What are the key characteristics of ICICI Prudential Business Cycle Fund?
Niraj Shah in conversation with Anish Tawakley on 'The Portfolio Manager'.
Niraj Shah in conversation with Anish Tawakley on 'The Portfolio Manager'.
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00:00 [MUSIC PLAYING]
00:03 Anil, welcome to The Portfolio Manager.
00:12 I'm your host, Neeraj Shah.
00:13 And our guest today is Anish Tavakle.
00:15 He's deputy CIO, ICSF Prudential AMC.
00:18 Anish, so good having you.
00:19 Thanks for taking the time out.
00:21 Thank you, Neeraj, for having me.
00:23 Our pleasure.
00:24 The pleasure is entirely ours.
00:25 Anish, just at the onset, for a lot of people,
00:27 we're talking for the first time on air.
00:30 Would you just tell us what kind of an investment approach
00:34 do you subscribe to or bring to the table
00:37 when you are thinking about investing or building out
00:39 a portfolio?
00:41 So our approach is--
00:43 I think there are two fundamental principles.
00:45 One is that we use both a top-down and a bottom-up
00:49 approach to portfolio construction, which
00:53 means we look at economic cycles when we are investing.
00:57 That's the top-down perspective.
00:59 And bottom-up, we look at stock selection.
01:02 We say we look at companies that have
01:05 strong competitive positions in structurally
01:08 attractive industries.
01:09 That's the summary.
01:11 A strong competitive position is evidenced by good--
01:16 it should be amongst the market leaders.
01:18 It should have a demonstrated track record of profitability.
01:21 And ideally, it should have room to grow.
01:23 That's how we look at the stock selection aspect.
01:27 When we are screening companies, we get them [INAUDIBLE]
01:31 Yeah, sorry.
01:31 You were saying, and if you get them at good valuations,
01:34 then that's [INAUDIBLE] so to say?
01:36 Yes.
01:38 OK.
01:39 And I'm going to talk to you in detail about your business
01:41 cycle fund, because it's an interesting concept.
01:44 But before I do that, can I just ask you
01:46 that in a market which is, let's say,
01:48 trading at whatever levels of valuations, FY25,
01:52 or 26, between 20 and 24, depending on your earnings
01:55 estimates, even if you find companies on a bottom-up basis
01:59 which are going to do-- which is earnings growth, et cetera,
02:01 so on and so forth--
02:02 do you find enough opportunities to build a large portfolio
02:06 at good valuations currently?
02:09 So actually, we are more comfortable with valuations
02:13 in the large-cap space than we are
02:15 in the mid- and small-cap space.
02:16 In the large-cap space, our view is
02:18 that while valuations might be slightly on the richer side,
02:22 they're not outrageously rich.
02:24 And if earnings growth comes through,
02:26 which means essentially if the economy does well
02:28 and if earnings growth comes through,
02:30 and if you stay invested for a two- or three-year period,
02:33 you should still be OK.
02:36 So large caps, I'm not too worried about valuations,
02:39 provided the economy delivers.
02:42 Small and mid-cap spaces is more challenging.
02:45 Got it.
02:46 And within this landscape, let's talk about this ICICI-approved
02:52 business cycle fund, because it kind of subscribes
02:55 to what you told me, that it aims
02:56 to make the most of the evolving economic and market environment.
02:59 Can you explain this in detail?
03:01 What kind of fund is this?
03:02 What kind of investors-- whether it's mutual fund or people
03:05 subscribing to this theory, what's
03:07 the kind of investors that should look for a fund like
03:10 this?
03:10 And how would you believe the returns for a fund like this
03:16 could be over a three- to five-year period?
03:18 Would it be lumpy in nature?
03:19 Would it be steady state in nature?
03:21 Give us some idea about this.
03:24 So let me first describe what we are trying to do in this fund.
03:28 See, our view is that the economies go through cycles.
03:31 Cycles last three to five years.
03:34 And what do we mean when we say economies go through cycles?
03:37 We are saying, look, there are periods of booms,
03:39 and there are periods of slumps.
03:42 A slump is when you have spare capacity.
