Growth through Balance of Knowledge & Temperament · The fundamental view overrides here Sectors like cement, media, 2 wheelers like Hero Motorcorp and NBFCs like Bajaj Finance where

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Kotak Classic Equity –Growth through Balance of

Knowledge & Temperament

“When emotional intelligence (EQ) first appeared to the masses, it served as the missing link in apeculiar finding: People with average IQs outperform those with the highest IQs 70 percent of thetime. This anomaly threw a massive wrench into the broadly-held assumption that IQ was the solesource of success.

Decades of research now point to emotional intelligence as being the critical factor that sets starperformers apart from the rest of the pack. The connection is so strong that we know 90 percent oftop performers have high emotional intelligence.”

Few quotes by eminent investment gurus:"Only when you combine sound intellect with emotional discipline do you get rational behavior."– Warren Buffet

“The most important quality for an investor is temperament, not intellect.”– Warren Buffet

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” – Benjamin Graham

“The most important organ in the body as far as the stock market is concerned is the guts, not the head .Anyone can acquire the know –how for analysing stocks. ”– Peter Lynch

Importance of EQ

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Issues with Emotions While Investing

Ignoring Cost

Illusion of Control

Herd Mentality

Anchoring Bias

Narrow Framing

Overconfidence

Past Record

Clinging to Losers

Gain Grabbing

Short Sighted

EmotionalRisk

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Investment Management Process

StockUniverse

InvestmentUniverse

Decision

Liquidity

ROE

Earnings

Value

Quality

Cash

Risk

Fundamental Analysis

Quant

• Research Based• Mix of to-down &

Bottom-up

Create GARP Driven Portfolio

• Valuation• Fundamentals• Statistics, etc

EQ Balanced Portfolio

• Further dissection and analysis

Difference in Calls

Balance Between IQ & EQ is Achieved

Final Portfolio•Take High

Conviction OW or UW bets

Common Stocks

How the Kotak Classic Portfolio is Created

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How The Process Works?

Quant Analysis

Fundamental Analysis

Decision

Stock Trigger Sell Buy More Review & Analysis

Stock Trigger Buy Buy Heavy Overweight

Stock Trigger Sell Sell Heavy Underweight

Stock Trigger Buy Sell More Review & Analysis

Sell side and In-house research Detailed Company Models Regular Company Meetings Plant Visits On ground research like Dealer

check

Our IQ Capability

Non Consensus Calls High Conviction OW/UW Calls Letting profits run Cutting losses if hypothesis changes

Our EQ Positioning

• Information is every where. But the meaning exists in Human Mind

• Intelligence is interfered with Human Perception in decision-making. Always!

• That is Why Kotak Classic sought the need to develop a new way

Finding Success in Balancing IQ and EQ

Sustainable Performance

Mix of Top Down- Bottom Up & EQ Verified

LargecapOriented

Growth At Reasonable

Price (GARP)

BALANCINGIQ & EQ

Flexibility to Take High Conviction

Calls

Uniqueness of the Kotak Classic Fund Strategy

The Distribution Daily Performance of Kotak Classic Equity Fund vis-à-vis the Benchmark

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y = 0.945x + 3.9418R² = 0.9683

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0 5 10 15 20 25 30 35

1 Ye

ar K

otak

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ssic

Ret

urn

1 Year Nifty 100 Returns

AlphaBeta

This Chart is to show that for every one 12 month performance of Nifty 100 on any day in the last 1 year, how was the parallel performance by Kotak Classic Equity. Past performance is no guarantee of future return. Source: ICRA

Particulars Nifty 100 Kotak Classic Equity - Reg - Growth

Maximum 32.24 36.43Min 1.95 5.02Average 18.35 21.28Median 18.35 21.28

• The Fund carries an alpha(regression) of 3.9 over a 1 year holding period.

• The Fund has a high correlation with the benchmark. In the period understudy, the fund has not underperformed the benchmark once

• The outperformance track record of the fund vis-à-vis the benchmark is high.

• The Fund has a better upside and downside performance vis-à-vis the benchmark

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0.86

6.17

-0.46

1.55

8.12

-10123456789

Allocation Selection Derivative Timing Alpha

Alpha Performance for 12 month ended Nov 17

3.72 3.95

-0.86-0.09

6.72

-2-1012345678

Allocation Selection Derivative Timing Alpha

Alpha Performance for 12 month ended Nov 16

• Fund Manager shows adeptness in stock and sector selection.

