Anish Tawakley, Deputy CIO - Equity and Head Research, ICICI Prudential AMC
You are not a fan of the very common Growth-at-a-reasonable-price, or GARP, strategy. Can you tell me why you prefer the barbell strategy, and the type of companies that fall on the ends of the spectrum?
I personally adhere to the barbell strategy because I typically find is that GARP is populated by companies that are not as good as the market leader. The GARP universe is made up of typically weaker companies, or rather, not as strong, but are pitching to be the next big thing. The next big bank. The next big market leader. Yes, they could have a good spell, but it is dangerous to extrapolate.
When I call a company “good”, it is not a fuzzy sentiment or feeling. I refer to market share and profitability. Gaining market share in its space or higher profitability than its competitors. The company should be doing either one, if not both. When it comes to governance, I look at minority shareholders and capital allocation. Dividends is a great indication. A company paying dividends, particularly from a minority shareholder’s perspective, indicates that the profits are real and the promoter is willing to share them and not indulge in a random project.
Frequently, I find that the market leaders or companies that fit the growth and quality bucket – have a good market presence and are highly valued, have some inherent strengths.
So if you take the best bank, it is in that position because it has done certain things right. It has a moat. Companies that have moats are difficult to displace. Even if they err, they can recover and bounce back. The leading car manufacturer may be late with a few models, but has the wherewithal and capability to come back strong.
On the other end of the spectrum are companies going through a bad patch in the cycle. No one wants to touch them. They are cheap. Expectations are low. The valuations support such buys. When you are buying something at 0.8 times Book Value it is not risky. It would have been a risky bet if being bought at 2.5 times Book Value.
GARP expectations are not low. People are expecting them to do well, so they are paying for the possibility of high growth. Expectations are probably more than what can be actually delivered. There is a big risk that the company won’t deliver as expected.
What motivates a sell?
If at any time I feel that earnings upgrades are done and going ahead earnings will likely be downgraded, then I would sell. I would not just assume that the PE multiple could expand further. Because when downgrades happen, typically the multiples also move downward. I look at my own earnings forecast and sell side forecast and arrive at a decision.
The number of stocks in my portfolio is irrelevant. I don’t even track that number. Being such a large fund, I have to enter and exit slowly. There will always be stocks in the portfolio which are on their way in or out. If the stock is below the price I am comfortable selling, I will hold.
What is the kind of investor you cater to, and the kind of investors you would rather not have in your fund?
Bluechip can cater to any investor. I would recommend it to everyone. It could be a core holding for anyone.
There are many ways to make money in the market, so every fund manager will have their own style that they consistently adhere to – be it growth or value. However, we at ICICI Prudential are not momentum investors, and at our scale we cannot be. This fund would not cater to a momentum investor.
And any investor who wants to invest for a period less than three years should avoid this fund. This I think holds for equity as an asset class, not just this fund.
The three years earnings outlook one can forecast, but very difficult to forecast what will happen to the PE ratio in the next one year. People ask me if the market is expensive or cheap at 21 times or 22 times or 23 times. If you invest for three years and assume that the earnings have grown in mid-teens, then the 23 to 21 is a 10% correction. So I don’t spend too much time thinking if the multiple is right or wrong. I look at the earnings outlook for three years.
The large-cap space is tough to stand out in. So when I talk about returns - there are two aspects I would like you to comment on. How do you generate alpha? When does your approach hit rough weather?
Unlike the Business Cycle fund, which I also manage and the calls are top down, in Bluechip I follow the bottom-up style of investing. While the sector weights are somewhat aligned with the benchmark, the active weights are on the stock level. So there will be an approximate 40% active weight.
There are instances where I may not like a sector at a given time, but still have some exposure to it. For example, I am not keen on Banking at the moment. But I do have banking stocks. However, the sector is underweight the benchmark. I don’t have FMCG though.
One approach is to aim for being in the top quartile each year. But then one will have to take on higher risk and be prepared for ending up in the bottom quartile as well. The other approach is to manage risk in a manner such that one can avoid being in the bottom half in any year. Even if one is consistently second quartile each year, there is a reasonable chance that one may end up in top quartile over a 5-year period.
People may perceive it as mediocrity. But mediocrity and consistency are two different things.
Just by avoiding big mistakes helps generate alpha. For example, avoiding euphoria in a sector when it is obvious that sector performance is driven by only four or five stocks.
When it is just a handful of stocks driving up the benchmark indices, this fund will underperform. If market performance is very concentrated, this fund cannot be expected to perform. After all, mutual funds by definition are diversified vehicles.
The market over the long run is rational, but not necessarily over the short or medium term. So when it is irrational, the fund manager has to decide whether to stay rational or outperform. It is impossible to do both simultaneously.
In a momentum market, this fund will not do well. However, there is earnings momentum and stock price momentum without the tailwind of earnings. I am referring to the latter.
ICICI PRUDENTIAL BLUECHIP
- Assets Under Management (August 2023): Rs 40,078.90 cr
- Fund Manager: Anish Tawakley
- Medalist Rating: Silver
- Star Rating: 5 stars
- Morningstar Analyst: Nehal Meshram
- What our analyst says about the fund
