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: What is your strategy for the equity component of the fund and what proportion of the fund is typically invested in equities?
Sudhir: About 73-76% of the fund is in invested in equities of which 65% in invested in top 100 companies by market capitalization (as per scheme mandate). The remaining 8-10% is invested in mid-small caps. Our investment orientation is mainly towards growth businesses with focus on capital efficiency and quality management. We follow a bottom up approach of investing. We prefer those businesses where the growth opportunity is large, earnings growth visibility is upwards of 15% with emphasis of capital return ratios, management quality is comfortable and at a reasonable price. Sector-wise allocation of the portfolio will broadly track the benchmark (depending our view on the sector) while the stock specific allocation will be different.
WF: What is your strategy for the debt portion of the fund?
Sudhir: Debt Strategy for Prudence fund is largely divided in two parts. The first part, is managed on a relatively static basis and is typically invested in govt. securities and corporate bonds. For the 2nd part, a more active strategy is adopted with appropriate changes in duration in line with the outlook on interest rates. Thus, the aggregate strategy provides in a balanced and consistent manner, benefit of both a directional return in line with underlying market environment as well as that of an active management strategy.
WF: To what do you attribute your fund's consistent alpha delivery and strong peer group performance in its initial couple of years since inception?
Sudhir: Disciplined approach to investing, with focus on quality up to a reasonable price along with diversification, has helped us deliver satisfactory returns. It's important to be in the right pockets to generate alpha, as divergence is significant, both across sectors, as well as stocks within a sector. At times, we also take a couple of tactical calls which has helped improve the overall returns.
WF: What are the sectors and themes you are most convinced about from a 2-3 year perspective?
Sudhir: We believe consumer facing businesses (both direct and enablers) will deliver superior earnings growth. Additionally, there is going to be a gradual shift from unorganized to organized sector across the industry led by GST. We will participate in such business/sectors as the growth rate of the organized players will be ahead of the industry growth rate. Such business will command better pricing power and hence higher margins. Broadly speaking, sectors, we are positive upon are Retail Banking, Auto, Metals, Consumer and housing finance and related building materials.
WF: Balanced funds are at the centre of action in the industry today - huge flows on one hand but niggling worries about them being perhaps misrepresented as "safe" due to the term "balanced" when in fact over 65% is allocated to equity. Is the rapid growth of the category a source of joy or worry for you?
Sudhir: Balanced funds certainly has a lower risk than a pure equity fund. Since these are 'equity oriented balanced fund', equity component is higher and that should be made clear to the investor at the time of entry. Balanced funds are very good from the asset allocation perspective as there is automatic rebalancing between equity and debt depending upon the market cycles. An individual investor does not have to worry about the asset allocation strategy.
The category growth should be viewed in the positive sense. This category will be mentally more comforting for many investors, as the volatility of the returns will be lower than a pure equity fund. I think, the category will play a key role in enhancing the equity culture in the country. However one piece of caution it has to be pitched to the correct segment of investors.
WF: Markets seem to have paused for breath last month, and recent newsflow on earnings and GDP growth are not very encouraging. In this context, what is your take on markets from a 12-18 month perspective?
Sudhir: From next 12-18 months view, there are many levers for earnings growth. From Q3FY18, low base effect will kick in and will continue for 3-4 quarters. Secondly, organized sectors will start reaping benefits of GST both from the perspective of market share gains and cost efficiency. Thirdly, demand recovery will boosted by 2 consecutive years of decent monsoon. Fourth, Government's impetus towards rural recovery through rural housing schemes, farm loan waiver and infrastructure projects will start showing some results.
I believe that markets are pricing in some amount of that recovery and will wait for the confirmation of the same. Overall, we are positive on the India growth story from longer term perspective.
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