will growth continue to surprise?
TRANSCRIPT
From the FundManager’s desk
Ajay Vora Nikhil Ranka
Executive Vice PresidentEdelweiss Investment Management
Senior Vice PresidentEdelweiss Investment Management
Fund Manager, Edelweiss Dynamic Growth Equity [EDGE] Fund*
Fund Manager, Edelweiss Dynamic Growth Equity [EDGE] Fund*
WILL GROWTH CONTINUE TO SURPRISE?
`Click here for an audible synopsis of
the month by our Fund Managers
What we said How it played out Our picks
“We continue to tilt towards energy for tradeas we strongly feel that demand will outpacesupply in the interim, with most countries likelyto open up in H2CY21.”
Nifty Energy returned a healthy24% for the first six months of thefiscal
• Reliance,• Indian Oil• Bharat
Petroleum
“We are also turning positive on organized real
estate players as we see finished inventory
falling to 2 years from 3 5 years, coupled with
improving affordability and lower interest
rates.”
Realty turned out to be the show
stopper of this semi-annual event
returning a hefty 53% from Apr-
Sep'21.
• Oberoi Realty
• DLF
“Our picks in the media space also paid off on
account of the above-consensus earnings and
positive management commentary on the
outlook.”
We were as sure of the media
sector outperforming as the
Starks were of the upcoming
winter. Evidently, both didn't
disappoint, and Nifty Media
delivered 35% returns
• Zee
“We maintained a highly defensive stance andran a low net long portfolio along withstructured hedges to limit any potentialdownside due to the upcoming FED meeting.”
We ran a portfolio with 50% of the market's exposure,expecting a correction in August, which didn't play outthe way we anticipated and missed some of the run-up Nifty enjoyed. Though, our opportunistic play indomestic pharma and the reopening trade helped usaccumulate returns and remain consistent for themonth.
September marks six months since the inception of EDGE; let's take a walk down our short but eventful
memory lane. Here's a recap of our calls over the last two quarters and how they played out
QUICK RECAP!
CONCERNS FIRST!
India's manufacturing sector will undergo significant shifts over the next 5-10 years. The
Production-Linked Incentive (PLI) scheme has the potential to increase the manufacturing
share in domestic value addition. Also, the ongoing theme of CHINA+1 will boost the demand
environment for few emerging sectors like chemicals and electronic manufacturing. These will
add to job creation and lead to much stronger broad-based economic activity for the next 3-5
years. The housing markets have shown improvement since 2020. Inventory in top-7 cities is
down to 7-8 year lows which is positive for pricing. Projects by leading developers have seen 5-
15% price hikes. Affordability levels are among the best in 2 decades. Rising prices should
attract investor demand and also induce demand from fence-sitting end users, sustaining the
cycle.
DOES INDIA HAVE A SLIGHTLY SWEETER DEAL, THOUGH?
Fundamental headwinds for the Indian market are (1) growing concerns regarding a sharp
slowdown in China, (2) expectations of reduced bond purchases and higher interest rates by
DM central banks and (3) rich valuations of the Indian market.
The Chinese Government's interventionist approach to its big-tech companies and indifferent
attitude (so far) to the challenges in its real estate sector may compound concerns around the
slowdown of China's growth. We are not sure if the Government will intervene aggressively to
support economic growth as China's high public debt-to-GDP may constrain large-scale
stimulus. At the same time, China cannot afford a sharp slowdown in real estate, given the
sector's large share in GDP and household wealth.
We expect DM central banks to start tapering over the next few months, whereas EM central
banks are likely to raise interest rates to fight inflation and reduce the negative real rates. On
the other hand, India is expected to follow a middle path with a staggered reduction in bond
purchases over time and a likely rate increase in H2CY22. We do not see rate hikes over the
next few months; given inflation is currently manageable. However, the ongoing supply-led
disruptions across commodities (mainly energy) may cause higher-than-expected 'entrenched'
inflation, leading to the recalibration of central banks' inflation expectations, resulting in
higher yields.
Gross Fixed Capital Formation (GFCF) has three major contributors (households, govt. and
corporate), of which the 40% contribution by households is essentially on account of the
property cycle. The HH Capex contribution to GDP shrank from 16% of GDP in FY12 to 11% by
FY21, which has created headwinds for GDP growth over the last nine years. The current
property cycle reversal will potentially generate a delta of 1.2-1.4 ppts to the annual GDP
growth. Evidence of GFCF upturn was visible in 4QFY21 (before the second Covid wave) when
as a % of GDP, GFCF hit a 27 quarter high.
India's long-awaited private capex cycle is now showing initial signs of revival. Government’s
capex has also started improving from FY21, and the trend-forward appears encouraging
though it cannot create a vast delta. The private corporate capex uptrend is visible selectively
in steel, PLI, data centres, etc., although broader revival may take 12+ months.
Unlike the first wave, the second Covid wave had a muted negative impact on economic
activity across most sectors, visible in government revenue collections. Gross GST collections
in 5MFY22 were at INR 5.65 tn —9.9% higher than 5MFY20 (54.7% higher than 5MFY21).