• Amount equivalent of derivatives exposure is invested in debt instruments. So, the total alpha contribution from derivatives exposure is actually not negative

Alpha Summary of the Kotak Classic Equity Fund

Past performance is no guarantee of future return. Source: Valuefy

Decision Matrix – Reflecting On Past Actions

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IQ = Sell, EQ = BuyIT

Metals(Quadrant 4)

IQ = Buy, EQ = BuyOMCs/ Energy

Gas Utilities(Quadrant 1)

IQ = Sell, EQ = SellPSU Banks

Pvt Corp Lenders(Quadrant 3)

IQ = Buy, EQ = SellCementMedia

Automobiles(Quadrant 2)

Disclaimer: The above segregation of sectors is based on the broad thematic assessment of the business. As such this is subjective to change from time to time and is based on fund manager’s prerogative with respect to that allocation.

Quadrant – 1 : IQ = Buy, EQ = Buy

When we are positive on a

sector/ stock both from the IQ and EQ

perspective, we take a big overweight position in that

sector/ stock

12 Disclaimer: The above segregation of sectors is based on the broad thematic assessment of the business. This is current positioning of the fund. The Fund manager reserves right to change the portfolio composition in accordance with provisions of SIDi, Data from Valuefy

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-5

0

5

10

15

Dec-1

4

Feb-

15

Apr-1

5

Jun-

15

Aug-1

5

Oct-1

5

Dec-1

5

Feb-

16

Apr-1

6

Jun-

16

Aug-1

6

Oct-1

6

Dec-1

6

Feb-

17

Apr-1

7

Jun-

17

Aug-1

7

Oct-1

7

Energy OW/UW

Security Wt. Index Wt. Return Selection Timing AlphaBPCL 3.09% 0.85% 67.15% 1.33% 0.01% 1.33%Indraprastha Gas 0.51% 0% 69.74% 0.41% -0.01% 0.40%GAIL 1.84% 0.55% 75.23% 0.03% 0.26% 0.29%Petronet 0.99% 0.13% 94.54% 0.23% 0% 0.23%

Performance Between April 16 - Nov 17

Quadrant – 3IQ = Sell, EQ = Sell

When we are Negative on a

sector/ stock both from the IQ and EQ perspective,

we take a big underweight

position in that sector/ stock

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-8

-6

-4

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2

4

6

Dec-

14

Feb-

15

Apr-

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Jun-

15

Aug-

15

Oct

-15

Dec-

15

Feb-

16

Apr-

16

Jun-

16

Aug-

16

Oct

-16

Dec-

16

Feb-

17

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Financial Services

Sector UW Alpha Allocation Selection Timing Derivative InteractionFinancial Services

-6.89% 5.69% -1.25% 6.43% 1.40% -0.90% 0%

Financial Services Allocation (Dec 16-Nov 17)

Disclaimer: The above segregation of sectors is based on the broad thematic assessment of the business. This is current positioning of the fund. The Fund manager reserves right to change the portfolio composition in accordance with provisions of SIDi, Data from Valuefy

Quadrant – 2IQ = Buy, EQ = Sell

The fundamental view overrides here

Sectors like cement, media, 2 wheelers like Hero Motorcorp and NBFCs like Bajaj Finance where thefundamental house view was positive, found overweight position in Kotak Classic Equity too

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COMPANY NAMEAvg

Weights RETURNMaruti Suzuki 2.64% 44.47%

Bajaj Finance 1.30% 101.61%

Hindustan Unilever 1.27% 46.41%

Piramal 0.99% 66.17%

Grasim 2.51% 57.55%

Sun T V 1.01% 8.28%

Nifty 50 17.32%

Nifty 100 18.49%

Feb-Nov 17


Quadrant – 4IQ = Sell, EQ = Buy

The market had seen the sector getting butcheredcontinuously since April 2010 during which the metalstocks in India corrected by more than 60% on anaverage and hence the investors were skeptical aboutthe recovery. But the sector showed up on the EQscreener as a deep value buy and we increased theweight gradually.

We were massively underweight on the IT sector tillSep, 2016 and then went overweight as the valueproposition of the sector increased as highlighted bythe EQ screener

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-8

-6

-4

-2

0

2

4

6

Dec-

14

Feb-

15

Apr-

15

Jun-

15

Aug-

15

Oct

-15

Dec-

15

Feb-

16

Apr-

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Jun-

16

Aug-

16

Oct

-16

Dec-

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Feb-

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Apr-

17

Jun-

17

Aug-

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Oct

-17

IT OW/UW

-4-3-2-10123456

Dec-

14

Feb-

15

Apr-1

5

Jun-

15

Aug-

15

Oct-1

5

Dec-

15

Feb-

16

Apr-1

6

Jun-

16

Aug-

16

Oct-1

6

Dec-

16

Feb-

17

Apr-1

7

Jun-

17

Aug-

17

Oct-1

7

Metals OW/UW


How Portfolio Stands From Rest!The Fund Makes its Alpha largely from Largecap

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Nov-16Dec-16

Jan-17

Feb-17

Mar-17

Apr-17May-17Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

0%

20%

40%

60%

80%

100%

Asset Allocation Through the Year

Large + Cash Mid&small

Period Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17Large + Cash 96.3% 94.4% 92.1% 91.0% 90.9% 88.9% 90.6% 89.2% 90.1% 91.4% 90.0% 88.7% 90.2%Mid&small 3.7% 5.6% 7.9% 9.0% 9.1% 11.1% 9.4% 10.8% 9.9% 8.6% 10.0% 11.3% 9.8%

