HDFC Mid-Cap Opportunities
- Star Rating: 5 stars
- Fund Manager: Chirag Setalvad
- Investment Style: Mid Growth
- Investment Process: The fund manager invests in tangible businesses and continues to hold them over the long term. He seeks quality companies from the mid-cap segment that he believes are reasonably priced.
- Analyst: Kavitha Krishnan
- Analyst Rating: Gold
- Date of Analysis: May 2017
The fund is one of the best at what it does. Chirag Setalvad stands out as a capable manager who applies a hands-on approach towards research.
The small/mid-cap segment can best describe the volatility across Indian equity markets. Other factors such as constrained liquidity and limited coverage can make small/mid-cap investing slightly more challenging. Hence, the need for a skilled manager and a solid investment process cannot be overstated. HDFC Mid-Cap Opportunities makes the grade on all counts.
In our opinion, Setalvad ranks amongst the best portfolio managers in the India Small/Mid-Cap Morningstar Category. He has been managing this fund since its inception in June 2007, and we view his long tenure at the fund house as a positive. Detailed and exhaustive research is central to his investment approach. Setalvad emphasises gaining an in-depth understanding of a business before investing. He seeks companies with proven track records so he can gauge how they have held up during testing times.
There is a perceptible quality bias in the investment style, characterised by investments in companies with strong management teams and robust business models. This inherent investment style is one that we have come to associate with the fund company’s equity funds. Setalvad combines absolute and relative valuation parameters to select stocks that aren't too expensive relative to their growth prospects.
The manager is a patient investor with a long-term investment horizon, which jells well with the quality bias. Given the bias for quality stocks, we expect the fund to underperform the competition in market phases when speculative fare is in favour. Investors must also note that Setalvad’s tendency to make contrarian investments can result in a divergent showing versus the category over shorter time periods. Nonetheless, over a market cycle, we believe the fund is equipped to serve investors well.
Our confidence in the fund’s performance potential has only grown stronger over time. Hence, we maintain our highest Morningstar Analyst Rating of Gold on this fund.
IDFC Sterling Equity
- Star Rating: 2 stars
- Fund Manager: Anoop Bhaskar
- Investment Style: Mid Growth
- Investment Process: The fund manager is mindful of the sector weights in the benchmark index when constructing the portfolio. He scouts for growth-oriented companies available at reasonable valuations.
- Analyst: Himanshu Srivastava
- Analyst Rating: Silver
- Date of Analysis: July 2017
The leadership at IDFC Sterling Equity has witnessed multiple changes in the past. Kenneth Andrade helmed this fund from March 2008 till it was taken over by Aniruddha Naha in June 2013. Naha relinquished his management responsibility when he quit the fund house in March 2016 and subsequently its reins were taken over by Anoop Bhaskar. Andrade was an accomplished manager and the fund had built an impeccable track record under him. He quit the fund house in September 2015. In our opinion, Bhaskar is an apt replacement for Andrade.
Despite the leadership change, there is a continuity in the process. Like his predecessors, Bhaskar too pays heed to the IISL Nifty Free Float Midcap 100 Index, loosely aligning the portfolio’s sector weights with those of the index. Having said that, he does not mind being significantly overweight or underweight in sectors either from a bottom-up basis or macro perspective. Yet, Bhaskar has a distinctive style of investing which he brings to the fore while executing the strategy. Consequently, the portfolio went through a makeover after he took over the fund to ensure that it is in line with his investment approach. While investing, he looks for companies which have decent amount of promoter holdings, good cash generation, low leverage, and profitability over a cycle. He avoids businesses that show profitability in spurts. Given the fund’s small/mid-cap bias, it gives Bhaskar an opportunity to play to his strength.
However, the investment team has witnessed significant turnover in the last few years which is a cause for concern. Except for Bhaskar, the other team members currently lack long-term portfolio management track record, though they have good research experience. Hence there is a key-man risk in Bhaskar.
Nevertheless, this fund is well placed under Bhaskar’s leadership and we draw conviction from his presence at the helm of the investment function. He is a proven small/mid-cap specialist and under him the fund has the means to outperform the competition over a longer time frame. Hence, we assign this fund a Morningstar Analyst Rating of Silver.
