Tata AMC’s Padiyar gives his views on market valuations, the impact of general election results, paying too much for good stocks and how fund manager’s interests can be aligned with those of the investors
Chandraprakash Padiyar joined Tata Asset Management as a senior fund manager (equities), in September 2018. ‘CP’ is bringing his entire over 19 years of experience in research and fund management to the Tatas, where he is now managing Tata Large & Mid Cap Fund, Tata Hybrid Equity Fund (equity) and Tata Offshore India Opportunities Scheme.
He began his career in equity research and analysis at UTI Mutual Fund and in time was designated fund manager, overseeing the mutual fund schemes. Just before joining the Tatas, Padiyar worked with Alchemy Capital Management Pvt Ltd. as portfolio manager for the onshore long-only strategies. In an interview to RupeeIQ, Padiyar gave his views on market valuations as Sensex pushes 39,000, general election results, paying too much for good stocks and how fund manager’s interests are aligned with those of the investors. Read on.
Do overall equity market valuations have any bearing on your equity selection approach? Or, do you select equity securities based on their standalone merit?
We at Tata Asset Management work with an investment philosophy of “Growth at Reasonable Price”. We are focused on identifying companies which can grow at a strong, sustainable pace over the long term with free cash generation and at the same time available at a reasonable valuation. Overall market earnings growth (BSE Sensex) is likely to be in healthy double digits as per consensus expectations driving our positive view on the markets.
In your April newsletter, your fund-house talked about a ‘lowered risk’ of a hung parliament. With already four phases done in the election (interview was conducted before the conclusion of the fifth phase), do you still subscribe to that view? Please elaborate.
Our view of the lowered risk from elections stemmed from the events in end-Feb which improved the chances of a clearer verdict from the ongoing electoral process. The voting percentage in the phases completed so far is inconclusive when it comes to indicating any material change in the potential outcome.
How do you define value stocks? Value stocks in the last few years have hardly seen any PE expansion. So, would the next few years belong to ‘value’ more than ‘growth’
Value has underperformed growth for a fairly long period and now that global yields are coming off, some catch up can be expected. Also, certain segments of the growth have become very finely priced making it prone to risks from any earnings disappointments. Tata Equity PE fund in the value category has a very simple and straight forward rule of investing – it invests 70% of its portfolio in stocks which are trading at trailing 12 months Price earnings ratio (PER) that is lower than the corresponding Sensex PER. This strategy along with bottom-up stock selection has performed very well over the last few years.
Consumption has been an over-bearing theme. But, there is also the risk of over-paying due to the constant noise. I am not talking about rolling over earnings 5-10 years ahead. How do you avoid over-paying?
Investment decision in our view needs to be taken while keeping in consideration a combination of earnings growth, sustainability of the growth in earnings, return on capital employed, economic environment and valuations. Valuations generally should never be the sole criteria to buy/sell a company. Consumer-facing businesses have performed extremely well over long periods of time both on earnings growth and market returns. From our portfolio perspective, we are overweight consumer businesses and have been very selective with a bottom-up approach to identifying the right investment candidates.
As an investor if I ask you, how can you show your interests are aligned with mine…what will be your response?
Asset Management business (AMC) is a scale business, where the sponsor makes money only if the performance of the funds is good which brings new investors to its fold leading to growth in AUM and profitability. An AMC would consistently review the performance of its schemes compared to peers and benchmark and if the performance is lagging then will be forced to take corrective action either in terms of rejigging the portfolio or changing the fund management team. The fund management team is always trying to improve the performance of the funds thereby aligning investor and AMC interests. One another reason for the interests of the fund manager and investor being aligned is the fact that fund manager’s personal savings are also invested in the funds of the same AMC.
How do you minimize the risk of my money when investing in Indian equity markets?
Equity markets are inherently risky especially in the short term. Our approach to minimise risk is to be very focused while investing in the markets. Buy businesses with long term management track record with free cash positive and sustainable profit growth profile. We believe that if the portfolio companies are likely to grow profits with free cash generation then the value of the portfolio may see short term volatility due to market reasons but ultimately fundamentals will prevail.
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