‘Equity Will Rule The Next Decade’
Mirae Asset Emerging Bluechip Fund, a part of the equity (others) category in OLM 50, is the largest large-and-mid-cap fund in the Indian mutual fund (MF) industry with assets of Rs 21,932.38 crore. The ‘others’ category created by us includes large- and mid-cap, flexicap and multi-cap funds. Neelesh Surana, chief investment officer, Mirae Asset Investment Managers, shares his investment strategy and market outlook with Kundan Kishore. Edited excerpts:
How difficult is it to manage a large-sized fund like Mirae Asset Emerging Bluechip Fund?
Earlier, this was a mid-cap fund. But after the Securities and Exchange Board of India (Sebi) reclassified funds in 2017, it became a large- and mid-cap fund. Besides, we soft closed (the fund does not accept lump sums anymore, but has been allowing opening of systematic investment plans or SIPs) five years back and we are maintaining that stance. We are not changing in terms of getting more money. Also, if you look at the corpus of around Rs 22,000 crore, half of it is into large-caps. We keep 50-55 per cent funds in large-caps so that a part of the fund would not face the size challenge. The remaining Rs 11,000 crore is in mid-caps, which is not something that is unmanageable.
If fund size is not a challenge, why have you shut the door for lump sum investments?
For us, the interest of existing unit holders is first and foremost. We ensure that size doesn’t become a hurdle for existing unit holders. The idea is to get decent money through SIPs so that the market share is maintained, but the performance is not impacted due to size. On a yearly basis, we get around Rs 1,500-2,000 crore through SIP inflows. There is predictability in terms of the size. Even if performance suffers because of call issue (strategy and stock selection) it won’t suffer because of the size. Not many funds in the industry were soft closed when inflows were good.
What according to you should be the size of a fund in the large- and-mid-cap space? How do you take a call on inflows?
The large-cap has a lot of room. There is proportionate liquidity. If you look at mid-cap today, and five years ago, the scenario has totally changed in terms of the cut-off. There is a difference between the earlier 250 companies and the current 250 due to market and GDP growth. Five years back, the cut-off for large cap was about Rs 24,000 crore market cap. Now that has increased to about Rs 46,000 crore. To put a number, I believe (a size of) up to $2.5 billion is fine for mid-cap, but beyond that it could be suffocating.
Every year, we do a detailed risk analysis of how much capacity (inflow absorption) a mid-cap should have, given the number of companies listed and the size of the economy.
What is the secret behind the superior performance of your fund?
This is a result of the teamwork of the research analysts. We focus a lot on primary research. We have identified some businesses ahead of the market. The other reason could be due to the fact that big errors were avoided in the last 12 years. It’s not that errors did not happen, but there were no big errors in terms of portfolio construction.
Currently, your portfolio is tilted towards the financial sector, which accounts for around 28 per cent. Is it because of benchmark weightage or do you see any value in this space?
If you scan the market today and look at good quality businesses at reasonable prices, the sector that comes out first is the banking and financial services sector. It has strong franchises, strong businesses, and the valuations are not high. We think that the economy has seen a bad patch over the last five years due to multiple reasons, and when it started to recover, you had three waves of Covid and then again the uncertainty over the global interest rate and commodity inflation. But these issues will get pushed behind, and a recovery will lead to credit growth. The balance sheet (of banking and financial services companies) is in a very good shape because corporate NPAs (non-performing assets) are behind us. Covid has not caused as much pain as it was feared. Consolidation is taking place in many businesses, including the financial space. Strong companies are getting stronger. With the advent of technology, the larger franchises, including four-five big names, are likely to become stronger. There will be huge consolidation in the sector. Additionally, subsidiaries are more meaningful than they were 10 years ago.
Are these in the large-cap space or mid-cap space?
Our first port of call in financial services sector are large and strong franchises. We don’t own a single mid-cap in the space by choice because we believe stronger companies will win. These companies have a lot of weight in the benchmarks, and we consider that while constructing a portfolio.
You have decent exposure of around 11 per cent in technology. But we did not see any major action in your technology portfolio. Are they conviction stocks?
We do not have any new entrants in technology, they were all taken a few years back. They are doing well. After Covid, there is front-loading of demand generation. New models have emerged in demand fulfilment. They are in the hold zone today. They were bought earlier and are doing well. We are just holding on and not adding any big amount in the portfolio. There is near-term visibility in the IT services.
Typically, it is seen that when a fund grows in size, fund managers start hugging the benchmark. What strategy do you follow while constructing the portfolio?
During portfolio construction, we take into account the benchmark weight, and try to identify stocks within it which are likely to outperform. Sector-level divergence is minimal, so that risk is avoided.
At any point of time, no stock, sector, size, or theme is disproportionate. This avoids risk.
Stock-wise, our approach is to have good quality businesses, but at reasonable prices. We avoid outliers with very good businesses if they are priced at obscenely high levels. It is a very actively-managed fund, where we take into account the volatility in the market. The combination of all these factors has yielded favourable results.
What is your view on markets in the medium to long term?
There are two recent issues to be considered—one, change in the interest rate regime, and second, rise in commodity prices. To an extent, these are challenges. I believe FY23 earnings will be erratic because of these factors, but FY24 will be broadly intact. Near-term hiccups will be because of oil and interest rate. India being a growth market, our view on equities is constructive.
Which sectors might do well?
There are tailwinds on various businesses, but they will turn around as conditions specific to them change. For instance, auto will do well in the next three-five years because the base is so low. Car sales are less than what we sold four years back, commercial vehicle sales are half, so the only trajectory is up. If you look at telecom, there is consolidation happening in the market. Now this is a two-player market. Take the case of housing; after eight years, it is turning around. We would see mean revert in many of the businesses.
What would be your advice to investors in this market scenario?
I would not advise lump sum investment because of volatility. I strongly recommend SIPs. Thankfully, Indian investors have shown a lot of maturity this time, unlike in the past. They should just continue with their SIPs. There is a long way for the India story to pan out and it would be much better than the past. Equity will rule the next decade.
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kundan@outlookindia.com