Can an equity fund really make money in a flat market? (Wealth-Forum e-zine)

Kenneth Andrade, CIO, IDFC MF

In March 2008, the Sensex was hovering around the 17,000 levels. The next 12 months can only be described as a bloodbath, with the Sensex dipping to a sub-9000 level. We then saw a sharp recovery in the second half of 2009, with the Sensex clawing back to around 16,000 levels. Since then, we have had a flat market - and even today - the Sensex is still hovering around the 17,000 levels. The last 4-5 years has been quite a forgettable period for equity markets and most equity funds. 

Here is a story of one fund which bucked this trend - and has delivered significant alpha in a flat market. It was launched in March 2008 - just before mayhem hit the markets - and in what has been one of the most difficult periods for equity investing, has done a commendable job of actually delivering wealth creation over the last 4 + years of its existence. And, in its performance, lies an important story - about what really helps a fund manager deliver alpha even in tough times.

Large Caps , Mid Caps or Simply Good Businesses ?

Here is what Kenneth Andrade has to say on this key issue :

The investor today has this question: Which fund to buy Large Cap vs. Mid cap, and are midcaps such a relevant play in the entire environment, if the large caps tend to remain sticky?

Our answer to it has been that whenever we have put a portfolio together, our starting line has always been good businesses and good visibility.

Since 2008 there has been a fairly good cycle of market trenching into 2009, and post that moving up. Our Sterling Equity Fund has been around since the beginning of 2008. It's been through a cycle where valuations were extremely cheap, moved into a cycle where markets went flat and then moved to a cycle where some part of the markets have got very expensive and that essentially is the scenario we have been in, 2008 and till date markets have been virtually flat, 2008 we launched Sterling Equity at a 17k index and the market is still hovering a little below that no, though the fund has generated significant alpha. And in that entire context there has been a huge reshuffling of the environment around us, we moved away from the investment economy, we became a pretty large consumer economy. We moved from distressed corporate balance sheets to stressed balance sheets and we have got into a very interesting cycle of how consumer leverage has started to pick up. In context of that over the next couple of years we will see consumer leverage being one of the key driver to where the environment will essentially lead and consumers or any part of the market which will receive significant amount of money from the system will continue to tier upwards in terms of growth and that should reflect in the underlying market cap.

Sterling's positioning essentially is that we try to buy growth businesses in the mid cap space. The fund actively builds a portfolio of companies with proven business model. The focus is on identifying structural changes in the environment and align companies based on how their valuations stack up within their respective industries.

We try to buy good businesses. The way to effectively do that is to make sure that the companies we are buying are not financially leveraged. The underlying portfolio will be completely diversified, we have our fair share of every other business that forms part of the benchmark index. And we would like to participate over the next cycle.

So we are not really looking at, where in the entire system the environment is placed or whether the FIIs are putting money in the system or not. If the company grows profitability it will attract its entire market and capital into it all. That's the space we operate in, and that's how we would like to grow the entire opportunity.

Disclaimer:

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