03:44 A boom is when you have demand that
03:46 exceeds capacity.
03:47 Now, when you're in a slump, obviously,
03:50 you have excess capacity, so you will not be doing much capex.
03:54 You've built excess capacity, so you'll probably not be giving--
03:58 you have excess capacity, so you will not be hiring.
04:01 So wage growth will be low.
04:03 And discretionary consumption will be low.
04:06 Whereas when you're in a boom, the economy
04:09 is at full capacity, so people are doing capex.
04:12 People are hiring more workers.
04:14 When people are hiring more workers,
04:16 they're also getting wage hikes.
04:18 So discretionary spending is also good.
04:20 The point being that when--
04:22 depending on where you are in the economic cycle,
04:24 different set of sectors do well.
04:27 In a boom, the sectors that would do well
04:29 are cyclical sectors, like industrial and capital goods,
04:32 cement, automobiles, also financials.
04:36 In a slump, the sectors that would do well
04:38 would be a different set of sectors.
04:41 So this fund essentially aims to pick sectors.
04:45 So it's a sector-picking fund based
04:47 on where we are in the domestic cycle
04:50 and where things might be in the global cycle.
04:53 The US economy or the Chinese economy
04:54 also go through cycles.
04:56 So these sectors will pick stocks
04:58 based on where the cycles are, both domestically and globally.
05:04 So coming to what kind of investors
05:07 is this appropriate for?
05:08 See, we find a lot of interest amongst investors
05:11 for sector funds.
05:13 The challenge with sector funds, we find,
05:15 is often that people get in, but they then
05:18 don't get out at the right time.
05:20 Or they may get in when the sector is too hot.
05:23 It's already the bulk of the returns have been made.
05:27 What we are saying here is, look,
05:29 we'll do the job of sector selection for you.
05:32 So we'll pick the handful of sectors, the few sectors
05:34 that we think are most appropriate based
05:37 on where the economic cycle is.
05:39 So people who like to invest in sector funds
05:44 should go for it.
05:46 It is, amongst our portfolio of funds,
05:50 yes, this does have higher deviations
05:53 than some of our other more conservative equity funds.
05:56 But it's still reasonably diversified.
06:00 So it's not a very high-risk fund.
06:01 But yeah, it's not the most conservative fund
06:05 in the equity portfolio that we have.
06:07 Got it.
06:08 And I can't talk to you about--
06:12 that's not allowed as per compliance guidelines.
06:16 So I wouldn't want to venture on how returns would look like.
06:19 OK.
06:20 Fair call.
06:21 But here's my question, then.
06:23 I read your presentation for the fund,
06:28 in which I presume for equities at large,
06:31 your view is, for the decade maybe,
06:34 is that the higher interest rates and elevated equity
06:36 valuations may result in volatility.
06:39 Now, within such a landscape, how does a business cycle
06:43 fund go about making its investment decisions?
06:47 What kind of themes--
06:49 domestic volatility, global volatility,
06:51 domestic valuation, global valuation--
06:53 what kind of themes does a fund like this, therefore, cater to?
06:57 So at the moment-- and I think we started on this two years
07:03 back--
07:04 we started feeling that the Indian domestic economy will
07:09 start recovering.
07:10 In the middle of COVID, we felt there was spare capacity,
07:13 but demand was recovering.
07:15 What made us come to that point of view
07:17 was we saw that real estate activity was picking up.
07:21 People had started buying homes again.
07:24 When people start buying homes, first the inventory
07:27 gets cleared, and then new home construction start.
07:30 And that is a trigger for a virtuous cycle.
07:32 Construction creates jobs.
07:35 When people have homes, they also buy durable goods,
07:37 because demand for durable goods depends
07:39 on the size of your house.
07:41 If you have a larger house, you buy more electrical fittings,
07:43 et cetera.
07:44 So we felt that was the start of a cycle.
07:46 The second factor we saw was that the central bank--
07:53 monetary and fiscal-- actually, not just the central bank,
07:55 but both monetary and fiscal policy
07:58 were supportive of demand creation.
08:00 So while demand at that time, two years back,
08:01 was weak, monetary policy was supporting demand generation,
08:05 as was fiscal policy.
