- Category: Equity: Mid Cap
- Fund Manager: Chirag Setalvad
- Star Rating: 5 stars
- Analyst Rating: Gold
- Date of Analysis: September 2018
- Morningstar Analyst: Kavitha Krishnan
Fund manager Chirag Setalvad emphasises understanding the niceties of a business before investing in it. Like all equity managers from the fund company, he adopts a hands-on approach to research in order to identify companies with robust business models, strong competitive advantages, and clean balance sheets. Company meetings are an integral part of the evaluation process.
The fund manager invests in tangible businesses and continues to hold them
over the long term.
Setalvad looks for tangible business models with a track record. Emerging/niche companies that have untested business models or are at best simply attractive ideas don’t find favour with him.
The portfolio’s top holdings, such as Sundaram Fasteners and Balakrishna Industries, bear out his approach. 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.
Broadly speaking, the investment style can be characterised as growth-at-a-reasonable price.
The investment process is evidently closer to a bottom-up approach. At its core, the process is reasonably simple and well-defined. For the process to succeed, getting the research right is primary. Setalvad is proficient on that front and has adequate support from the investment team.
Also, he has consistently executed the strategy proficiently.
Chirag Setalvad is benchmark-agnostic when constructing the portfolio; he has also shown a willingness to go against the grain.
This has resulted in a portfolio that often differs significantly from the IISL Nifty Midcap 100 TR Index and the category norm. The portfolio follows a diversified approach and currently consists of around 70 stocks with top 10 holdings constituting around 30% of the portfolio. Individual holdings typically range around 4%.
Post the SEBI recategorisation, Setalvad has had to exit a few large-cap stocks in order to align the portfolio to its current mid-cap mandate.
As a result, the fund’s large-cap allocation has come down to around 15% of the portfolio. The weighted average market capitalisation of the fund has also come down as compared with peers as well as the index. Having said that, there are no other major changes on the fund except at the portfolio level.
Setalvad's portfolio typically reflects a buy-and-hold approach. The fund’s turnover ratios (March 2014: 26%; March 2015: 18%; March 2016: 82%; March 2017: 25%) bear out the long-term orientation.
The fund boasts a solid track record across the risk and return parameters over the long term.
An impressive performer under Chirag Setalvad’s watch (June 2007 to August 2018), the fund returned 17.22% (annualised), outperforming the IISL Nifty Free Float Midcap 100 Index by 5.8%, beating 100% of the competition.
On a year-on-year basis, the fund consistently featured in the first/second quartile in terms of performance apart from 2012, 2015, and 2017.
Despite posting a 94% return, the fund landed in the third quartile in 2009 owing to overweighted stocks from the healthcare and consumer defensive sectors. It underperformed the category and the index in 2012 by 7 and 3 basis points, respectively. It also underperformed both the category average and index in 2015 by 6 basis points each. Setalvad has consistently held a significant exposure to the financials sector, but the underperformance of Public Sector Banks like Allahabad Bank, Punjab National Bank, and Indian Bank, amongst others, had a major impact on the fund’s overall performance.
In 2016, performance picked up as the fund bounced back to the top quartile, with holdings in Public Sector Banks yielding slightly better returns. Despite this continuing in 2017, its relative performance fell to third quartile within its category owing to negative stock selection in most sectors. Despite posting a return of negative 1.89 on a year-to-date basis as of August 2018, the fund fell in the first quartile--aided by picks in the technology and healthcare sectors.
