Widely read:
हिंदी में भी पढ़ें 
Rajat Chandak stands out at ICICI Prudential Mutual Fund as he favours a growth-oriented investment style, contrasting with the fund house's general preference for value investing. But "it's not as difficult as it seems" he says, adding he gets "enough freedom" as he has been in the organisation for 16 years.
Currently a senior fund manager, Chandak oversees three funds - ICICI Prudential Balanced Advantage Fund, ICICI Prudential Flexicap Fund and ICICI Prudential Transport and Logistics Fund. These funds have combined assets of around Rs 77,700 crore.
In this interview, Chandak discusses his experiences in the equity markets, his unique investing approach and provides insights into the recent underperformance of the ICICI Prudential Balanced Advantage Fund.
What initially drew you to equity investing right after completing your MBA in 2008?
My brother-in-law deserves a great deal of credit for introducing me to equity markets. He is older and was on the debt side of the market; I always looked up to him as my mentor. I asked him about my career prospects, and given my passion for finance, he guided me in entering this field. In fact, when I was doing my summer internship, I worked at ICICI Prudential Mutual Fund and got even more interested in equities. So, in a nutshell, I had a mentor who guided me, and I liked my days at ICICI Pru during the internship. That got me into the equity markets.
After completing your MBA, did you try to get into another organisation?
I had another offer from a bank, but I got a pre-placement offer from ICICI Prudential Mutual Fund. And since I wanted to be in equity and worked with them during my internship days, I gladly took up the offer.
You've climbed the ladder from investment analyst to fund manager at ICICI Pru. Could you share some key moments or insights from your journey?
Equity markets are, in a way, very interesting, and there will be many moments during the last 16 years that have shaped my journey. However, one of the biggest takeaways from the market is that there is no right or wrong way to invest. You must have observed someone who follows a growth style, value style, contra style or momentum style of investing. In my 16 years of experience, I have seen all styles of investments work, but the only thing is that you have to play at your own strength. Another takeaway is that, as you spend more time in the investment world, you realise that there is no one perfect way of generating returns for your investors. Second, one should have patience because investing in equity markets is a game of patience. Sitting through a solid investment idea for the long term has yielded rich dividends for me.
Could you share your personal investment philosophy with us? What kind of stocks or market conditions interest you?
I'm bullish at heart. In general, most of us want to make investments when market valuations are cheap so there is margin of safety, or after a market correction when the risk-reward is more favourable. But over the years, I realise that if one has patience and a long-term investment horizon, you need not pay much heed to timing the markets.
Secondly, I have a more growth-oriented mindset. For me, growth can come from various parts, such as a company gaining market share from unorganised to organised, executing better than peers and gaining market share, or adding new product lines related to their existing business. These are some of the factors that contribute to growth. Another thing I look at, is their leadership or management capabilities, their past execution track record and how they think about running their business. (We also look at) how the management has behaved in the past and how they have been able to execute in the last 7-8 years. Maybe that's the second aspect, which would also mean in terms of operational performance, how they have done.
The final factor is whether the companies or promoters are considering the interests of all stakeholders involved in the business. Ultimately, businesses have to create value for not only shareholders but also all the other stakeholders. Therefore, employees' happiness, the added value they receive from working for a specific company and suppliers' satisfaction are crucial factors to consider. Do companies deal with their suppliers, distributors or dealers in a fair and transparent manner? These are the more nuanced aspects that I strive to examine thoroughly.
Lastly, the valuations are important criteria but do not serve as the primary basis for any investment decisions. Broadly speaking, in my 16 years of experience, I have witnessed markets generously reward companies that consistently and sustainably gain market share. I like to examine whether their management is strong, which is a big moat or if they have unique strengths in their line of business which may not be easily replicated by their competitors.
You mentioned being a bull at heart, and ICICI Pru is known as a value-focused fund house. How do you manage the different styles?
It's not as difficult as it seems. I don't know why people have the perception that ICICI Prudential is only a value-focused fund house. Having said that, many team members are value-oriented, but when you spend 16 years in one company with the same set of colleagues, you get some cushion. Our CIO has seen me do research and manage funds for around 16 years and knows that this is my style and that it has worked in terms of generating returns for the funds I manage. As previously stated, there is enough freedom in the company for everyone to pursue their own investment style and thought process.
The ICICI Pru Balanced Advantage Fund has faced some challenges recently. What's been affecting its performance, and how do you plan to turn things around?
As previously discussed, the in-house model is the guiding force in determining the asset allocation of the fund. The model uses other criteria as well, but predominant is the valuation. When the aggregate market valuations increase, the model recommends reducing the equity allocation, and it continues to do so. If you look at the markets over the last 3-4 years, they have continued to rise and deliver handsome returns. That means valuations are higher today than they were three-four years ago. Thus, the equity allocation has been a little conservative, although throughout the period, growth in earnings has been supportive of the higher valuations. (Although) the fund can have equity exposure in the range of 30-80 per cent, the equity exposure has been on the lower side, at close to 40 per cent for the last 18 months, due to the high valuations. A continuous upward moving market may prove challenging for the fund. This is because we keep reducing the equity exposure while markets keep going up, which could result in lower returns than funds with higher equity allocation. However, over a complete market cycle, the investor will see less volatility in the strategy than a fully invested equity strategy. What we all need to acknowledge is that there will be always volatility in the market which will throw up some interesting investment opportunities across asset classes, which a fund like our BAF looks to capitalise on.
Your ICICI Prudential Flexi Cap Fund portfolio favours the consumer discretionary sector (34 per cent). What's driving your optimism here?
As our country's per capita gross domestic product (GDP) growth continues to improve, the penetration of discretionary products such as air conditioners, cars and footwear, which are currently at a lower level, will increase. For instance, India's car penetration is only 1/20 of that of developed nations such as the US, Japan and Europe. Therefore, there is significant potential for increased penetration in many of these categories. The other thing is, again, mathematical - if the average income goes up by 25-30 per cent over three years, the per capita income of the middle-income bracket or even the high-income bracket will go up multiple times. Therefore, all of these factors will drive consumption in the discretionary space, a trend that I believe will continue for at least a decade. I firmly believe in this concept, which is why I am significantly overweight in that particular segment.
Your portfolio includes high P/E stocks like Zomato, Trent, Avenue Supermarts and Siemens. Does the current high valuation of these stocks worry you? Also, do you face any internal resistance to this?
Building a portfolio involves many things, and I have elaborately explained my thought process on them. As said earlier, valuation is the last criterion for me. Also, if the growth is large, the company is gaining market share, and I have a long-term horizon, I will buy the stock. Internally, we debate with the analyst, who may hold a different view on a specific stock. However, I can assure you that most of the time, the difference lies in the time horizon. While the analyst is concerned about performance over the next three to four quarters, I would consider a period of five to seven years. So I could go wrong in the short run, but I observe that my thesis has worked out well for investors over the longer term.
Considering the current market landscape, where do you see the most promising investment opportunities?
India is a very large market, and there are more than 5,000 companies listed. We cover around 500 companies internally, and I believe there are enough names in the market that can have a reasonable upside in the medium to long term.
New episodes every Friday