08:06 So we felt, look, we have an economy with spare capacity.
08:09 Demand is picking up.
08:10 Policy environment is favorable.
08:12 So we said, look, this is the environment
08:14 that creates demand for--
08:18 creates the right environment for domestic cyclicals.
08:20 So these are sectors like cement, real estate,
08:23 industrial capital goods, because people will start
08:25 adding capacities.
08:26 Capital goods, obviously, once people have incomes.
08:30 Demand for automobiles, et cetera, would also rise.
08:33 So if you look at the portfolio, the last published portfolio,
08:36 you will see that skew in the portfolio.
08:38 You will see automobiles being pretty heavy.
08:41 You would see cement being pretty heavy,
08:44 industrial and capital goods being pretty heavy.
08:47 Equally important, what you see missing
08:49 is FMCG was zero in the last published portfolio.
08:53 Metals was zero in the last published portfolio.
08:56 So you see that there are significant sectors
09:00 skews in the portfolios we construct
09:02 based on our view of people.
09:06 Got it.
09:07 Just wondering, before we talk about the composition--
09:12 and we may not talk about exact names, which is fine,
09:14 but maybe we'll do that on the other side of this break.
09:16 But just one quick follow-up question to this, which is,
09:20 what are the key risks to your mind for almost any portfolios
09:25 that you might be running, Anish,
09:27 and specifically for a portfolio which
09:30 is kind of taking advantages or playing
09:34 according to business cycles?
09:37 Well, obviously, look, if you read the cycle wrong--
09:40 No, no, which is--
09:40 sorry, Anish.
09:41 Sorry, let me rephrase my question.
09:42 I'm not asking about generic risks,
09:45 but the risks in the current business environment.
09:47 Sorry.
09:48 Oh, in the current business environment.
09:50 See, I think, obviously, there are geopolitical risks which
09:56 you need to keep a watch on.
09:59 But apart from the geopolitical side of things,
10:02 actually, economies, not just in India, but even in other markets,
10:06 are looking reasonably good.
10:10 US economy is actually booming.
10:11 If you look at the US data on the labor market side,
10:14 unemployment is at near 50-year lows.
10:17 There are 1.5 vacancies for every one unemployed worker.
10:21 So the US economy is booming.
10:24 If anything, they are having to deal with excess demand.
10:28 Europe has a little bit of problems,
10:30 but relative to their own history of unemployment,
10:33 they are also at relatively low unemployment levels.
10:36 And China is going through a period of transition.
10:39 We are not that negative on China.
10:41 We actually feel that China's economy will recover.
10:43 It's probably bottoming out.
10:45 They're going through a period of transition
10:47 from being real estate dependent to shifting demand
10:50 to other sectors.
10:52 That is a process that is painful,
10:55 but it will happen over time.
10:58 So I think the biggest risk right now is geopolitics.
11:01 It's not the standard economic risks.
11:04 We don't see huge excesses, which
11:09 should burst anywhere in the world, apart from the geopolitics.
11:13 OK, interesting.
11:14 Now, the point is we'll try and correlate that
11:17 with the kind of investments that this fund has made.
11:20 And Anish, I would love to understand,
11:24 within the parameters that you laid out,
11:27 where is it that you have the largest overweight on currently?
11:33 Large overweights-- actually, three sectors.
11:35 Large overweights are in automobiles,
11:38 industrial and capital goods, and cement.
11:41 We normally, at this point of the cycle,
11:44 would have also liked financials.
11:47 But our view was that while there
11:49 will be good demand in the financial sector,
11:52 competitive intensity, at least amongst the lenders, which
11:55 is banks and lending and NBFCs, was very, very high.
11:59 So we've avoided banks and lenders.
12:03 We do have insurance companies and asset managers.
12:06 So in financials, if you look at financial intermediaries,
12:09 we have insurers and asset managers.
12:12 And then we have discretionary sectors
12:14 like automobiles, cement, and capital goods.
12:17 Interesting.
12:18 So non-lending financials have a very large share.
12:21 Now, they haven't done very well relative to maybe the market
12:27 as well for a long time now.
