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INTERVIEW SANDEEP KOTHARI, Fund Manager, Fidelity Investments

MAINTAINING
FIDELITY

PHOTOS: FAWZAN HUSAIN

Sandeep Kothari is a chartered accountant but never into various sectors and I was fortunate to go through 4-
pursued it as a discipline. After completing his CA in late 5 of them on a regional basis. So I have done regional
1993, he worked with several broking houses like B&K steel, metals and mining and healthcare. It had been a
James Capel, before moving to Fidelity in 2002. good experience.
Since 1994 he has spent time in stock markets, keenly While being a regional analyst, you are also given the
observing and analysing various industries. He has been responsibility to run a pilot fund, which is Fidelity’s
managing money since 2005. own money. It’s a small sum of money, which grooms
you up to structure a portfolio and manage it before you

Q What was your initial role at Fidelity? get bigger amounts of money. I was also managing a
pilot fund. Subsequently, I managed some of the off-
My role, when I joined Fidelity, was that of a shore funds investing into India. And as of July last
A regional analyst. The focus was India plus other year, I took over two domestic funds — Fidelity Equity
regions. The philosophy of Fidelity is to put an analyst Fund and Fidelity Tax Advantage Fund.

April 15-May 14, 2007 Mutual Fund Insight 43
INTERVIEW
Q Inbeenyour career in stock markets, which one has
the difficult phase?
your portfolio on occasions.
Since the time that I have taken over the portfolio,
In 2002 when I joined Fidelity, we had seen the A it will be between 60 and 75 stocks. I would like to
A worst of the bear markets. I remember we had a keep it that way. But again, I don’t get guided by how
large investment in Infosys and it fell 25-30 per cent. At many of stocks are there. What I believe is that if you
that point in time, we had to take a step back, think don't take reasonable position in a stock, then it doesn't
about what the fundamentals are and what the long- make too much of a difference to the portfolio. So if a
term holds for the company. Fortunately for us we held stock is falling and I can’t buy it, I usually tend to get
on and invested more, and that paid off extremely well. out of that stock, because that means I don’t have
Those were great learning experiences. enough conviction in it.
Apart from that, my experience with the steel indus-
try was a great learning. I was initially given the respon-
sibility 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.

Q There have been huge expectations from your fund
and you have met them reasonably well. What’s
your sense about all of this?

WE TAKE 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
A To be honest, I don't really think about the out-
comes. It is a variable which will happen if the Q ‘Reasonable position’ means?
process is right. I just try to keep it simple and focus
on what needs to be done. If you start worrying too A You need to have at least 50 basis point of your
portfolio invested in a stock. But again, this cannot
much about the outcomes — what happens tomorrow, be a rule. Sometimes you are trying to build conviction,
what happens next month, then you miss on the basic trying to learn about a company you like. Or sometimes
process which you have to follow. I believe that if the you just don’t get stocks at the price you want to buy. So
process is right and if you follow the basic principles there are a lot of factors which can drive your alloca-
right, your convictions are right, and if you have done tions. As a principle, 60 to 75 stocks give you enough
your homework well, hopefully the outcomes should diversification. Then the trick is which area to focus on
be there. of 5,000-odd companies. That's where our research
process and our research team come in handy.

Q Brief us about the things that you emphasize upon
and on things which you don’t?
We tend to focus on high-quality businesses, like the
ones which have higher ROEs, huge scalability and

A For the fund, the philosophy is to try and keep it as
simple as possible. You have a valuation frame-
which can become long-term value creators. It's a mix of
both, the bottom-up and top-down, but a large focus is
work for each industry. We work within those frame- on bottom-up stock selection.
works, while keeping the markets and the economic
cycle in mind.
We look for risk-adjusted returns and try to achieve Q How much input do you get from the people close-
ly tracking these companies?
consistency in performance. We take a reasonable, cal-
culated risk and back it up with lot of good systems, A We tend to meet every company we invest in.
Meeting the managements is very important. We
processes and research. We try to know as much about have modeled 280-300 companies. We have six research
an investment as possible to build convictions. analysts. We have support from the Delhi facility, which
helps us with model building, initial company facts,

Q This conviction bit, how do you do that with hun-
dreds of them? There have been hundred stocks in
etc. Portfolio managers do the company meetings, and
like this, it is a library which gets created.

44 April 15-May 14, 2007 Mutual Fund Insight
WHAT IS IMPORTANT IS NOT THE
NUMBER OF STOCKS, BUT WHAT
PERCENTAGE OF YOUR PORTFOLIO
YOU ARE COMFORTABLE TO RISK
IN THOSE STOCKS

