'Not market, we are bullish on a number of stocks'

Santosh Kumar Singh, Fund Manager, Motilal Oswal AMC, says “there is no fixed criteria for cash holding. It is just that I am not so bullish on the markets and that is why our prop model shows our exposure to be somewhere and I am not so bullish, so we have kept some cash there. But generally, we do not keep more than 1% or 2% cash in the fund. Generally, we are a fully deployed fund. But as of today, we are slightly higher cash in the fund.”

Can we dive deep into your Balanced Advantage Fund returns? It has given great returns of almost 23% and it is very interesting to note that out of the four funds that you are part of, most of the allocation that we can see in the mid and the small end of the market is in the Balanced Advantage Fund. Is that the strategy that you have been following since the inception and because of the boom that we have seen in this end of the market?

Balanced Advantage Fund is an asset allocator fund. First we need to understand that it is an asset allocator fund where what we are trying to do is trying to reduce the standard deviation of the fund. So the standard deviation of this fund will be significantly lower than Nifty standard deviation.

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The first thing we are trying to do is allocate between equity and debt. As a strategy, we are very active investors. We do not passivize any bit of either the equity part or the debt part or sort of hedging in this particular fund. So we do not do any passivization. What has worked for the fund is that it is not about mid, small or large.

Our allocation in the smallcap space will be closer to 20-25% to 20-30%. So the idea has been simple to find stocks where we can generate money rather than sort of track the market. So with that basic idea we are trying to run the fund. The equity allocation strategy is also very simple. We get into profitable segments with high profit growth rate and low PE ratios. This is the basic strategy we run the fund with.

But since it is a Balanced Advantage Fund, as you rightly mentioned, the main focus is actually to get that standard deviation in control and you have that debt component as well as a part of your Balanced Advantage Fund. Amongst the equity and the debt side, what sort of a ratio do you try to maintain for the Balanced Advantage Fund and how do you rebalance the same when there are variations?

Our allocation between equity and debt is based on our own proprietary model which we call Motilal Oswal Value Index and that is published daily on our website. So you can actually go and see there if any investors want to see what our allocations would be… So I was explaining that we use our own proprietary quant model for allocation between equity and debt. That is the core for the allocation part and that model is based on three fundamental criteria that is price to book, price to earnings and dividend yield. We use all the three to see how the markets are positioned.

Based on that, we actually try to position our fund between debt and equity. If you look at the fund, current equity allocation will be closer to 55-56%. And that is based on the MOVI Index, the Motilal Oswal Value Index, as well as the discretion which I have. If I find that the markets are directionally getting into some area where I might want a lower or a higher allocation. So that is how we determine the equity and debt allocation.

The allocations can move from normal circumstances from 30-35% to 75-80%. This is the range in normal circumstances it moves into. And for the last one year, the markets have been rebalancing. So we were talking about rebalancing quite frequently because we use derivatives for rebalancing.

I was audible when I talked about the Motilal Oswal Value Index which we use for our allocations. Current allocation between equity, net equity is around 55 to 56%. This is the current allocation of equity based on the indications from our proprietary model.

Apart from that, you have exposures in pharma, transport, IT services and more. We wanted to know if going ahead any sector that you believe can have more allocation in your portfolio or has the potential to perform in a better manner? What is your sector specific approach at this point in time?

I run with slightly contra views. What you will find is that the most underperforming segment of the market might be the highest weight in my portfolio. That is why what you will find is a company called Star Health will be the largest weight in the portfolio because it has been a stark underperformer in the year.

What we try to do is we try to find companies, some of the great companies, where the markets have turned negative and we try to sort of get exposure to that. So currently, if you ask me, I am bullish on financials, but not lenders because the fund is quite underweight on lenders. I am bullish on all other parts of the financials. So we have a large exposure to insurance, we have large exposure to capital markets through Bombay Stock Exchange. IT is another sector for where I am quite positive and that is an area where we have incrementally become overweight. That is why you could see one of the largest weights there.

What is the strategy regarding the cash holding because I could see that almost 4% of the total AUM you are holding in cash as of now. Is that some percentage near to that? We always see you holding this much cash in your portfolio or it gets skewed when you find better opportunities as well?

There is no fixed criteria for cash holding. It is just that I am not so bullish on the markets and that is why our prop model shows our exposure to be somewhere and I am not so bullish, so we have kept some cash there. But generally, we do not keep more than 1% or 2% cash in the fund. Generally, we are a fully deployed fund. But as of today, we are slightly higher cash in the fund.

You are not that bullish and still looking out for opportunities and not much opportunities left in IT now?

That is why the fund has some contra contours to it. The areas where we are invested our highest overweights are the areas which have not performed at all in the market. Even in the past, if you look at the fund performance it has come from some seven, eight stocks, which were not being bought by anyone. So we have a slightly contra mindset while running the fund. And that is why we find opportunities in the market.

I might not be bullish on the market, but I have a lot of stocks where I am quite bullish and tend to buy and wait for our time because we are buying some of the best companies in the industry.

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