12:29 What makes you confident that there could be a turn?
12:32 Actually, asset managers have fared quite well.
12:34 And some of the insurers have as well,
12:37 particularly relative to banks.
12:39 So our view is that if the economic cycle remains strong,
12:45 then what we should see is the total pool of savings
12:49 and the total pool of people looking
12:52 to deploy those savings in capital assets,
12:55 like factories, houses, will increase.
12:59 Because when you have more incomes, you save more.
13:01 And those get invested.
13:03 So the role of financial intermediation
13:05 increases as the cycle recovers.
13:08 And asset managers and insurance companies,
13:12 we think, are very well placed.
13:13 Banks will also see good demand.
13:16 But the competitive intensity is capping the profitability there.
13:19 Got it.
13:20 Just a follow-up there, sorry, before I
13:22 come to the other sectors.
13:23 There is a thought of people who look at,
13:25 compare what's happened in different countries
13:27 where import capital has moved up
13:29 and what could happen in India too.
13:31 And one of the themes that comes up
13:33 is asset managers of all sorts doing very well
13:37 over a 10, 15-year period simply because discretionary demand
13:40 will be invested.
13:41 I would love to understand, do you
13:42 think Indian financial institutions, which
13:46 are into asset management, wealth, et cetera,
13:48 have that longer runway?
13:50 And would it be as powerful a runway
13:52 as we might have seen in some of the other economies?
13:56 Yeah, so this is a good point.
13:58 And I should clarify this.
14:02 The fund focuses on the cyclical aspect of the economy.
14:06 We don't typically like to take 10-year views or 20-year views.
14:10 That's a structural view of the economy.
14:13 Now, we do know, having said that,
14:16 if the economy does well over a 10-year period,
14:19 overall the financial sector will grow.
14:22 But I would not know which way, whether people, households,
14:26 and firms will choose banks as the intermediary or asset
14:29 managers as the intermediary or insurance companies
14:32 as the intermediary.
14:33 That we will see as things develop,
14:35 how the regulatory landscape changes,
14:37 frankly, depends on preferences of households.
14:40 You might choose to--
14:41 we don't know.
14:42 Indian households might choose to keep
14:44 all their savings in banks.
14:45 They might choose to move more of their savings
14:47 to asset managers.
14:48 That will depend on the regulatory landscape, what
14:52 kind of competitive market exists.
14:55 And we don't like to take a 10-year view.
14:57 We would focus on the two- to three-year view
14:59 to see how things are changing and adjust the view as things
15:02 go along.
15:03 Fair point.
15:03 Thanks for that clarification.
15:05 In the portfolio positioning currently--
15:07 and I'm talking about the sectors, if I'm not wrong--
15:11 the interesting thing that I saw was that construction and cement
15:14 at 7% and 5%--
15:16 much higher than industrials at 3%.
15:18 I'm just trying to understand, are you
15:21 trying to play the CapEx theme via construction and cement
15:24 in some fashion?
15:25 And why is industrials so low relative to the other two?
15:28 Just trying to--
15:29 Oh, industrials is certainly not that low.
15:32 I think some of the companies are getting missed out
15:34 in the duping that you've captured there.
15:38 So industrials and capital goods--
15:42 well, it depends on some companies.
15:43 Can be classified as construction more
15:45 or industrials and capital goods more.
15:48 But I think it's better to aggregate the two
15:50 and therefore look at it.
15:52 I get your point.
15:53 And that's pretty easy.
15:55 Fair point.
15:55 The other aspect is automobiles.
15:57 12%, I would presume-- and correct me if I'm wrong--
15:59 is a relatively high weightage to the index weightages.
16:02 Now, one, why is that the case?
16:05 Because it's not that autos have had a bad run.
16:07 You're coming off a decent base of performance
16:09 as well on the last two, three years.
16:11 So why such optimism?
16:13 And what within this auto landscape do you like more?
16:16 Because it's a very varied landscape,
16:19 including auto components.
16:22 So firstly, see the portfolio gets built over time.
16:26 And it changes gradually.
16:27 Sure.
16:29 So some of these auto positions that we built,
16:31 we built when they were obviously much cheaper.