Mirae Asset Emerging Bluechip
- Star Rating: 5 stars
- Fund Manager: Neelesh Surana
- Investment Style: Mid Growth
- Investment Process: Stock selection has been the primary contributor of performance. The investment process has been consistent over all time frames, leading to consistency in fund performance.
- Analyst: Nehal Meshram
- Analyst Rating: Silver
- Date of Analysis: July 2017
The fund manager’s distinctive stock-picking ability and skilled execution are the defining factors in this fund.
Neelesh Surana is the lead manager and he also heads the equity function in the capacity of CIO. Our confidence stems from the presence of Surana, who has been associated with the fund since its inception. He is aided by a fairly small but experienced investment team. Over the last year, the team saw two exits--Gopal Agrawal, who was the CIO, Mirae Asset Global Investments (India) and Sumit Agrawal (Fund manager). However, it was an easy transition due to the cohesive team structure.
An interesting facet of Surana’s investing style is he sticks to his convictions even if the situation is contrary to his investment decision. The strategy is centred on a bottom-up stock-picking with exhaustive filtration laying emphasis to margin of safety. This approach limits the decision of the manager going wrong. Surana believes alpha is generated through the right stock selection and not by sector rotation. He only invests in companies that meet the stock selection parameters and would look at both qualitative and quantitative factors. A key quantitative parameter he tends to follow is high return on capital and high cash flows. With this strategy, the fund has delivered above-average returns and has emerged as a winner in the respective categories. The fund’s lower expense ratio vis-a-vis its peers also makes the fund more appealing.
The strategy makes the fund a good proposition. In our opinion, we have a lot of comfort around the manager and his research-intensive investment approach. We view it positively that Surana works closely with the investment team, but we also believe there is a huge key man risk. However, overall we like the investment process and believe the fund can hold investors in good stead over a market cycle. In keeping with our high conviction in its prospects, we rate the fund as Silver.
ICICI Prudential Midcap
- Star Rating: 2 stars
- Fund Manager: Mrinal Singh (Mittul Kalawadia co-manager)
- Investment Style: Mid Growth
- Investment Process: The portfolio is positioned to benefit from the first signs of economic recovery. The fund managers ply a growth-at-a-reasonable price approach for selecting stocks.
- Analyst: Himanshu Srivastava
- Analyst Rating: Silver
- Date of Analysis: October 2017
The challenges in managing a mid-cap fund are abundant. While unpredictability in the equity markets is accentuated in this segment, factors such as constrained liquidity, limited coverage, and poor disclosures make mid-cap investing a tricky proposition. Hence, the need for a skilled manager and a solid investment process cannot be overstated. ICICI Prudential Midcap makes the grade on both counts.
Mrinal Singh is a competent portfolio manager who has been in the job since May 2011. He has had extensive experience as an analyst in the small/mid-cap space. Unsurprisingly, intensive research forms the core of his investment approach. He fluidly combines top-down and bottom-up approaches to identify companies to invest in. Although the investment strategy here is intended to be growth at a reasonable price, Singh, given his expertise in value investing, tends to scout for stocks that are attractively valued. Therefore, to complement his value bent, Mittul Kalawadia, who typically adopts a growth-oriented investment approach while investing, was appointed as the comanager here on April 2016. As per the fund house, both the managers share equal responsibilities on this fund now.
This has also led to some tweaks in the fund’s investment process, though the broader strategy remains unchanged. For instance, an element of benchmark alignment has been introduced by reducing the extent of the portfolio’s deviation from its benchmark. Also, while selecting stocks, growth aspect is now given more prominence than before. Although ancillary, these changes would give teeth to the strategy.
The fund’s performance has been below average in peer-relative terms over the past few years, that is, from 2015 till 2017 so far. This is largely because Singh has positioned the portfolio for an uptick in the economic cycle, which is yet to happen. While we will evaluate how the comanagement shapes up in the fund going ahead, we continue to draw conviction from Singh’s presence at the helm of the affairs here. We believe his research-driven investment approach and executional capabilities would keep the fund in good stead. Hence, we reaffirm the fund’s Morningstar Analyst Rating of Silver.
