Mirae Asset Emerging Bluechip Fund completed 10 years recently. Congratulations. Looking back, what are your thoughts? What are the big hits and misses?
Over the last ten years, there has been unprecedented focus on macro-economic parameters – both, domestic and global related. At various occasions, there were plenty of reasons to be sceptical about the prospects of Indian equities. These included events like the global financial crisis, including Eurozone crisis, policy paralysis period accompanied by oil shock, two-elections, taper tantrum, Brexit, demonetization, and periodic uncertainties related to growth, interest rate, inflation etc.
The Covid-19 pandemic brings us another crisis on an unprecedented scale. Yet, the returns of the fund have been about 5x in 10 years — our optimism sustains, and we continue to be resolute in our faith in India’s growth prospects. The crux of optimism is our investment philosophy that a good investment on a bottom-up basis is ultimately about businesses delivering superior earnings growth despite macroeconomic volatility, as returns over time converge with earnings growth. The common theme for emerging bluechips has been that quality and scalable growth run by decent management create wealth irrespective of volatile macro-economic scenario.
The scheme occupies number 1 slot in the large & mid cap category in three-, five-, seven-, and 10-year periods. It has given around 18% returns in 10 years. It must have been tough to retain the top slot continuously. How do you manage it?
Disciplined approach to investing, with focus on “quality up to a reasonable price,” has helped us deliver a satisfactory track record. The focus is more on stock selection, through bottom-up approach in growth companies, available at a reasonable valuation. We would like to outline the two key aspects of investment decisions:
Stock selection: Our investment philosophy is centered around participating in quality businesses, but up to a reasonable valuation. Analysis of all three buckets – Business, Management, and Valuation is important from a risk-reward matrix and outliers are avoided. These outliers include a sub-par quality of business or management, and at the other extreme great businesses but with an expensive price tag.
Portfolio construction: Discipline, and adequate diversification is important.We seek to construct a diversified portfolio, which could handle mistakes and deliver decent risk-adjusted returns.
The ability of fund managers to deliver alpha or more returns than the benchmark over a long period is severely contested these days. Those who favour index-based investing point out the performance of large cap funds as proof. Do you think it is still possible to deliver alpha return in other categories like large & mid cap?
At an overall level, both active and passive funds can co-exist, given their respective advantage. We would believe that about 100-300 bps alpha in the long term is a good, sustainable and achievable target – only if funds demonstrate and maintain the alpha, there is a right to win over passive.
The scheme was originally a mid-cap scheme that was recategorized as a large & mid cap scheme two years ago after Sebi came up with new rules for mutual fund categories. Did that make any big difference the way you manage the scheme?
During the March 2018 reclassification by SEBI, EBF moved to the newly defined “Large and midcap category.” As per the offer document, large and midcap category is mandated to invest minimum 35% each in large cap and midcaps. We intend to keep 50 + or – 10%, that is, 40-60% in each of these two buckets, subject to bottom up stock picking opportunities. Overall there has been a shift of 15-20% from midcap to large cap. The overall template to buy stock and construct the portfolio remains the same, irrespective of size of businesses.
You have stopped fresh lumpsum investments to the scheme in 2016. Do you still believe the size of the fund poses threat to performance? Especially, since you can also invest in large cap stocks now?
In October 2016, we stopped accepting lumpsum investments into this scheme but continue to accept SIPs. This restriction in lumpsum will continue as we believe it’s in the interest of existing unitholders. Despite no lumpsum investment the AUM has grown to over 10000 crore, which is highest in the category. We believe that the fund size is manageable for now given the steady inflow which it gathers – we have a sustainable and predictable SIP book of about 250 crore. Also, the move to the large and midcap category increases the addressable universe and liquidity of underlying stocks manifold.
The Covid-19 pandemic has put a big question mark on prospects of equity mutual funds. How do you view the scenario?
Pandemic will determine the timeline of normal and that is clearly a negative part today. However, there are several positives also:
- When we do DCF valuation the fall in intrinsic value of many businesses is much lower than the stock price correction during pandemic – this is based on the simple premise that pandemic impair cash flows only for say 1-2 years. Any price correction more than value correction provides investment opportunity.
- We have stable macros with respect to low interest rates, forex reserves, current account situation, recovery in rural markets, etc. The interest rate remains an important lever for recovery as it impacts equity markets in three ways – (a) it helps improve demand in rate-sensitive sectors, (b) helps improve cash flows, and (c) P/E multiples are also a function of interest rates.
Overall, we believe that markets can consolidate in the near term, given both the rally and extended timeline for recovery. However, we do believe that valuations to be reasonable from a long-term view – that is, a 3-year viewpoint considering low interest rates. Investors should continue with SIP during the ongoing volatility.
What are your thoughts on the mid cap segment? It is yet to see a meaningful revival.
At an aggregate level, there is not much of a discount between valuation of mid caps Vs large caps. However, selectively across size we believe that the pandemic dislocation offers decent opportunities. Our view is that strong companies will become stronger. In this context, within midcaps companies with a strong balance sheet, thought leadership of management will be better able to weather the challenges. Select midcaps will emerge stronger post the ongoing crisis.
Most mutual fund investors have still not warmed up to the large & mid cap category. Why? Before recategorization, most multi cap schemes were essentially large and mid cap schemes.
We believe that this is a fantastic category as investors get exposure to the best of large and mid cap in one single scheme. It is similar to a well-defined multi cap fund with about 50% each in large cap and midcap. Over time we remain optimistic that this category will get traction.