Volatility control funds could be suitable for both high and low risk investors in current market situation, according to Kartik Soral, equity fund manager at Edelweiss Asset Management.
In an interview with Sagar Chheda, Kartik Soral said the worst in corporate performance may be behind us, however, it is still too early to expect economy to function at full potential.
Could you explain fund management style for Edelweiss Absolute Return Fund and EDGE Top 100? How do you spot arbitrage opportunities? How it helps to overall fund performance?
At the core of our investment approach is the principle to invest in quality stocks at a reasonable price (QARP). Such an approach focuses on attributes of quality, value and safety of the investments to provide superior returns over longer periods of time. While value focus sets a good base for investment growth, quality and safety focus help preserve these returns through a natural downside protection. To bring such a philosophy in to effect, we use a factor based technique that breaks down the quality, value and safety characteristics of an investment in to quantifiable elements that define these characteristics. This helps us to quantify and isolate the risk/return drivers and make objective investment decisions. Further, as market movement is governed by different factors at different times, a factor based approach allows these risk/return-drivers to be used in a combination with each other to provide market-beating returns over long term.
Given Edelweiss Absolute Return Fund (ARF) is an equity-oriented fund that aspires to generate absolute returns with low volatility over a 2-3 year timeframe, we allocate a portion of portfolio to cash-future arbitrage strategies. Such strategies lend a degree of stability when markets turn volatile. To spot best cash-future spreads, we have built our own systems that track the arbitrage opportunities available in the live market. However, all our trades are executed by various broker empanelled with us. Some of them use algorithms for execution of the trade.
Do you see any arbitrage opportunities in the current market environment?
We do normal cash future arbitrage in our fund. Such opportunities are almost always available in the market. However, the returns from these strategies depend on prevailing interest rates, fund flows and FII/FPI presence. Arbitrage opportunities are also available in index future and equities/futures of the underlying constituents of the indices, but currently we do not use this strategy.
What is your view on the current situation in the markets? How do you see the market outlook over next 6 months?
While it is impossible to speculate movement of markets in a short term period, we believe that probability of downside move and upside move are more-or-less equal. Undoubtedly, India seems to be on a healthy recovery mode but there is an overhang of potential US Fed rate hike(s) over the global markets which may lead to unwanted volatility over next few months. While, under normal assumptions, such volatility should not be prolonged for Indian markets, it will still be a critical event. Another risk is the third quarter earnings in which the investors would ideally want to see some recovery which has been elusive so far.
How do you rate corporate earnings performance in the second quarter? Do you think corporate performance will improve from here on?
Second quarter performance was disappointing. While, we had expected that turnaround in cyclical companies with domestic demand focus will take time to come back fully, we were somewhat disappointed by the slowdown in revenue momentum for defensives like Pharmaceuticals and FMCG.
We believe the worst in corporate performance may be behind us, however, it is still too early to expect economy to function at full potential.
Your portfolio is heavily concentrated to consumer non-durables, banks, software and Pharma stocks. Could you give reasons for betting big on these sectors?
Although we follow a sector agnostic approach to selecting stocks, we continue to be bullish on companies that have demonstrated healthy profitable growth in the past and continue to do so. As of today, most of these companies are concentrated in the mentioned sectors.
According to you, what retail investors should do in the current market scenario?
As this would be a function of investor's risk appetite and investment horizon, suggested approach will be different for each investor and hence I would refrain from commenting on this.
Could you suggest funds that high and low risk investors should consider in the current market situation?
Volatility control funds could be suitable for both these classes of investors in current market situation.
DISCLAIMER: Kartik Soral is the Equity Fund Manager at Edelweiss Asset Management Limited and the views expressed above are his own and should not be construed as investment advice. Recipients must make their own investment decisions based on their specific investment objectives and financial positions by taking suitable competent advice. Edelweiss Asset Management Limited, Edelweiss Trusteeship Company Limited or any of its Directors, Officers, Employees and personnel do not accept any responsibility for the content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same.
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