16:34 Got it.
16:34 Now, how do we think about the exits
16:38 is an important question.
16:40 So when we feel that earnings downgrades,
16:44 and expectations have just become too high,
16:46 and earnings downgrades are more likely than earnings upgrades,
16:50 that's the point in time we would like to print.
16:52 When I start building the portfolio,
16:55 I feel we take a view that things are cheap.
16:58 Cycle is turning.
16:59 But we really don't have a perfect idea
17:01 of when the cycle will peak, how far it will run.
17:05 That idea evolves over time.
17:06 And we continuously monitor things to say, look,
17:09 have we got to a point where now we are really
17:11 having to stretch assumptions to come up with an upside?
17:15 We are really having to stretch things.
17:17 Or are expectations still reasonable
17:19 and could get upgraded?
17:21 If we reach the latter view, we'll hold on to the call.
17:24 So to your point, yeah, they may have done well in the past.
17:26 But if our view is that, look, we might still
17:29 get earnings upgrades, we'll hold on.
17:32 Is that the view currently for autos?
17:34 Yeah, that is why they have to be put forward.
17:37 Yeah, I know.
17:37 I'm just wondering whether in the near term--
17:39 I mean, you're there right now, but you
17:40 might be changing your view post the results, which
17:42 is why I was wondering.
17:43 You still think there is a case for earnings upgrades?
17:45 Because we did hear one large auto ancillary
17:47 give this warning around how growth is looking shaky,
17:50 both in India and global.
17:52 Essentially, I'm talking about Baba Kalyani.
17:54 I'm not referring to that stock, per se.
17:56 But just that commentary that came in from them.
17:58 But you still believe the earnings downgrade case is not
18:01 being built in autos currently?
18:04 We don't think that that's the more likely scenario.
18:08 Fair call, fair call.
18:09 Just wanted to get that clarity as well.
18:11 And our thesis is more about domestic growth, right,
18:14 rather than export.
18:15 We should also distinguish that.
18:17 So we are more positive on-- for autos,
18:19 more positive on the domestic economy than on S&L.
18:23 Got it.
18:23 So we are negative on exports, but the positivity
18:26 comes more from domestic.
18:27 And that was going to be my last question, Anish.
18:31 Fund which looks at global cyclicals as well
18:34 might be interested, for example, in metals, oil,
18:38 mining, et cetera.
18:39 Are you currently completely averse to that?
18:43 Because the global economy is looking,
18:45 for lack of a better word, a bit more shaky
18:47 than what the domestic economy is?
18:49 So let's focus on metals.
18:51 Metals, we have-- in the published portfolio,
18:54 you can see we have a [INAUDIBLE]
18:57 And the thing that matters for metals
19:00 is not so much the global economy,
19:01 but the Chinese economy.
19:03 So for most metals, China is 50% of global demand.
19:08 And our view on the Chinese economy
19:10 is that it's going to transition away
19:13 from a very metals-heavy infrastructure,
19:16 house-building kind of activities,
19:18 to other service-oriented activities, which
19:20 will use less metals.
19:22 And if you say, look, 50% of demand comes from China,
19:27 and that demand is going to be weak or declining,
19:31 it's very difficult to get positive
19:32 on the overall metals.
19:36 Got it.
19:37 But I'm not saying--
19:38 But Anish--
19:39 --that your metal stocks are expensive.
19:40 I understand they are cheap.
19:41 But our view is, as I said, right,
19:43 is earnings upgrades or downgrades,
19:45 we feel the upgrades risk is lower.
19:48 The chance of upgrades are higher.
19:51 Yeah, point well taken.
19:52 And thanks for filling up that blank as well.
19:55 But Anish, it was so good talking to you.
19:57 Time will always be less, but television compulsions,
20:00 so we'll have to wrap it up here.
20:01 But much appreciate your time and your insights.
20:03 Thank you so much.
20:04 Thank you very much, Neeraj.
20:05 It's a real pleasure talking to you.
20:06 Yeah, likewise.
20:07 And viewers, thanks for tuning in to this leg
20:09 of the Portfolio Manager.
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