Fund Focus: Reliance Top 200

Domestic capex is the theme to bet on now

Sailesh Bhan, Deputy CIO - Equity, Reliance Nippon AMC

3rd October 2016

In a nutshell

Since the change in its name and portfolio strategy, Reliance Top 200 has recorded 3 good calendar years of performance out of 4, though this year has started off so far on a relatively weaker note. Sailesh strongly believes his portfolio is well geared to capture emerging growth opportunities, and signals domestic capex - especially short cycle capex as a theme to bet on, along with urban discretionary and the oil and gas sectors. Sailesh observes that in the last 18 months, while the midcap index has run up over 24%, large cap indices have been flat - clearly signaling where relative value now lies.

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: After 2 strong calendar years of performance relative to benchmark and peers, this calendar year (YTD 2016) has been somewhat disappointing so far. What drove performance in CY 14 and CY 15 and what is coming in the way of replicating this performance this year?

Sailesh: Reliance Top 200 Fund has registered consistent performance across market cycles and has outperformed the benchmark in 6 out of 8 calendar years. The fund despite its large cap orientation has created meaningful alpha in reasonable growth years, like 10% alpha in 2012 and 19% alpha in 2014. Since Aug 26, 2011 (when the fund strategy was changed) till date (Sep 28, 2016) Reliance Top 200 Fund has grown by 1.3 times as compared to the benchmark which grew by 0.9 times during the same time.

Reliance Top 200 invests primarily in market leaders and is currently focused on recovery themes like Consumption and early cycle capex, which can benefit from the domestic revival

The domestic story is still unfolding and has not completely played out due to 1) Global concerns like: a) China slowdown worries in early part of 2016, b) Fear of rate hikes by US Fed and 2) Domestic developments like Banking sector provisioning norms etc.

However, near term events notwithstanding the we remain optimistic on prospects of domestic economy, given the strong domestic macros, policy reforms like GST, FDI etc and recovery in corporate earnings. The fund with its focus on domestic growth themes is well placed to benefit from the expected revival and can potentially outperform over the medium term.

WF: Can you please take us through the rationale for your overweight positions in Short Cycle Capex and Oil and Gas?

Sailesh: The Fund has invested into companies which would be beneficiaries of short cycle capex, typically product engineering companies who supply to developers in areas like Roads, Railways, Power T & D etc. This space is expected to benefit from the huge emphasis by the Government on building Infrastructure & improving manufacturing, with a target of improving the share of Manufacturing to 25% of GDP by 2022. Approximately 1.6 Lakh Crs of fresh ordering has happened in Roads, Power generation, T&D and Railways in the last one year.

The segment has low capital requirements (unlike Metal or Infra plays) and from a low-demand environment resulting in lower capacity utilization, the segment is likely to get benefited from the ensuing fundamental demand resulting in operating leverage, improved margins and possible re-ratings.

Oil & Gas exposure is a play on relative valuations and growth turnaround. The lower oil & gas prices along with subsidy rationalization efforts of the Government has led to improved margins. In the fund we have allocations to downstream oil companies and gas majors like Reliance Industries, IOC, LNG Petronet etc.

WF: Your fund mandate allows you to go upto 30% in midcaps and maintain a minimum of 70% in large caps. Your latest allocations suggest a 16% exposure to midcaps. How has this number moved over the last 12 months? Is it getting increasingly difficult to find value in the midcaps space now?

Sailesh: Over the 12-18 months the equity markets have witnessed high divergence in performance of Large Caps versus Mid & Small caps. For instance, in the last 18 months since April'15 till Sep 2016, S&P BSE Mid cap index is up by 24.6 % on an absolute basis whereas the S&P BSE Sensex returned only 0.1% during the same period

Thus clearly the risk/reward were in favor of large caps and during this period we increased our allocations to the Top 100 companies by Market Capitalization. Larger businesses have a well-established track record across market conditions and are expected to be the early beneficiaries of the economic revival. Hence the fund used the opportunity to increase allocation to Top 100 companies over the last 12 - 18 months.

WF: How do you find valuations in the large caps space now relative to history? Is there a case for re-rating our valuations upward to take cognizance of a zero/negative interest rate global market or is that just another theory to talk up markets on the way up?

Sailesh: The recent run up in the equity markets since March 2016 has led to markets now trading at 10% premium to 10-year average PE multiples. These valuations should be seen in the light of cyclical low base of earnings and expectations of the likely earnings improvement (higher double digit growth (15-17%) expected in FY17 and FY18) supported by uptick in cyclical demand. Also large sectors like Banking, Metals are at their lowest profit in recent times and this can turnaround going forward aiding earnings growth.

With many factors now showing improvement year over year and earnings expected to rise mid-teens for the next 12-24 months given the current low base, Indian Equity markets are attractively priced from a medium term time frame.

WF: If you were to pick one theme that you are most convinced will deliver significant wealth creation over the next 5 years, what would that be and why?

Sailesh: We are constructive on domestic recovery themes from the medium term perspective. Discretionary Consumption & Domestic capex can be significant beneficiaries of the recovery and offer good growth possibilities.

On the consumption side we are focused on Urban revival themes and this space is displaying early signs of recovery across areas like Passenger Cars sales, Hotel occupancies, Air Traffic, organized retail, Entertainment, Advertising spends etc.

Domestic Capex recovery is likely to be supported by the lower interest rates and expected increase in cyclical demand. The key themes which can gain from the same are: Corporate Lenders & Manufacturing space. This space can benefit from both operating and financial leverage over the next few years.

Share this article