What has resulted in Mirae Asset India Opportunities’ outstanding performance in the past one year?

Since inception, Mirae Asset India Opportunities Fund has delivered a compounded annual growth rate (CAGR) of 20 per cent, outperforming the S&P BSE 200 benchmark by almost 8 per cent. Over the last one year, the fund has delivered 60 per cent returns, outperforming the benchmark by 20 per cent.I would pin stock selection as the primary attribute that has helped sustain the fund’s outperformance on a consistent basis. Our approach has been to first try and beat the respective sectors, and thereby, the broader benchmark index. Our investment philosophy is centered on participating in high-quality businesses up to a reasonable price and, holding the same over an extended period.

Can you share the stock selection process that you follow and the research behind it?

The stock selection process has three aspects: business selection, management analysis and valuation. We look for quality businesses with decent growth prospects and their return characteristics (that is return on capital employed-ROCE). These are the crucial initial filters. For instance, when the opportunity size is large, such as the pharma sector, the longevity of growth is high. Management analysis is subjective where we look at the track record and corporate governance. A well-managed company will have better capital efficiency, so the return on equity (ROE) tends to be better than in the same sector. Lastly, the stock’s value has to be higher than the market price so that there is enough ‘margin of safety’.

To do the above, our research team constantly meets with companies in a structured way, and thereafter, makes internal financial models. Our research is also supplemented by reports from brokerage houses. We try to lay emphasis on in-house research to understand the business and to supplement external analysis.

What is the basis for mid-cap allocation in this fund?

The broad range of mid-cap allocation in the fund is 25-30 per cent. Our definition of mid-cap is a stock that is not in the top 100 and, yes, we have bias towards larger mid-caps. For small-cap allocation, we look for companies with a minimum operating profit of Rs.100 crore.

What stocks and sectors do you avoid when managing this fund?

Essentially, within the framework of benchmarking, we focus on cash flows. So, we avoid companies that have inferior ROCE and, thus, low cash flows. The second category, as I mentioned above, is with respect to small companies where the cash flow is less than Rs.100 crore. The third category includes companies where valuations are very high, i.e., all other factors like growth, management, return on investment (ROI) and, so on are being very good). We do not buy companies at just any price.

What can investors expect from the fund this year?

Last year was very good, as the market covered for the previous year’s underperformance, which was adversely impacted by macro challenges. At present, the market is reasonably valued—neither very cheap nor expensive and, thus, returns should be similar to the earnings growth. New investors in this fund should have at least a three year view as one year is generally considered short from the perspective of equity investment.

From a long-term investment point of view, returns should be in line with the earnings growth of portfolio companies. Overall, one can expect NAV returns of about 15-18 per cent from this fund.

OLMdesk@outlookindia.com