INTERVIEW SANDEEP KOTHARI, Fund Manager, Fidelity Investments
MAINTAINING
FIDELITY
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&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.
Q What was your initial role at Fidelity?
My role, when I joined Fidelity, was that of a
A regional analyst. The focus was India plus other
regions. The philosophy of Fidelity is to put an analyst
PHOTOS: FAWZAN HUSAIN
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 off-
shore funds investing into India. And as of July last
year, I took over two domestic funds — Fidelity Equity
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-
work for each industry. We work within those frame-
works, 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, cal-
culated 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.
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.
Q How much input do you get from the people close-
ly tracking these companies?
A We tend to meet every company we invest in.
Meeting the managements is very important. We
have modeled 280-300 companies. We have six research
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


Q Being in the markets since 1993, you have been
through a period where we had these great compa-
nies which suddenly became illiquid. How much does
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
cooked stock prices as well.
Definitely, that’s a big challenge. But you have to
A emphasise upon what the management's track
record is, and probably the association since 1993 gives
that much more insights into what the management
track records are.
A business does not operate in a vacuum. It relates,
transacts and deals with lot of external parties. When
we are taking a reasonable position in a company, we
conduct an absolute 360 degree analysis — what’s the
track record of this person, what’s the execution capa-
bility etc. I understand your concerns. We did see in
1995 that lot of these names become very illiquid when
the business cycle turned. But see, even some of the
good companies will get caught in the business cycle.
So you have to stick to your basic principle and
analyse what drives the profit growth, what is the
opportunity, where the business is positioned, what’s
the execution capability of the management. An oppor-
tunity could be great but can the management execute
that? Then you weigh the kind of liquidity risk that you
want to take, because if the business cycle turns, obvi-
ously liquidity is going to be a huge problem. Based
upon this, you take a call where there are probable gains
and make your investment decisions. See, there will be
cycles. We saw one in 1995. But hopefully, this time
around it won’t be that bad if it occurs. This is because
WHAT IS IMPORTANT IS NOT THE
NUMBER OF STOCKS, BUT WHAT
PERCENTAGE OF YOUR PORTFOLIO
YOU ARE COMFORTABLE TO RISK
IN THOSE STOCKS
there is more institutional participation now. Moreover,
in this bull-run, you haven’t seen one pied piper or just
one sector carrying the entire market.
Q You don’t see those kind of excesses visible here?
A Right now, no. In hindsight, maybe three years on,
we may realise that indeed there were excesses.
But the fact is that we have been in a global business
cycle, which is extremely strong. I mean, just look at the
growth opportunities, the demographic dividends, the
investments which are happening. See, you have to take
a view on the risk-adjusted returns. For example, there’s
a company, say X, which is large and liquid, which
gives you a 25 per cent return. But a Y company, which
is less liquid, gives you a 100 per cent return.
Now you have to take a call on the risk-adjusted
returns. If you have confidence on the 100 per cent-
return company, after doing your homework, that the
opportunity as well as the execution capability are
there, then you may go for it. There is no one right
answer to this, but I won’t be scared by thinking that
what happened in 1995 will happen now.
If you are worried that the business cycle is turning,
then you look at execution capabilities much more
intensely. You should not be in those businesses that
can be hurt by the downturn, and that is how you try to
balance the risk-reward. But running away from the
market altogether is not a luxury that I have. I get
money to invest in the equity market and I have to
remain invested. I don’t take cash call, except for the
fact that if something is really over-valued, I sell it and
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
with the number of stocks?
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
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 grav-
itated 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.
A The capex and infrastructure investment cycle, I
believe, has long legs to run. So that is something
which we are overweight on.
Q Any Peter Lynch principle which you followed and
which led to investment idea in India?
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
philosophy, it's pretty much engrained in that bottom-
up stock-picking approach. We try to think of ideas that
are scalable… that are simple. That philosophy runs
through the research process.
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?
India has become a mainstream market and the
A expectations from India are high. Therefore, if it
doesn’t deliver on the expectations, the volatility could
be much higher. Volatility would be something which
A There is not much time left. I try to get to office
early and leave early. That is a luxury which this
job gives because I can go back home and work if I
have to. But yes, I do spend time with my family. I've got
two kids, and I try to spend as much time as possible
with them.

46 April 15-May 14, 2007 Mutual Fund Insight