Apoorva Shah, Executive Vice President & Fund Manager, DSP Blackrock

After a long hiatus, DSP Blackrock has now launched a domestic equity fund - their last domestic equity launch was way back in 2006 ! The new DSP Blackrock Focus 25 Fund aims to distill the best of the fund house's stock picks in a concentrated portfolio of high conviction bets. Apurva Shah takes us through how he is going to manage this exciting new fund.

Representative: You have built a great track record with DSP Blackrock Top 100. Will the new DSP Blackrock Force 25 Fund be a subset of your picks in the Top 100 Fund ?

Apoorva Shah: The Top 100 has about 40 - 45 stocks - but they are from the top 100 companies by market capitalization. Whereas in this fund, we have only 25 stocks - but from the entire market. This will include large caps (the top 100 companies), mid-caps as well as small and micro caps. To that extent, the entire universe of stocks is available to us in this fund. We expect to invest about 80% of the portfolio in companies that are within the top 200 by market capitalization. The balance can be invested in small caps and other mid cap names.

Across all our equity and balanced funds, we hold some 120 stocks. Our endeavour - in this fund - will be to pick the 25 stocks where we have the highest conviction - out of our universe of 120 stocks that we own.

The fund will combine an active and a passive style. The core of the portfolio will remain invested while at the periphery, we will take active positions in the top 100 names.

Representative: While alpha can clearly be delivered through concentrated bets on high conviction names, there is also a higher risk attached to this strategy. How do you propose to manage this risk ?

Apoorva Shah: We believe 25 stocks offer a decent diversification. In addition to stock and sectoral diversification, we will also have an interplay of stocks to help manage risk. For example, if a variable which determines stock performance is oil prices, when you combine a company in the upstream with a company in the downstream, they benefit by inverse movement. Upstream benefits if oil goes up and downstream benefits if oil goes down. When you combine the two stocks in the portfolio and if you are bullish on both of them, then you are hedging the oil price risk.

Representative: When you are casting your portfolio for your new fund, what are some of the key sectors and themes you will be focusing on ?

Apoorva Shah: Currently we are bullish on the capital goods sector, because we believe that after a year or two of heavy consumption growth we have reached capacity constraints - therefore companies will have to expand capacity. Normally they will do it when they reach constrains and they have a good outlook. Since outlook has improved, we expect industry to go for capacity expansion this year. And therefore companies will receive more orders and business activity levels will look up.

Along with that, we feel that banks will see good growth - while consumption growth continues, they will also be lending to the capital goods sector. The Government's focus is also infrastructure, so they will go for more public-private partnerships in infrastructure - which again will mean more business for banks.

One of the big growth areas within the overall consumption theme is the media space. There are others like automobiles and consumer goods - but that will depend on individual stocks. We will avoid companies that are facing intense competitive pressures. So, its going to be more stock specific.

Sectoral calls are important - as there are divergences in sectoral performances. But, more than sectoral calls, we will be looking at the specific stocks which we believe have the highest potential from across the entire universe of stocks we track and own. We have seen that there are sharp divergences in performance of stocks within a sector - which reinforces our view that a bottom-up stock picking strategy will work better.

Representative: Which are the some of the sectors which you are cautious on at this point of time?

Apoorva Shah: I think in general, a lot of sectors are doing well, but due to the market being in a cyclical recovery, some of the steady sectors - which do well year after year - but do not have any major change from last year to this year - maybe quiet steady. So they may not perform in line with the market. FMCG is a case in point. While we may tend to avoid FMCG on a sectoral basis, there may be individual stocks there which are worth picking. But in general, raw material price risk and competitive margin pressure can weigh on their performance.

Representative: Do you think market valuations are looking a bit stretched now ?

Apoorva Shah: We are not that worried about market valuations because the recovery is strong - that may lead people to change their earnings forecasts upwards. So, while it may be looking fully valued on current earnings, if you project growth into FY12, the market is some 13 X FY12 - which is below the median of 15 X. There is a room for appreciation over a one year period.

Representative: What are your key concerns on markets ?

Apoorva Shah: The concerns are more on the external factors. We do not have much visibility on what may be happening within China - there are people who believe that China has certain bubble like characteristics. But we don't know whether it will continue to have those characteristics for a few more months or years. So we have no handle whether and when this bubble will settle or will break. Because they drive a lot of global commodity market, we are cautious on the material sector.

At the same time we are sensing that there are risks of certain countries defaulting like Greece for example - maybe more such countries could be in trouble. Frankly, the whole recovery is not a normal one - its driven by Governments borrowing. And therefore at some stage if the Governments cannot borrow more, because they have reached their limits, or people gets worried on Government borrowing and therefore they don't want to lend or if Governments withdraw their stimulus packages - any of these can impact global markets.

From a domestic perspective, the big issue is whether we will be able to ramp up capacities - across infrastructure and manufacturing - to meet the growing demand. Slippages in supply can aggravate the inflation issue - which is not healthy for markets. It is critical to get infrastructure in place to support growth. There are physical problems in executing some of these large projects - which need to be tackled.

Having said that, we are seeing a good year after a breakdown year, liquidity is strong for emerging markets and therefore the market had upside before any down fall.