HDFC Mid-Cap Opportunities Growth
Chirag Setalvad emphasises understanding the niceties of a business before investing. Like all equity managers from his AMC, he adopts a hands-on approach towards research with a view to identify companies with robust business models, strong competitive advantages, and clean balance sheets. Company meetings are an integral part of the evaluation process.
Setalvad looks for tangible business models with a strong track record. Emerging/ niche companies with untested business models don’t find favour with him.
He typically looks for companies that can generate reasonable free cash flow and have high returns on equity. He combines absolute and relative valuation parameters to select stocks that aren’t too expensive relative to their growth prospects.
Setalvad predominantly maintains an allocation towards large caps not exceeding 15% of the portfolio. However, this has changed since 2014 with the level of large-cap names going up. The fund currently holds about 35% in large-cap stocks; however, most of these stocks are mid-cap names that have witnessed an increase in market cap owing to the recent market runup. His investments in companies like Yes Bank, UPL Ltd, and IndusInd Bank typify this approach.
While the fund had a slightly higher allocation towards small-cap stocks, these stocks constitute about 15% of the portfolio as of March 2017.
After an average performance in 2014 and an underperformance in 2015, the fund once again outperformed, as it did consistently for 6 years (2008 – 2013). Although Setalvad has consistently held a significant exposure to the financials sector, the underperformance in 2015 could be attributed to public sector banks like Allahabad Bank, Punjab National Bank, and Indian Bank amongst others, which had a major impact on the fund’s overall performance.
You can read the brief analyst note here
Franklin India Prima Growth
This fund has an excellent track record. Its 15-year annualized returns are 26%. Although Janakiraman was named the comanager in February 2008, he has been acting as the lead manager only since February 2011. The fund has done extremely well under his watch. It underperformed the category average in 2015, featuring in the category’s third performance quartile, given a poor showing by stocks such as Yes Bank and Finolex Cables. However, the same stocks helped the fund rebound in 2016 and outperform 66% of the competition.
Fundamental research forms the crux of the investment process. The coverage list for small/mid-caps is built by the portfolio managers in conjunction with the analysts. When selecting companies, the investment team places strong emphasis on qualitative aspects such as managerial strengths and corporate governance standards; also, rigorous business analysis is performed to understand the growth prospects of the industry, its competitive landscape, entry barriers, the company’s market share, and scalability prospects of the business, among others.
Analysts construct sector-based model portfolios comprising the best ideas from stocks in their investment universe, which in turn is compiled by the research head to construct a diversified small/midcap portfolio. Janakiraman uses this model portfolio as his initial reference point, and he selects companies that can generate consistent and sustainable earnings growth over a business cycle and have low leverage and reasonably high ROEs.
He is aware that it is difficult to forecast earnings in small/mid-caps over a long-term horizon given the unpredictable nature of their cash flows; hence, he uses historical five-year data as a yardstick to project five years ahead. He is not very rigid on valuations so long as the company fulfills his investment criteria.
We believe the process is robust and Janakiraman can make it work.
You can read the brief analyst note here
