Compact portfolio of 28 stocks makes this fund nimble footed in any market
This is a high quality, pure large-cap play. IDFC Imperial Equity fund has displayed commendable resilience during market downturns. Its 2008 performance shoved it into the limelight. If its claim to fame is the sturdiness it displays when the market tanks, how does it perform when the reverse takes place? It rises, but does not outshine its peers.
The downside protection and subdued performance in a rising market are a reflection of the fund's fundamental characteristic: its investment universe comprises the top 70 stocks by market cap. This will impact returns when mid-cap stocks or stocks outside the universe of the top 70 outperform large caps. Yet, this fund has never deviated from its investing style to chase returns. Its large-cap bias has ensured that such companies comprise 80-100 per cent of equity allocation. In the long run, it stands vindicated. The 2- and 3-year returns are ahead of the category average.
It would be worth mentioning its 2009 performance when it landed in the bottom quartile. In March 2009, its equity allocation was as low as 62 per cent. Though it rose to 73 per cent next month, cash and debt exposure averaged 22 per cent for the six months ended August 2009. Hence, it missed out on the rally and this affected its annual return.
Portfolio construction revolves around selecting companies which have low financial risks and are self sustaining. "When we look for quality companies, we interpret it to mean capital efficient with a high RoE," says fund manager Tridib Pathak. "We pick those that fulfill such criteria and those which, on a sustainable basis, are moving into that territory." The fund manager has a task on his hands attempting to balance quality and growth. Would a bias towards quality ignore valuations? "We ensure that the EPS growth of our portfolio is around that of the Nifty. However, our RoE will be higher than the Nifty's average RoE," explains Pathak.
The fund maintains a compact portfolio of around 28 stocks. The small asset base offers him the leeway of frequent churning, though majority of the portfolio is held on for the long term. "Our investment horizon is long term but we change the portfolio to respond to circumstances. Depending on how the stocks have performed and our view going forward," says Pathak.
This fund targets first-time equity investors or cautious ones who seek the assurance of a completely recognizable portfolio.
