Fund Talk: DHFL Pramerica Large Cap Fund

15 X growth over 15 years

Alok Agarwal,

Fund Manager – Equity,

DHFL Pramerica AM

15 X in 15 years in the large caps space speaks well about DHFL Pramerica’s Large Cap Fund and indeed the market, which has demonstrated its long term wealth creation potential time after time. Alok is aware of the near term performance challenges that his fund is presently going through, but remains confident that with a strong portfolio of high capital efficiency, low leverage and high earnings growth, he will reverse the near term hiccups.

WF: Congratulations on your Large Cap Fund’s completion of 15 years of wealth creation. What are some of the most significant milestones that this fund has crossed in its long journey?

Alok: DHFL Pramerica Large Cap Fund has been one of the most consistent funds in the category. Since its inception the fund has created wealth for its investors by growing over 15 times in 15 years. The fund stands for picking up growth stocks from the large cap domain giving preference of capital efficiency and avoiding high leverage companies. Being disciplined through this long journey of markets ups and downs has been one of the key achievements of the fund, which in turn led to this wealth creation.

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Data as of 23-Mar-2018

WF: The last 1 year seems to have been relatively challenging in terms of alpha generation. What are some of the factors that have caused this near term underperformance and what steps are you taking to reverse this trend?

Alok: Our outlook and management style is more focused on the longer term, where markets have time and again shown that earnings (and growth) are the key determinants of returns. In the shorter term, there are a host of factors that impact the share prices and in turn the fund returns. Having said that, we are aware of the near term under-performance caused by a confluence of factors like demonetization, GST implementation, global developments on trade front, commodities movement. We keep a reasonably diversified portfolio of about 50 stocks and are overweight on consumption, private retail lenders. With a strong portfolio of high capital efficiency, low leverage and high earnings growth we are confident of reversing the near term hiccups.

WF: Market sentiment has turned cautious and worries now abound on global trade wars, on domestic macros, on election uncertainties and so on. What is your outlook on markets over the next 12-18 months and what do you see as the key drivers going forward?

Alok: With the demographics structurally in India’s favour and consistently higher GDP growth rates, we are both absolutely and relatively better placed than many other countries of the world. Shorter factors (both negative and positive) have always been around. However, with a double nominal GDP growth rate expected to sustain for a longer period, we do expect better managed companies to deliver even higher earnings growth rate than the nominal GDP growth rate. In this context, the corrections, in fear of any of the events mentioned by you, would offer opportunities to investors. With the earnings cycle having picked and internal looking stronger, we continue to be positive on equity as an asset class.

WF: Is our cyclical economic recovery on hold right now? Is this the time to get defensive in portfolio strategy?

Alok: These are early days of the economic recovery. GDP growth rate has moved back to above 7% region, inflation is consistently staying under 5%, IIP numbers have shown three consecutive months of 7% growth, bank credit growth is close to 2 year highs, over 50% of the BSE500 companies reported double digit growth in Dec’17 quarter (almost a six year high), thermal power plants recorded PLF of over 60% - first uptick in nearly 10 years, the NCLT/IBC is ensuring faster resolution of NPAs. All these are few of the factors that suggest that cyclical economic recovery is definitely happening, although its taking its own time. Within the defensive side of the market, we continue to be structurally positive on consumption.

WF: What sectors and themes are you overweight on now and why?

Alok: Consumption is one of the structural overweights for us. Within this, we prefer discretionary over staples. With one of the youngest populations in the world and ever improving dependency ratio, India is in a sweet spot to get higher growth rates for years to come. Focus on improving rural income, creation of more jobs would only add to the existing advantages of this sector. Combination of consistent growth, expanding market, high capital efficiency and low leverage makes confident about this sector.

Private Banks (especially retail lenders) are also structural overweight for us. With a lion’s share in incremental lending, less than a sixth share in system NPAs, higher efficiency as seen through better NIMs and higher ROAs, private banks are set to keep gaining market share from their PSU counter parts who currently have nearly 2/3rd market share.

WF: A key industry concern now is the nervousness among lakhs of new equity fund investors who are perhaps witnessing their first significant market correction, and the first occasion when their 1 year SIP returns are turning negative. What message would you want distributors to give to these investors at this juncture?

Alok: Equity as an asset class creates wealth only over a period of time. The legendary Warren Buffett had famously said “Its not about timing the market, it is about time in the market”. Being invested through thick and thin and consistently adding up to the existing investment is the time tested way of creating wealth through equity markets. The great Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”

If we are building portfolios for future, corrections offer opportunities to add more units at lower value. Funds, with a disciplined approach to investing in companies with higher growth, high capital efficiency, lower leverage should be preferred.

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