Q Being in the markets since 1993, you have been
through a period where we had these great compa-
there is more institutional participation now. Moreover,
in this bull-run, you haven’t seen one pied piper or just
nies which suddenly became illiquid. How much does one sector carrying the entire market.
that scare you today? We talk about companies which
one didn’t hear of. We seem to be back in the old times.
A lot of it may be scary….things like cooked books, and Q You don’t see those kind of excesses visible here?
cooked stock prices as well.
Definitely, that’s a big challenge. But you have to A Right now, no. In hindsight, maybe three years on,
we may realise that indeed there were excesses.
A emphasise upon what the management's track But the fact is that we have been in a global business
record is, and probably the association since 1993 gives cycle, which is extremely strong. I mean, just look at the
that much more insights into what the management growth opportunities, the demographic dividends, the
track records are. investments which are happening. See, you have to take
A business does not operate in a vacuum. It relates, a view on the risk-adjusted returns. For example, there’s
transacts and deals with lot of external parties. When a company, say X, which is large and liquid, which
we are taking a reasonable position in a company, we gives you a 25 per cent return. But a Y company, which
conduct an absolute 360 degree analysis — what’s the is less liquid, gives you a 100 per cent return.
track record of this person, what’s the execution capa- Now you have to take a call on the risk-adjusted
bility etc. I understand your concerns. We did see in returns. If you have confidence on the 100 per cent-
1995 that lot of these names become very illiquid when return company, after doing your homework, that the
the business cycle turned. But see, even some of the opportunity as well as the execution capability are
good companies will get caught in the business cycle. there, then you may go for it. There is no one right
So you have to stick to your basic principle and answer to this, but I won’t be scared by thinking that
analyse what drives the profit growth, what is the what happened in 1995 will happen now.
opportunity, where the business is positioned, what’s If you are worried that the business cycle is turning,
the execution capability of the management. An oppor- then you look at execution capabilities much more
tunity could be great but can the management execute intensely. You should not be in those businesses that
that? Then you weigh the kind of liquidity risk that you can be hurt by the downturn, and that is how you try to
want to take, because if the business cycle turns, obvi- balance the risk-reward. But running away from the
ously liquidity is going to be a huge problem. Based market altogether is not a luxury that I have. I get
upon this, you take a call where there are probable gains money to invest in the equity market and I have to
and make your investment decisions. See, there will be remain invested. I don’t take cash call, except for the
cycles. We saw one in 1995. But hopefully, this time fact that if something is really over-valued, I sell it and
around it won’t be that bad if it occurs. This is because am happy to wait till I find an idea.

April 15-May 14, 2007 Mutual Fund Insight 45
INTERVIEW
Q With the combined capability or scale of your off-
shore allocation to India, as well as your domestic
one should be most wary of.

funds, does it give you any advantage in terms of access What are the excesses that you see in sectors? Is there
to management, a quasi-insider kind of privilege? Q any sector which you will not touch right now?
No, no, it does not. And I don’t think we can make
A money by getting insider information on a long- A Ifrom
won’t call it untouchable, but we did stay away
property in this entire period.
term basis. Ultimately, you need to have your valuation I am not saying property as a sector does not have
framework right because the market is much smarter. any future; it is not a dotcom which will go bust. We all
Moreover, at Fidelity we are very-very strict about these need housing. Go to Mumbai. The shortage of good
aspects. What helps is the Fidelity brand name. People office space is immense. Earlier, it was a very unorgan-
and companies like Fidelity as an investor. So it is easy ised sector but now it is becoming an organised one. But
if I am calling up a corporate. But that doesn’t mean the things like the valuations, how good an understanding
corporate will go out of the way to give me something, you have of what you are buying, are what kept us away
or I will seek something. I tell you what gives us and that fortunately has worked well for us.
advantage. If you have a reasonable understanding of
somebody’s business and go and meet a management Any sector for which you are developing a
after you have done your homework, you develop a Q favourable bias?
good rapport. The Fidelity name gives you that
acceptability that these people would have done
enough homework. And then if you demonstrate this
in a meeting and you interact at a good intellectual
level with them, then the discussion leads you to bet-
ter conclusions, not necessarily information which
won't be given to public. And then it is up to us to do
the hard number-crunching, because you just can’t
build castles on air. But if you have had a good under-
standing of the businesses, it is easier to take a call on
those numbers. So you have to do your hard work,
whether you are Fidelity, or anybody else.

THE CAPEX AND INFRASTRUCTURE INVESTMENT CYCLE, I BELIEVE, HAS LONG
LEGS TO RUN. SO THAT IS SOMETHING WHICH WE ARE OVERWEIGHT ON

Q Were you comfortable with most of your portfolio
when you took charge? Were you uncomfortable A The capex and infrastructure investment cycle, I
believe, has long legs to run. So that is something
with the number of stocks? which we are overweight on.
See, every portfolio manager has his or her own
A 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 Q Any Peter Lynch principle which you followed and
which led to investment idea in India?
do with the fact that some of the positions were small
and there were some of the businesses I would have A Oh, I’ve been a big fan of Peter Lynch and I've read
whatever he has written. If you look at the Fidelity
taken time to understand. So what I did was that I grav- philosophy, it's pretty much engrained in that bottom-
itated to what I understood well. Subsequently, the up stock-picking approach. We try to think of ideas that
positions did go up. You don’t buy or sell because you are scalable… that are simple. That philosophy runs
want ‘x’ number of stocks in your portfolio. It is not through the research process.
about the number of stocks, but what percentage of your
portfolio you are comfortable to risk in that stock.
Q Apart from managing funds, how you balance your
personal life?

Q What is the most alarming thing that you see in the
market today? A There is not much time left. I try to get to office
early and leave early. That is a luxury which this
India has become a mainstream market and the job gives because I can go back home and work if I
A expectations from India are high. Therefore, if it have to. But yes, I do spend time with my family. I've got
doesn’t deliver on the expectations, the volatility could two kids, and I try to spend as much time as possible
be much higher. Volatility would be something which with them.

46 April 15-May 14, 2007 Mutual Fund Insight