Data as on 30th November 2017. Source: Valuefy, ICRA, Earnings Data: Internal estimates

Additional Portfolio Information

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Scheme Name FY18 FY19 FY182 FY193 ROE P/BVKotak Classic Equity 16.58 21.18 20.93 17.27 16.69 5.45

Earnings Growth P/E

Year Kotak Classic Equity Nifty 100 Nifty 502015 12.77 12.47 12.632016 11.86 12.59 12.592017 8.17 7.73 7.45

Standard Deviation (Volatility)

-30-20-10

010203040

2.13882.6019…

3.38883.8386…

1.70963.3571…

0.96043.4649…

1.51874.4231…

1.60953.8081…

1.84143.9753…

6.13686.1416…

3.80524.8429…

2.1395.3508…

4.58585.403…

3.62744.2732…

3.50464.4031…

3.18276.667…

Sum of Top 3 Kotak Classic Equity OW/UW Sectoral Positions

Valuations are largely commensurate with Growth expectation

The general volatility in the portfolio and market has been on a decline

Kotak Classic tends to take a very strong Overweight and Underweight Position than usually observed. But it has not added to the volatility of the fund

Data Source: internal estimates; & ICRA. Past performance may not be guaranteed in future

Sector Allocation as on November 2017

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Sector Fund Wt. Index Wt. OW/UWFinancial Services 22.18% 33.01% -10.83%Energy 19.62% 13.88% 5.73%Consumer Goods 11.31% 12.24% -0.94%Cash & Cash Equivalent 10.86% 0.00% 10.86%Information Technology 9.38% 9.65% -0.26%Automobile 8.57% 10.31% -1.74%Metals 6.82% 4.82% 2.00%Pharma 4.37% 4.51% -0.14%Telecom 2.64% 2.26% 0.37%Cement & Cement Products 1.98% 2.11% -0.13%

The above positions are as on 30th November. This view may change based on evolving information and concurrent analysis. This is a brief gist of FM view and a more comprehensive and nuanced position is undertaken. Data is from ICRA

Major Stock Allocations – And What is Our View

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Stock % Allocation Rationale

HDFC BANK 7.13

The bank managed to outperform the systemic loan growth by a huge margin. After demonetisation, the increase in financial savings in the economy had translated into strong business growth, which should continue (we see 20% CAGR over the next few years). CASA accretion gained momentum after demonetisation. NIMs are likely to remain stable at 4.3% due to decline in cost of funds and increasing share of higher yielding assets. The digital initiative started paying off with establishment and branch addition costs ‐moderating. Overall asset quality continues to remain stable.

Reliance Industries 5.88

RIL’s almost US$50bn capex program is nearly complete with key projects like petchem (ROGC) and polyester expansion, ethane sourcing and Jio already commissioned. The petcoke gasification is the only major unit remaining to be commissioned and is expected by end of FY18. • With steady income and capex cycle largely ending, RIL is expected to generate positive FCF in a couple of years which will lead to debt repayment and higher valuation.

Infosys 5.21Taking the right steps, to transform itself from a cost-arbitrage driven model to one which adds value to its customers. Focus on design thinking and automation, and realignment of its sales team to focus on delivery capabilities rather than domain expertise, indicate the management thought process.

MarutiSuzuki 4.51

Strong new launch pipeline, best model cycle and weak competition means we continue to see marketsharewins to continue for MSIL. Further with increased contribution of new models we see blended realisations and margins to move up

Hind Unilever 4.51

We expect consumer spending in rural areas to revive from 2HFY18 on back of near normal monsoon, farm loan waiver, MSP hikes (5%+) for key crops and front- loading of expenditure before Central elections that are scheduled to be held in 1QFY20 (April-May,2019). HUL is expected to be key beneficiary as it derives 50% of revenue from rural areas and product portfolio aligned with needs of rural consumer.


