How the best mutual fund managers excelled during COVID-19

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© Venkatasubramanian K How the best mutual fund managers excelled during COVID-19

At a distributor’s meet in Bengaluru, Shridatta Bhandwaldar, Head-Equities at Canara Robeco mutual fund was asked how serious Coronavirus was to Indian markets. That was in the last week of February 2020 and Bhandwaldar just knew that the virus originated in China, but underestimated its lethality. Within days, the virus became a global pandemic. Bhandwaldar wasn’t the only mutual fund manager caught unawares by the sudden market crash that followed after COVID-19 hit Indian shores; many others were left stunned. But despite the setback, his equity fund – Canara Robeco Bluechip, a large-cap scheme – gave 23 percent returns between January 2020 and March 31, 2021. The scheme was the best performing large-cap fund over this period.

After falling 31 percent  between Jan 2020 and March 2020, the S&P BSE Sensex started to rally. No one expected a raging bull market. But between April and December 2020, the S&P BSE Sensex rose 70 percent. Mutual fund managers who were agile, watchful and read the markets correctly during crisis times came on top.

Who are these fund managers and what were their strategies? Moneycontrol tied up with CRISIL to identify the fund managers who did well during the COVID-19 crisis – the first wave specifically. The idea was to not just to pick funds that gave the highest returns in 2020. To leave out schemes whose outperformance was more of a flash in the pan, we considered three time periods.

These were: the COVID-19 first wave (January 2020 to March 2021), the pre-COVID-19 phase (to ensure funds had done reasonably well until then, too – January 2018 to December 2019), and then both periods put together. Only those schemes that came in the top quintile in their respective categories in all these three time periods were shortlisted. Further, only diversified categories were considered; thematic, sector and value funds were left out. Schemes less than Rs 100 crore were also left out. And to ensure fund manager track record, we only considered those schemes where the fund manager (or at least one, if there were many) of the scheme was present during pre-COVID and rallying phases.

A caveat: These are not our investment recommendations, given that only shorter time periods were examined. The only purpose of this exercise was to understand how fund managers fared. The idea was to dwell on how they read the markets, spotted opportunities and maneuvered tricky corrections.

Dwelling deep into portfolio companies’ debt

When the pandemic struck, Rajeev Thakkar, chief investment officer of PPFAS Mutual Fund, re-visited the portfolio of Parag Parikh Flexi Cap Fund (PPFCF) to analyse companies that may not survive the pandemic. Thakkar is the scheme’s lead fund manager; Raunak Onkar manages the foreign investments and Raj Mehta is in-charge of its debt portion.

The only company that Thakkar was worried at that time was Mahindra Holidays and Resorts India, a firm running holiday resorts on a timeshare basis. It was expected that the company would have seen a fall in guests coming over if a prolonged lockdown was to follow. But the fund had only around 2 percent of the portfolio invested in it. Thakkar did a stress test of the scheme’s portfolio. “If the lockdown were to have extended and companies made zero earnings, would they go bankrupt? That was the question. If they were highly leveraged, then perhaps yes,” says Thakkar, whose prime objective at that time was to double-check every company’s leverage levels.

Thakkar also used this time to pick stocks in falling markets. At the end of February 2020, PPFCF had around 12 percent cash. In March, Thakkar deployed most of it and brought down the cash levels to about 3 percent. Between January 2020 and March 2021, PPFCF gave 32.59 percent return to top the flexi-cap funds category.

Seizing opportunities in a pandemic

Pankaj Tibrewal, Senior Vice President & Fund Manager (Equity) at Kotak Mahindra Mutual Fund tried to identify stocks for Kotak Small Cap, a scheme that he manages, and which he thought would do well during the pandemic. “As work-from-home set in, people suddenly became conscious of maintaining their houses. We realised that companies in home décor and furnishing would do well,” says Tibrewal. He bought additional shares of Century Plyboards, Sheela Foam (manufacturers of Sleepwell mattress and furniture cushioning) and Dixon Technologies, a firm that manufactures televisions, microwave ovens and other appliances for Samsung and LG, among other large companies.

Kotak Small Cap was the best-performing scheme in its category between January 2020 and March 2021, delivering a return of 48.52 percent. The Nifty Smallcap 250 index gave 35 percent in this period.

Bhandwaldar also saw an opportunity in the Auto sector. And though the loss of jobs and fall in income levels initially may have caused concerns, experts realised that with the advent of the pandemic, “people would be wary of using public transport,” says Bhandwaldar. He picked up stakes in Maruti Suzuki India and Hero Motocorp.

Loss of job and a fall in income levels could also put banks at risks if borrowers delay loan repayments. Fund managers such as Bhandwaldar and Thakkar shuffled their portfolios early on. Both reduced their dependence on banks and instead focused on buying, or increasing exposures to finance entities, whose earnings were pandemic-proof. Thakkar picked Indian Energy Exchange in July 2020 and today it is the scheme’s third-largest holding, accounting for 6 percent of the scheme’s corpus. This is a sort of an exchange where energy produced through alternative means such as solar power is traded on a real-time basis.

Bulk consumers such as the Railways and industrial units are the typical buyers of electricity generated by bulk sellers such as wind-mill farm owners. The stock’s price has appreciated nearly 130 percent in the past 12 months. “At that time, we were concerned with lending organisations such as banks, even well-run banks. Borrowers have willingness to pay, but the ability to pay would have been hampered with businesses shutting down. But other finance companies that earned a fee income became attractive,” says Thakkar.

Conviction in tough markets

Few funds can match the consistency of Mirae Asset Emerging Bluechip (MAEB). Small wonder then that despite restricting inflows (no lump-sum investments are allowed in this scheme since October 2016 and systematic investments plans or SIPs have been periodically curtailed), the scheme’s corpus has grown from Rs 6,388 crore in January 2019 to Rs 16,190 crore in March 2021. The scheme gets inflows of roughly Rs 300 crore every month through SIPs. Between January 2020 and March 2021, MAEB gave 28.07 percent return. Limiting inflows at the right time has also helped Surana to deploy money gradually. This was important, as MAEB invests close to 40 percent of its corpus in mid and small-cap stocks.

One reason why the fund has done well in rising and falling markets is the mix of stocks that fund manager Neelesh Surana has picked . He holds a combination of stocks geared for an economic turnaround, as well as defensive picks. Stating close to – but not hugging – the benchmark index is vital. Surana picks stocks he thinks are available at a reasonable price but avoids bad managements and those with good managements and high quality, but remain expensive. MAEB has avoided stocks such as Asian Paints and Bajaj Finance because Surana finds them expensive. Surana’s other scheme, Mirae Asset Tax Saver, also scored high in its category.

COVID-19 is still around us and there is no telling how long the pandemic would last. But investors in mutual funds can get comfort from the way quite a few money managers have shown their agility in adapting to volatile markets.