Risks
While it would be simpler to hide behind the pretext of weak market conditions, we admit upfront to not being pleased with the AIF performance last quarter. Our portfolio NAV declined ~6% on pre-tax basis, broadly in line with the benchmark BSE 500. We largely attribute this performance to heightened volatility which hit domestic markets earlier than anticipated, thereby resulting in steeper erosion in stock values, particularly mid caps (66% of portfolio). We were also hurt by lack of exposure to the Information Technology (IT) sector, which outperformed.
Volatility to continue
India has underperformed most emerging markets during the quarter, initially due to the imposition of LTCG tax and corporate fraud in the banking system. However, what could make this correction more long lasting are the twin effects of (1) trickier political situation in the run up to spate of elections in India, and (2) risk of global slowdown due to higher interest rates and trade restrictions. In such a scenario, cyclical sectors could be weighed down by concerns regarding sustainability of growth. On the other hand, sectors like IT, Pharmaceuticals and defensives may enjoy disproportionate premium to justify steadier, albeit slower growth rates. Despite the YTD correction, overall market valuations are still at 15-20% premium to historic averages indicating volatility will be the new norm this year.
… but there are compensating factors
Notwithstanding the issues which may be weighing on our markets, we highlight aspects which could reverse this sentiment:
- Improvement in GST collections, through better compliance i.e. e-way bill
- Normal monsoon for third consecutive year
- Favourable outcome for ruling party in upcoming Karnataka state elections in May
- Pick up in construction and other allied sectors esp. road projects
- Sustenance on strong consumption demand (autos, durables, airline traffic)
- Peaking of bond yields, due to recent government led measures (staggering and lowering of borrowing programme)
Better positioned to tide over uncertainty
Our initial portfolio was constructed around the ‘3Cs’ theme, namely Construction, Consumption and Commodities. While we still retain faith in this theme as illustrated by bottom up stock identifications, the elevated macro risks have also forced us to be more accommodative in our investment strategy. As a result, we have diversified by raising exposure to non-cyclicals (IT, Pharma, Defensives). Also, the current portfolio is a better representation of an all-cap fund with balanced distribution (weighted market cap at Rs. 134.5bn).
| Shift in industry exposure (%) | Mar-18 | Dec-17 |
| Auto & Auto Ancillaries | 21.00 | 22.25 |
| Consumer | 18.45 | 10.11 |
| Industrials | 17.83 | 15.28 |
| IT Services | 11.40 | – |
| Construction & Cement | 10.02 | 12.22 |
| Materials | – | 10.14 |
| Financial Services | – | 8.21 |
| Pharmaceuticals | 7.34 | – |
| Aviation | 4.86 | – |
| Cash & Cash Equivalents | 9.10 | 21.79 |
Portfolio realigned to underlying investment strategy
AGOFS has invested 91% of its corpus across 22 stocks, which is similar to position at the start of the quarter. Key alterations to portfolio and rationale is explained below.
- Commodity related stocks continued to do well for the second successive quarter, contributing meaningfully to our performance. However, global fears over slowdown and trade restrictions drove our decision to exit from our holdings, albeit much earlier than originally intended.
- In the consumption space, we have redistributed investments by (1) exiting holdings in financials, which included NBFCs (loss of competitiveness due to rising interest rates) and a Life insurance company (change in valuation paradigm), (2) adding a name in durables (air conditioning), which is continuously gaining market share and has the potential to expand margins, (3) adding a aviation company which we believe is best positioned to piggy back on the secular growth in passenger traffic.
- In construction led segments, we have pruned our positions slightly by exiting a holding where execution was not picking up as anticipated but substituting it for another name in the road construction sector where both order flows and execution pace was brisk. We also retained our exposure in CVs which is through ancillaries, feeding into the construction and capex cycle.
- We have initiated investments in the IT sector through a mix of large and mid tier names. Our stock choices are driven by expectations of strong revenue growth and possibility of margin expansion. We also invested in non-generic Pharma companies during the quarter, mainly in the CRAMs and speciality space.
| Top 5 Positions | % weight |
| Voltamp Transformers | 7.93 |
| Ramkrishna Forgings | 7.33 |
| KEI Industries | 7.25 |
| Page Industries | 6.99 |
| NRB Bearings | 6.58 |
| Total no. of Holdings/ Stocks | 22 |