What kind of thematic funds are available and how different is your fund?
If you look at the India Opportunities Fund as such, this is a special situation style of investing that we adopt, India Opportunities Fund. Essentially to give you some bit of a background here, there is this famous fund manager, famous investor known as Anthony Bolton who ran Fidelity Special Situations Fund in UK for about 28 years from 1979 to 2008. He was very successful at that and generated about 90% CAGR returns. At some point in time, it was the UK’s largest fund, open-ended fund and we do not have this style of investing in India and this product gap is precisely what we are filling in through this India Opportunities Fund. It is a special situations investing that we follow like I said.
Now what is special situations investing? Essentially special situation is any situation which is causing the company, some sort of a problem, right? But the problem is very unique, it is a unique situation that the company is going through and from our experience of managing this fund for about four years now, we have gathered that each of the special situations that a company faces can be categorised into one of the four buckets.
The first bucket can be something like company-specific special situations. What I mean by that is, say a company like a large IT services company which went through this whistleblower problem or it could be a small cap pharma company which went through this IT rates problem, that is a very company-specific special situation.
Moving on, the second category is what we call as the sector-specific special situations. Now this could be of the nature of auto sector facing semiconductor supply issues or it could be telecom sector facing consolidation issues. One large player emerges and it leads to the death of many telecom players, so that is a sector-specific problem. The third category is what we call as the regulator or government-led special situations. Now what are these? These could be of the nature of OMCs absorbing the increase in international oil prices and seeing a sudden dip in their marketing margins or it could be telecom sector facing AGR-related issues or it could be IMO mandating that ships cannot use high sulphur furnace oils. So, these are sector or rather regulator-driven special situations. And the fourth category is what we call as the macro-driven special situations. This could be of the nature of US-China entering into this trade war because of which you see metal prices crashing big time or it could be Brexit leading to a large auto major facing problems in UK market, their investment plans getting derailed. So, these are macro-driven special situations. Broadly in our experience, like I said, any special situation can be broadly categorised into one of these four buckets. These are not run-of-the-mill problems. It is not earnings miss problem you are talking about. We are talking about a very unique problem which is not recurring often. And whenever such a problem happens, what tends to happen is the stock invariably corrects and price point becomes very attractive if you want to invest into that particular stock.
So, you are trying to tell me, based on these factors and the valuations which might have gone cheaper at that time, you pick up companies which have a better and brighter future?
Absolutely. So, the upside is fairly limited and in our assessment if we believe at that point in time, the downside risk is fairly limited based on a special situation, the risk that a special situation throws up, we go ahead and invest in those companies. It is a high return, high risk scheme from our stable and the weight of that particular stock in the portfolio is decided based on the number of risks that a special situation throws up. Talking about the current scenario and the four situations that you just laid out, you just explained, what exactly are the current situations or triggers that might just classify into these three-four types of scenarios?
Yes, for example, let us say you have these recent budget announcement where life insurance companies were asked for the policies with greater than five-year ticket sizes. The investors had to face marginal taxation rates, that is a special situation which is in the third category. If you look at the injectables business, the pharma companies which do injectables business, they are seeing significant competition, that is again a sector-specific problem. If you look at a biosimilars company which is facing a very company-specific problem wherein it has to reduce its debt, bring down its leverage, in the process it is selling a significant stake in one of its subsidiaries, so that is a company-specific problem. So, these are some of the current special situations at this juncture.
Let us talk about the current scenario also. Before I go deep into the fund performance and the kind of risk and reward ratio investor needs to understand before investing in a theme like this, how is the market looking to you? How are you reading it?
See, from a market standpoint, market view perspective, while there has been significant correction, the correction has been for a reason and that is largely to do with the global slowdown. When you have global slowdown happening at a time when the interest rates are fairly high, they are not still yielding, we still do not have a situation where we can see them coming off from these levels where we can see that the peak interest rates have been achieved, it is better to be a bit cautious.
While we understand the long-term opportunity that the Indian market has for its investors, we got to be a bit more cautious at this point in time and own sectors like utilities, telecom utilities, power utilities, pharma sector which has been a rank underperformer and is fairly resilient in terms of its business conditions. Large liability franchises which can withstand the challenges that this global slowdown brings about, wherein large liability franchises can withstand the liquidity decline that we have seen at the LAF window.
So, these are some of the sectors that we are very positive about. We are negative about sectors which are more consumer-oriented, consumer-focussed because we believe the weak demand conditions will continue to remain weak for some more time to come, so from that perspective, we are still negative on or cautious at least on the consumer names.
Your top five sectors where you are heavily invested right now?
Right now would be telecom and power utilities. And we have exposure to pharma companies and we have exposure to large liability franchises.
Trajectory for these sectors in near term or maybe two to three quarters is how according to you?
The prospects still look great for these names, the names that we own. We believe this should also provide downside protection at this point in time. Not only is there upside that these stocks present, but they should be less volatile compared to the rest of the market. So though it is a high risk, high return fund, given the market conditions, these stocks because they are resilient businesses with the market conditions, should do quite well in our opinion.