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Major Stock Allocations – And What is Our View

Stock % Allocation Rationale

Hindalco 3.43

Hindalco’s captive alumina portfolio will insulate it from higher costs and benefit from any improvement in Aluminium prices. Novelis continues to report strong profitability driven by improving share of automobile shipments and stabilizing beverage can cycle in North America & Asia. Strong free cash generation will see the company continue with its balance sheet de-leveraging

BPCL 3.23 Reforms in the pricing of petrol and diesel and DBT in kerosene and LPG to benefit the OMCs

Powergrid 2.98 Picked because of investment in transmission sector and falling G-Sec yields, since such stocks tend to do well in falling interest rate environment

Bajaj Finance 2.87

Bajaj finance to continue to trade at premium valuation given consistent 30%+ CAGR in AUM over last many years, while keeping a very robust asset quality with GNPA ratio maintained at less than 2%. We believe its niche positioning in consumer durable financing coupled with diversified nature of its book helps in derisking the portfolio. Moreover high use of analytics and premium customer base helps in maintaining high cross sell rate.

Gail 2.72

With Government aiming to double share of natural gas in India’s energy basket, gas supply demand in India is expected to increase significantly going forward which will entail higher transmission and trading volumes for GAIL. The constitution of PNGRB quorum would be followed by expected tariff hikes for GAIL’s key pipeline networks.


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To Summarize:

• The fund is a true large cap product and has diligently maintained its allocation mandate. Even in the light of product repositioning on account of SEBI guidelines, this investment style will not change

True to Label Fund

• In contrast, the largecap peerset has been allocating in midcap to generate alpha. In light of SEBI mandate, these performances may not happen in future

Generates Alpha Largely from Largecap Space

• The fund investment process has a double check in its investment framework. This balances the IQ & EQ in the fund management process and allows the fund to take non-consensus calls

• Ability to take conviction calls as the nudge in form of EQ check is available

Conviction Driven

• The Fund manager has a long and extensive experience in F&O. • This allows the fund manager to identify value-mismatch in between spot and Futures market. • Thus, the fund manager, given an opportunity allocates through futures, and utilizes the cash to invwst in

debt instruments to generate additional alpha while keeping the positioning same• The consequent allocation in CBLO & Futures leads to optically higher turnover ratio but adds to the alpha

Smart Tactical Play

Performance As On 30th November 2017

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Scheme Inception date is 27/07/2005. Mr. Deepak Gupta has been managing the fund since 01/01/2017.

Different plans have different expense structure. The performance details provided herein are of regular plan ^Past performance may or may not be sustained in future.*All payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Note: Point to Point (PTP) Returns in INR shows the value of 10,000/- investment made at inception. Source: ICRA MFI Explorer. # Name of Scheme Benchmark. ## Name of Additional Benchmark

Top 3 & Bottom 3 Funds Managed by Mr. Deepak Gupta

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Top 3 Funds Managed by Mr. Deepak Gupta

Mr. Deepak Gupta manages 13 funds of Kotak Mutual fund.Kotak Banking ETF, *Name of the Benchmark - Nifty Bank, Scheme Inception date is 10/12/2014. Mr. Deepak Gupta has been managing the fund since 24/11/2014.Kotak NV20 ETF - *Name of the Benchmark Nifty 50 Value 20, Scheme Inception date is 01/12/2015. Mr. Deepak Gupta has been managing the fund since 08/12/2015.Kotak Nifty ETF, *Name of the Benchmark - Nifty 50, Scheme Inception date is 08/02/2010. Mr. Deepak Gupta has been managing the fund since 25/02/2011.

Bottom 3 Funds Managed by Mr. Deepak Gupta

Mr. Deepak Gupta manages 13funds of Kotak Mutual fund.Kotak Asset Allocator Fund - Growth, *Name of the Benchmark - CRISIL Balanced Fund – Aggressive Index, Scheme Inception date is 09/08/2004. Mr. Deepak Gupta has been managing the fund since 01/09/2008.Kotak Equity Arbitrage Fund - Growth, *Name of the Benchmark - Nifty 50 Arbitrage Index, Scheme Inception date is 29/09/2005. Mr. Deepak Gupta has been managing the fund since 01/09/2008.Kotak World Gold Fund - Growth, *Name of the Benchmark - Financial Times Gold Mines Total - Price, Scheme Inception date is 06/06/2008. Mr. Deepak Gupta has been managing the fund since 01/02/2015.Different plans have different expense structure. The performance details provided herein are of regular plan

^Past performance may or may not be sustained in future.*All payouts during the period have been reinvested in the units of the scheme at the then prevailing NAV. Returns > = 1 year: CAGR (Compounded Annualised Growth Rate). N.A stands for data not available. Source: ICRA MFI Explorer.

Disclaimers

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Documents

Growth through Balance of Knowledge & Temperament · The fundamental view overrides here Sectors like cement, media, 2 wheelers like Hero Motorcorp and NBFCs like Bajaj Finance where