'ELSS is not just a tax-saving option but a wealth-generating one'

Overseeing a wide range of funds distinctly different from one another - from tax-saving funds to PSU funds, multi-cap funds to hybrid funds - can be daunting for any fund manager. But not so for Dhimant Kothari. It's his everyday job at Invesco Mutual Fund. When we ask him about this, he simply says that each fund's strategy is "derived from its mandate".

Kothari then proceeds to discuss the factors influencing the performance of the Invesco India ELSS Tax Saver Fund and his approach to creating diversified portfolios in other funds. Here's an edited version of our interaction with Invesco's fund manager.

What first sparked your interest in equity investing?

My father used to write accounts in a traditional manner, which led me to pursue my professional degree in Chartered Accountancy (CA). During my internship, I realised that traditional auditing and accounting didn't excite me much. Fortunately, my internship at CRISIL sparked my interest in industrial research. In 2004, I began conducting equity research, marking a pivotal moment as Indian equities and the economy began to flourish. From that point on, I began to develop an interest in the operations of businesses and, subsequently, in the equity market.

You've had a diverse career across organisations like CRISIL, Lotus AMC and CARE Ratings. What are some of the most valuable lessons you've picked up along the way?

CRISIL and Care Ratings had the ethos of credit research. There was a financial crisis early in my career during the 2008-09 period. This experience underscored the significance of balance sheets and leverage in my investment strategy. That said, growth is equally important for me when making any decisions in the equity markets. But there is no point in growth if that comes at the cost of the balance sheet or if there is no adequate cash flow convergence. I believe that the balance sheet and cash flow should support the growth. So, leverage and leverage-related ratios play an equally important role for me, and that is what I have learned and ingrained from the beginning of my career.

Can you describe your investment philosophy? What kind of stocks or market scenarios get you excited?

At Invesco Mutual Fund, we have a proprietary categorisation framework under which we identify stocks based on their characteristics and link each of them to the various financial parameters. We categorise or classify the companies into leaders, high-growth companies, and turn-around companies. We operate under a broad framework, supplemented by an ESG overlay encompassing governance and other relevant parameters. On top of that, there will be personal philosophies that could help me select stocks within the investable universe.

I'll identify myself as having a balanced personality, and again, for me, the balance sheet and cash flow statements will be of equal importance in terms of investment. In terms of stock selection, I prioritise growth at reasonable prices or quality at reasonable prices. Companies must remain highly relevant in today's dynamic environment, characterised by rapid changes. Many businesses and companies these days are struggling to keep pace with the changing environment. Therefore, it is crucial that the company has a long growth trajectory, effectively innovates, and invests in adapting to the changing dynamics.

You manage various funds, from tax saver and multi-cap to PSU and hybrid funds. What's your strategy for managing such a diverse portfolio?

The strategy is derived from the fund's mandate. If we talk about the tax planning fund, it doesn't have any restrictions on the market caps. However, when it comes to multi-cap funds, we must allocate 25 per cent each to large, mid, and small-cap stocks. So, the fund's mandate is critical, as it will eventually determine my top-down approach and stock positioning in the portfolio.

At Invesco, we don't take any cash calls, and within our internal stock categorisation framework, we can own several stocks. We run a fund that is true to its label. So, in a thematic PSU fund, we don't own any non-PSU, despite the mandate allowing me to invest 20 per cent in such names. I also manage financial services funds, and you will not find a single stock that is not from the financial services space. In the case of hybrid funds, there is a proprietary model that determines the debt and equity allocation. Even there, I don't deviate from the model outcome by more than 2 per cent. So yes, there are guardrails in our system, which helps as a risk mitigation tool.

With the recent joint venture, in which a 60 per cent stake was sold to IIHL and an 18-month lock-in for the remaining 40 per cent, do you foresee any management changes?

We do not envisage any management changes in the organisation. The way we operate and the investment process remain the same. From the investor's point of view, the investment process remains paramount, and there are no changes taking place there. So, there is nothing that would really impact the way we do business.

2022 was challenging, but 2023 saw a strong recovery for the ELSS Tax Saver Fund. However, despite outperforming the index, the first half of 2024 has shown only modest performance. What factors have affected its performance recently?

Let me start with the period 2022-23, just to give an overall perspective. In 2022, the market significantly outperformed its fundamentals, as evidenced by the P/E ratios of 24-25 times. India's premiums to the emerging market index were also at an all-time high. The idea behind this fund is to not only generate returns while outperforming the benchmark but also minimise the drawdowns. So, we had a large-cap positioning in 2022, which took away some of the alpha in 2022 relative to the benchmark. But eventually, things normalised, and we came back in 2023. From 2023 onwards, the earnings cycle strengthened, increasing opportunities in mid and small-cap stocks, putting us back in the game. The six-month period in 2024 is too short to talk about the performance. That said, a few of the bottom-up ideas did not go as well as anticipated. But, of late, they have started to perform. On a long-term basis, we are comfortably outpacing the benchmark and our peers.

The large-cap portfolio is highly diversified, with many stocks holding less than 2 per cent each. Are there any plans to consolidate these positions?

It's a very relevant question. The opportunities in the economy are very diverse now. We wanted to remain well diversified to mitigate valuation risk, and with the overall economy buoyant, we tried to participate in as many opportunities as possible. Frankly, time will tell whether all the opportunities are actually materialising or not. But if you ask me whether we see any headwinds, my answer is no. However, there are many narratives about why stock prices are what they are today. We have created a diversified portfolio to mitigate the risk of valuation and growth slippages or earnings downgrades. When the economy starts to plateau and eventually slow down, the consolidation phase of any portfolio begins. We honestly do not anticipate any economic slowdowns in the near future. So this long-tail or diversified portfolio approach will continue.

Tax-saving funds haven't seen much growth in net inflows recently. What strategies are you considering to attract more investors to these funds?

It's quite unfortunate that people have a herd mentality and change the categories based on the previous year's returns. So, in the last year, we have seen mid and small caps and some thematic categories doing exceedingly well, and they have received strong flows. As far as the tax saver fund is concerned, we are trying to educate investors that this is not just a tax-saving instrument but a wealth-generating investment because equities are the only asset classes that can beat inflation over a longer period of time.

There is a tendency among a large number of investors to put money into ELSS funds only during the last few days of the year-end (March). So again, we tell them to follow the SIP (systematic investment plan) route and invest in a disciplined manner rather than a last-minute rush to get into tax-saving investments. Hopefully, this education will help the category as a whole and eventually lead to a pickup in flows.

How do you balance the allocation between large-cap, mid-cap, and small-cap stocks in the multi-cap fund, especially in a volatile market?
We have around 40-45 per cent of large-cap companies that are growing at a higher rate and have a better ROE, which forms our overall anchor in the portfolio. That said, these numbers differ from month to month, but a ballpark number is around 40-45 per cent in large caps. In mid and small caps, we have tried to diversify and have a longer tail to avoid material single-company risk. The overall outlook is very buoyant, but you don't know what eventually comes and hits you. The global economy and its dynamics remain highly volatile, with ongoing issues such as the Russia-Ukraine, Red Sea, and Israel conflicts, and it's uncertain which of these issues will emerge in the future. In such a scenario, market sector rotation is very fast. Therefore, we are striving to increase our diversification by focusing more on the mid and small cap sectors, as well as the large tails. Currently, the valuations on the mid and small-cap sides are slightly higher, and any downgrades in earnings will result in a disproportionate impact. So, to mitigate this valuation risk and the rest of the unknowns, we are trying to be much more diversified.

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