Nivesh Mitr (NM): 2018 was a very volatile year. How did you and your team handle the volatility for managing Aditya Birla Sun Life Tax Relief ’96?
Ajay Garg (AG): 2018 was a year of reversals. Globally, most asset classes were in the red due to macro concerns, especially volatile crude oil prices, strong USD and rising yields. Geopolitical events kept investors on tenterhooks and domestic events such as tightened liquidity and State elections added fuel to the fire. Secular growth in the equity markets seen in 2017 gave way to volatility in 2018 globally, and India was no exception. In such a volatile environment, our approach was to take measured risks and be aligned with quality and low-beta rather than cyclicals. To a major extent, we avoided sectors and stocks with high linkage to macro variables.
NM: Aditya Birla Sun Life Tax Relief ’96 is generally seen to be having a very unconventional portfolio. What is the investment strategy (or stock selection criteria) of the fund?
AG: Our approach is medium-to-long term and our endeavour is to identify beneficiaries of a fast-changing world. In the process, we try to enter businesses early before growth accelerates. We are encouraged by factors such as the large domestic market of 1.35 billion people representing 15% of the world population, with a per-capita income of ~USD 2,000 and rising aspirations, GST implementation, fuel price deregulation, import duty on precious metals, India’s trade neutrality with the USA, broader earnings growth supporting the market, valuations now turning attractive post correction in broader market, and steady retail SIPs, etc. Rising per-capita income is also likely to trigger a change in consumption pattern.
We invest in high-quality companies with strong parentage and professionally managed. Time and time again, it has been proven that focus on quality stocks pays off in the medium to long run, even though one has to endure short-term volatility and use the mispricing of stocks in volatile periods to one’s advantage.
NM: Does the fund have a mandate on the percentage allocation to large, mid and small-cap stocks?
AG: The fund does not have any such mandate. But we always try to identify and invest in the leaders of tomorrow.
NM: What will be your portfolio strategy for 2019?
AG: The ABSL Tax Relief ’96 fund is a well-diversified, multi-cap fund in the ELSS category with a lock-in of 3 years. Our investment style is to focus on the medium-to-long term rather than one year and trade. We focus on sales growth and predictability of earnings for 3 years and beyond. The fund has representation from all major sectors: Autos, Consumer Discretionary, FMCG, Financial Services, Industrial & Capital Goods, Pharmaceutical, and Agrochemicals. The investment philosophy of the fund is to invest in quality companies. Quality orientation involves selecting companies run by professional managements which have strong promoters, adhere to corporate governance, spend sizeable amount of revenue on R&D, predictability of earnings, and companies which have strong moats. Integration of ESG (Environmental, Social & Governance) factors into investment analysis and portfolio construction is practiced on a regular basis. While investing we try to avoid buying companies that have excessive business uncertainty.
NM : Your opinion on 2019? Should we consider it as good year, bad year or just a year where we should keep our expectations low?
AG: Rather than focusing on just 2019, we should actually be revisiting the past 3 years and analysing the potential of returns over the next 3 years. Over the past 3 years, the NSE500 has given a return of around ~15% annualized. And over the next 3 years, we can expect annualized returns in the low-to-mid teens, especially with the GST implementation behind us. We believe the breadth of the market will improve in 2019 and one can expect meaningful returns from a bigger basket of companies. A broad-based recovery can be expected around the time of elections in May’19 as major events would have played out by then.
NM:Your advice to investors of Aditya Birla Sun Life Tax Relief ‘96?
AG: The fund is ideal for individuals who are investing in equities for the first time with the twin objective of tax savings as well as capital appreciation. As we all know, Equity linked savings scheme – ELSS is qualified to take income tax benefit under section 80C of IT Act, majority of investors in this category are from low to medium income group who aspire to save on tax and also seek growth. For most investors, ELSS funds give them the first flavour of equity and they would prefer consistent performance rather than a volatile journey. The 3-year lock-in helps in taking medium to long term view on stocks of emerging quality companies and enables us to invest in these companies quite early. However, equity markets can be quite volatile in the short term while it may take a longer time for the investment thesis to play out. In case of equity investments, investors should ideally keep a minimum 3-5 horizon and the lock-in ensures that investors do not get swayed by short-term volatility. Systematic Investment Plan (SIP) would be the ideal vehicle since it would enable investors to take advantage of volatility and enhance returns.