How do you assess the market? Have you made any adjustments in your mutual fund schemes in the last three months or so?
Yes, clearly the market is in a different state from where we were in March and mid April. It is a different market altogether. Most of the companies were available at rock bottom prices at that moment and you could pick some in the portfolio as well. Now the scenario is totally different and the valuations are looking stretched.
Some of them have even crossed the pre-March lows or pre-March highs. At the same time, when we realised that there were some opportunities available, some of our existing ideas were added on and we added a few more ideas in the form of ITC, Oracle Financial Services and MCX.
There does not seem to be any problem with the FAANG stocks as such and mutual fund schemes have exposure to some of the global FAANG names. Are you considering reducing any exposure any time soon?
Well that is a constant thought where you always look at valuations vis-à-vis how the business will perform. We are constantly on the lookout to find if the companies we own are expensive or cheap and if we can add now or sell. But clearly most of these valuations have reached a territory where we cannot buy or add any more. However, the business opportunity that exists for them going ahead is clearly not a sell right now as well. We still take some time to evaluate whether it merits a sell, but definitely it is not a time to buy.
What would be your advice to mutual fund investors at a time like this? How should they be positioning their portfolio in terms of allocation to different sectors as well as timeframe that they should keep in mind?
The timeframe for equity investments usually is north of five years. If you have a horizon which is more than that, equity funds may not be the right criteria for you to invest as an asset class. Seeing that currently the valuations have moved very sharply, it will be advisable to stagger some of the investments, if you have some SIPs running and not go and venture out a lot of lump sum investment in the mutual funds right now.
The reason is when a sharp rise happens, the optimism is always there and valuations do not make sense in many areas. While you cannot find new ideas to invest, when we entered the crisis, we are probably about 11% in cash and we have used up all that cash all the way up till May and June. Now, we are seeing a little build up of cash which has gone close to about 6% in the portfolio and it is just an indication that there are not too many good ideas out there to add.
Clearly, when valuations are stretched, you need to be very cautious, not to treat the market as it is going to go up constantly because clearly we are right now in a phase where most results are coming out. Most managements are commenting about the business performance that has happened in the quarter that has ended in June.
However, we still have not seen the actual impact when things try to go back to a seemingly normal situation, after the lockdowns open up and the economy starts the way it was before. We have not seen that impact yet. A lot of data is missing right now. It is time to be cautious and not to be too adventurous.
We were talking about your overall portfolio. You said you have added existing ideas in the portfolio. What does the portfolio look like now in terms of allocation to different sectors, those FAANG stocks, etc.
In the US portfolio, it is about 30% of the overall portfolio. We have not added anything apart from a little bit of Amazon in this period of three months. Most of the gains that you see are because of the stock price appreciation in the US stocks. On the domestic side, we added three new ideas. One is Oracle Financial Services. It is a software product company. We also added ITC to the portfolio which is a consumer company and a sum of the parts valuation makes sense at that valuation. The third is MCX which is a platform company in exchange business and which is quite a lucrative business with a lot of network effect working for them.
From the existing ideas, we did not consciously add to the banking stocks because clearly there might be some issues in terms of NPAs coming up. A lot of economies are being shut off. We do not know what the real impact will be and it is a good time to be cautious about leverage businesses.
On the technology side, we added to our existing holdings of Infosys and Persistent where we understand the business a little bit better in terms of IT services. Clearly now we see that IT services are not as badly impacted with the work from home scenario and client delivery has clearly succeeded.
What about telecom? Given all the news and buzz in the space, is that a segment you would be looking at, even if cautiously, with an eye to what may be coming up?
For telecom, the context needs to be a little longer. I would actually go back 20 years and see the 20-year history of telecom all over the world. It has been an amazing ride because billions and billions of dollars have been sunk in to create this infrastructure and we are beneficiaries of this.
We are enjoying it right now in terms of seamlessly communicating from where we are. And the point is that in telecommunication, the value actually has been taken away by people who built something on top of the telecom pipeline, rather than those who laid the pipeline and that is unfortunate because all over the world, you have net neutrality laws which make sure that all traffic that all data traffic is neutral. Nobody can charge extra for streaming a movie or a voice call or Zoom chat or whatever.
The point is that whoever have invested money and created platform services on top of their telecom pipelines, are supposed to have done well and we are seeing now that wave happening in telecom industry all over the world, where a lot of these new platform add-ons or even OTT bundles are mixed along with telecom business. The telecom business itself has become a data distribution business and people are consuming services on top of that.
At the same time, if you look at their capex requirements of the telecom companies and if you look at the past return ratios of these companies, it is not a very great industry to look at. When we invest, we look at companies with a stable operating history. We would like to see the numbers in terms of positive performances coming up in a few years and if the valuations make sense, we might take a look at them again.