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Jayesh Gandhi, Fund Manager and Vice President of Morgan Stanley Mutual Fund, doesn't see a valuations hangover and he advises to invest at current levels.

As an MF, he said, they will target quality large caps and underowned and undervalued stocks.

Excerpts from CNBC-TV18's exclusive interview with Jayesh Gandhi:

Q: Do you find any kind of a hangover of sentiment on your second fund from the first because the first was a bit of a debacle, do you see that hamstringing you at all?

A: Not at all, we are very comfortable with investing in this current environment when we started our pre-NFO road shows in the early part of January, we predicted and commented on the shorter-term outlook on the market suggesting a correction of 15-20%. Since then we have seen this correction and the valuations and the market comfort and the overall market situation are now in favour of long-term investing. So we see this as an opportunity to build a very good solid portfolio, which would deliver better risk adjusted returns over the long-term for investors. So I’m confident that we are in a position to build a much better portfolio now than probably what we had in early January.

Q: I was asking you about your only other product in India the MSGF which doesn’t have very good memories in the mind of investors; do you think that since it’s the only trackrecord that you have of managing money in this country, could that become a bit of a hamstring for you?

A: If you look at the returns of MSGF over the long-term since its inception, the fund has returned something like 17.73% CAGR against the benchmark of 13%. Now over the 14-year time horizon a 17.5% or close to 18% return is pretty good, so the long-term returns have been pretty good. The near-term of the last 3 and 5 years have been average returns and we see and know that the fund has done pretty well.

The old memories are there for some investors but the performance of funds over the period of last 8-10 years has helped us come back. We think that investors have looked beyond those old memories and are now looking forward to our new fund.

Q: These past few months have seen the market shrink as well by way of participation and it has only got more narrow. Just explain what you would look at when you say cross capitalization, what does it start at, what does it end at and how much do you lean towards the largecap versus a midcap or a smallcap?

A: At this point of time and from the next 1-2 years perspective, it would be wise for investors to be in a multicap strategy and have a judicious mix of largecap and midcaps in the portfolio and not tilt towards a particular cap. The reason is because markets in 2007 in particular saw a huge return or huge out performance of midcaps and valuations in many sectors and many stocks were significantly higher than largecaps. So midcap focused strategy would not work for those investors looking at higher returns.

Similarly in largecaps, there are quite a few pockets of sectors and stocks, which have not participated in the 2007 rally to name a few sectors such as FMCG, Pharma, IT and Autos. There are sectors and stocks in the largecap space as well, so as our strategy stands we will target the quality largecaps, the undervalued, underowned largecaps and at the same time look at selective stocks in midcap space as well and build a portfolio, which will have a judicious mix of largecap and midcap.

Also, what we are clearly suggesting in our strategy is that investors should not get focused towards a sector, particularly those sectors which have done well in 2007, because what we see is that consistently there has been sector rotation, leadership and rotation of sector returns. We have seen that happen every time there has been a sharp correction and to our mind this time as well, we would see leadership in sectors changing. So the sector leaders of 2007 may most likely may not come back in 2008.

So investors should not get trapped in sectors, particularly those sectors that have done well in 2007, but have a flexible approach and have the ability in the portfolio strategy to move across from overvalued, overowned sectors to undervalued and underowned sectors and that is what we would like to bring to this table in terms of our portfolio strategy.

Q: So you are saying that if you had that money to invest today you would not be buying anything in capital goods or infrastructure or power?

A: We’ll have to be very selective there. We have already seen some bit of correction in this segment, but my view is that there is some more pain left to be taken off there. Some of the names in this sector had given huge returns to investors and are quoting at much higher valuations than what they have had in the history of last 5-8 years and average P/E for those stocks.

So there is a bit of a discomfort there and one has to be very careful, at the same time there are sectors which have not participated in 2007 where there are good value stories, good long-term growth stories and investors would be wise to look at those as well and not ignore them.

Source: Moneycontrol.com