Sandeep Kothari is a chartered accountant but never pursued it as a discipline. After completing his CA in late 1993, he worked with several broking houses like B and K James Capel, before moving to Fidelity in 2002.
Since 1994 he has spent time in stock markets, keenly observing and analysing various industries. He has been managing money since 2005 and now is a fund manager for Fidelity Equity Fund and Fidelity Tax Advantage Fund.
Here are the excerpts from an interview with Value Research where he speaks about his learning experiences and Fidelity's investments.
What was your initial role at Fidelity?
My role, when I joined Fidelity, was that of a regional analyst. The focus was India plus other regions. The philosophy of Fidelity is to put an analyst into various sectors and I was fortunate to go through 4-5 of them on a regional basis. So I have done regional steel, metals and mining and healthcare. It had been a good experience.
While being a regional analyst, you are also given the responsibility to run a pilot fund, which is Fidelity's own money. It's a small sum of money, which grooms you up to structure a portfolio and manage it before you get bigger amounts of money. I was also managing a pilot fund.
Subsequently, I managed some of the offshore funds investing into India. And as of July last year, I took over two domestic funds -- Fidelity Equity Fund and Fidelity Tax Advantage Fund.
In your career in stock markets, which one has been the difficult phase?
In 2002 when I joined Fidelity, we had seen the worst of the bear markets. I remember we had a large investment in Infosys and it fell 25-30 per cent. At that point in time, we had to take a step back, think about what the fundamentals are and what the long-term holds for the company. Fortunately for us we held on and invested more, and that paid off extremely well. Those were great learning experiences.
Apart from that, my experience with the steel industry was a great learning. I was initially given the responsibility of the steel sector on the regional basis and it was a sector which had gone through a slump for a decade. There was no hope for it, and the mindsets were "how can you invest in the steel industry?" But if you look in the hindsight of the last 4-5 years now, that was the start of a bull run in the steel industry. It was a very good learning, just to see how the cycle for the entire industry changed. You just can't write anything off.
There have been huge expectations from your fund and you have met them reasonably well. What's your sense about all of this?
To be honest, I don't really think about the outcomes. It is a variable which will happen if the process is right. I just try to keep it simple and focus on what needs to be done. If you start worrying too much about the outcomes -- what happens tomorrow, what happens next month, then you miss on the basic process which you have to follow. I believe that if the process is right and if you follow the basic principles right, your convictions are right, and if you have done your homework well, hopefully the outcomes should be there.
Brief us about the things that you emphasise upon and on things which you don't?
For the fund, the philosophy is to try and keep it as simple as possible. You have a valuation framework for each industry. We work within those frameworks, while keeping the markets and the economic cycle in mind.
We look for risk-adjusted returns and try to achieve consistency in performance. We take a reasonable, calculated risk and back it up with lot of good systems, processes and research. We try to know as much about an investment as possible to build convictions.
This conviction bit, how do you do that with hundreds of them? There have been hundred stocks in your portfolio on occasions.
Since the time that I have taken over the portfolio, it will be between 60 and 75 stocks. I would like to keep it that way. But again, I don't get guided by how many of stocks are there. What I believe is that if you don't take reasonable position in a stock, then it doesn't make too much of a difference to the portfolio. So if a stock is falling and I can't buy it, I usually tend to get out of that stock, because that means I don't have enough conviction in it.
'Reasonable position' means?
You need to have at least 50 basis point (0.5 per cent) of your portfolio invested in a stock. But again, this cannot be a rule.
Sometimes you are trying to build conviction, trying to learn about a company you like. Or sometimes you just don't get stocks at the price you want to buy. So there are a lot of factors which can drive your allocations. As a principle, 60 to 75 stocks give you enough diversification. Then the trick is which area to focus on of 5,000-odd companies.
That's where our research process and our research team come in handy. We tend to focus on high-quality businesses, like the ones which have higher return on equity, ROEs, huge scalability and which can become long-term value creators. It's a mix of both, the bottom-up and top-down, but a large focus is on bottom-up stock selection.
How much input do you get from the people closely tracking these companies?
We tend to meet every company we invest in. Meeting the managements is very important. We have modelled 280-300 companies. We have six research analysts. We have support from the Delhi facility, which helps us with model building, initial company facts, etc. Portfolio managers do the company meetings, and like this, it is a library which gets created.
Were you comfortable with most of your portfolio when you took charge? Were you uncomfortable with the number of stocks?
See, every portfolio manager has his or her own style. There were about 85 stocks in the portfolio at the time I took it over, and it went down to 60. It was to do with the fact that some of the positions were small and there were some of the businesses I would have taken time to understand. So what I did was that I gravitated to what I understood well.
Subsequently, the positions did go up. You don't buy or sell because you want 'x' number of stocks in your portfolio. It is not about the number of stocks, but what percentage of your portfolio you are comfortable to risk in that stock.
The original interview appeared in April 2007 Issue of Mutual Fund Insight
Tomorrow: Part II
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