.

2. Resilience in rural consumption supported by improving farm income and larger focus on infrastructure build-up

3. Improvement in consumer demand on the back of salary rationalisation of government employees

4. Higher government spending on the back of better than expected tax collections through the year

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