Gross tax revenues in 4MFY22 grew 83%, while the net tax collections surged by 161% (mainly
reflecting the sharp surge in excise duty receipts). Given the limited dent to economic activity
and tax collections, we remain optimistic about the ability of the centre to deliver a lower
GFD/GDP at 6.4% in FY22E (6.8% in FY22BE).
We believe the rich valuations of the Indian market as a whole and most sectors, after a
sharp re-rating of most stock multiples from their pre-pandemic levels, raise prospects of a
pullback, albeit a moderate one at worst. This pullback may be accompanied by modest
returns for a longish period, given no fundamental change to short and medium-term
drivers of the Indian market.
However, if 10 year UST yields spike beyond 1.8%, driving the DXY index, we can see
accelerated FII outflows from the EM region.
DOES INDIA HAVE A SLIGHTLY SWEETER DEAL, THOUGH?DOES INDIA HAVE A SLIGHTLY SWEETER DEAL, THOUGH?
92%
-26%
118%
66%
Long Short Gross Net
Equity Exposure
In September, we continued to maintain our net long positions of > 60%. Market sentiments got a
boost as at the start of the month; the US Fed chairman commented that the US central bank
wouldn’t be in a hurry to raise rates, even after they taper their asset purchases
Our exposure in ITC, RIL and media outperformed the market by a wide margin. Among sector
indices, realty and power gained 33% and 10%. We were well placed in both these sectors.
After almost two quarters, we have turned positive on the auto sector due to improving rural demand,
abating Covid scare, and inexpensive valuation. In addition, we have also added sector leaders in airlines
and alocbev to participate in re-opening theme.
Capex revival is clearly visible across most large sectors now. We have identified key beneficiaries for
our core portfolio.
Given the heavy long Retail and HNI positioning in single stock futures and negative FII stance, we have
added the required index hedges to protect the portfolio.
How we performed NAV as of 30th Sep’21: 11.6852
Returns are for A1 class, net of management fees and expenses, gross of performance fees and taxes. Fund inception date: 5th Apr’21
A look at our portfolio
Exposure excludes investment in mutual funds and other securities for margin or temporary deployment of surplus funds
EDELWEISS DYNAMIC GROWTH EQUITY [EDGE] FUND – SEP’21
Fund/ Benchmark 1 Month 3 MonthSince
Inception
EDGE 3.75% 8.52% 16.85%
Nifty 5 0 TRI 2.89% 12.37% 21.25%
Exposures are % of Total NAV; notional values for derivatives (including options) considered here
Top five holdings
Quantitative
Indicators
Annualized
Volati l ity
Sharpe
RatioBeta
EDGE 6.16% 4.91 0.38
Nifty 5 0 TRI 11.86% 3.31 1
How we fared on the risk front
HDFC Ltd: Valuation below 2x FY23e book, impeccable asset quality and potential for value unlocking
through stake sale in subsidiaries
Reliance: Recent underperformance, improving GRM and ARPU makes it a good long term story.
Just Dial: Open offer at 1022 along with likely acceptance in the range of 70-75% should
restrict downsides
ITC: Worst seems to be over for the cigarette and hotels business. Strong growth in FMCG business and
value unlocking can be a potential trigger for re-rating.
HCL Tech: Valuations are at a 30% discount to peers, and we expect growth to pick up in the coming
quarters
2.9%
3.8%
3.9%
5.9%
6.6%
HCL Tech
ITC Ltd
Just Dial Ltd
Reliance
HDFC Ltd
Fund type Open ended Category III AIF
Fund Managers Ajay Vora & Nikhil Ranka
Minimum Investment INR 1 Cr
Subscription 15th and last working day of every month
Redemption Last working day of every month
Placement Fee Upto 2%
Management Fee (p.a. on average AUM)
Performance Fee Classes Fixed Fee Classes
A1 A2 A3 A5 B1 B2 B5
1.75% 1.50% 1.00% 1.00% 2.25% 2.00% 1.75%
1-5 Cr 5-10 Cr 10-25 Cr 25 Cr + 1-5 Cr 5-10 Cr 10 Cr +
Performance Fee 15% for class A1, A2, A3 | 12.5% for Class A5 (No catch up)
Hurdle Rate 10% pre-tax, post expenses with high water mark
Exit Load 1 % for exit between 0-12 months
Fund Expenses At actuals, capped at 35 bps
Custodian Edelweiss Capital Services Limited
Disclaimer: Edelweiss Dynamic Growth Equity Fund ("the scheme") is Category III Alternative Investment Fund – a scheme of Edelweiss Alternative Strategies Trust having SEBI Registration Number -
IN/AIF3/20-21/0857. Past performance is not an indication of future performance. Investments in the Securities Market are subject to Market Risk. Please read the Private Placement Memorandum (PPM) and
Scheme related documents carefully before investing. For a detailed Disclaimer, please click here
1Consistent returns across market cycles 2
Lock-in returns at regular intervals 3
Limit drawdownsduring extremevolatility
Objectives we’re striving towards
Fund Terms
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AIF Benchmark indices as per benchmarking agency CRISIL – Not Applicable. The Scheme has not completed one year since its inception