Neelesh Surana, Head – Equity, Mirae Asset AMC, has been doing an excellent job at the helm of Mirae Asset India Opportunities and Mirae Asset Emerging Bluechip.
India Opportunities was the best player in the large-cap space in 2009. Since then it has stayed a top quartile performer with excellent 3-year (21%) and 5-year (14.35%) annualised returns. Emerging Bluechip is another top quartile performer with the best 5-year annualised returns (23.53%) in the small/mid-cap category.
What do you look for in a mid-cap stock?
Irrespective of size, the stock selection process is same and has three aspects: Business selection, management analysis, and valuation.
We look for businesses with decent growth prospects and high Return on Capital Employed (ROCE). These two parameters are important initial filters.
The second filter is with respect to management analysis, which is a bit subjective but very important particularly for mid caps. We look at factors such as the track record, corporate governance and capital allocation. A well-managed company will have better capital efficiency so the ROE’s tend to be better than that of peers in the same sector.
The last factor is to arrive at a particular value. Value has to be more than the market price so that there is enough ‘margin of safety’
To summarize, we look for investment in scalable, quality business up to a reasonable price and hold it over an extended period.
So the filter is essentially ROCE and growth?
Yes, for business selection the filter is essentially ROCE and growth. When you go lower down the market cap ladder, the return expectation is higher, so the filters must be tighter. This is because there must be additional “margin of safety.”
So it would be safe to say that you are a growth oriented asset manager.
Yes, but only growth as a parameter will not the complete the picture. It would be a mistake to purchase growth at any price, and in that context, “growth” should be a sub-set of “value”. The point I am making is that pure value (low earnings growth businesses) does not create enough wealth in the long term.
In 2011, 2013 and 2015, your funds managed to do better than the category average. In fact, they have been fairly consistent. How have you managed that?
We have been in the right pockets as divergence across sectors and stocks within sectors was significant over the last seven years.
A disciplined approach to investing, a focus on quality up to a reasonable price, and diversification has helped us deliver a satisfactory track record.
We try not to take extreme calls – either by way of a theme, investing style, stock or sector. We do not go disproportionately high in either one. We avoid concentration in our portfolios and diversify.
We also keep an eye on the benchmark where our multi-cap fund is concerned to ensure that we do not go overboard in taking high positions. Take banking for example, where the benchmark has an exposure of about 27%. Over the past seven years, we would not have crossed plus or minus 3% of the benchmark weight.
We endeavor to generate alpha by the right stock selection.
So you have an eye on the benchmark and stock selection.
Yes. For instance, in terms of exposure to banking stocks, we are equal in terms of weight with regards to the benchmark. But even within this space, we looked predominantly at high quality, private sector banks. Compared to the benchmark’s exposure to public sector banks, we were very underweight.
Why?
Banking is a service industry and we believe that government owned companies have rarely done well in the service sector. So if you take a 10-year view, on various parameters, private sectors have done well - be it the agility to move on the technology front or have better liability-side franchises, and so on and so forth.
How are you positioning your portfolio this year?
We believe that the Indian economy is on the right track towards recovery given the significant improvement in macros such as the current account deficit, inflation and interest rates. These coupled with concerted efforts by the government to revive the investment cycle, initially through public capex, will eventually lead to growth in corporate earnings, which is muted over the last two years.
We expect consumption to accelerate along with a pick-up in economic growth.
We have not made significant changes to the portfolio. From a sectoral perspective, we are overweight on private sector financials, the entire consumer space particularly discretionary, and healthcare.
We like the consumption sector, both the staples and the discretionary space given the triggers in the medium term, as well as considering the long-term potential. In the medium term, the fall in inflation couples with higher income (from the 7th pay commission) would give fillip. The long-term potential is intact for many categories where the penetration level is low, given that India is in midst of a strong multi-year domestic consumption theme due to population growth, urbanisation, and demographics.
We are looking at businesses which could benefit from multiple factors – recovery in the economy, GST, lowering of corporate tax rates. Many of the consumption oriented businesses fit within these themes.
Barring L&T, you avoid Infrastructure.
We have been underweight on capital goods, and construction within Infrastructure. While the sector will continue to grow, we have limited opportunities considering valuation and other filters. Many of the construction companies do not have a high free cash conversion. In this context, we have participated in related businesses such as logistics and some exposure in power related companies.
A version of this interview appeared in the online publication of India Markets Observer. The outlook for various asset classes, perspectives on the industry, investing insights, interviews of fund managers, and the entire list of contributors, can be accessed here.
