Sailesh Raj Bhan, Deputy CIO, Reliance Mutual Fund, chats with Morningstar about what helped Reliance Large Cap Fund win Morningstar’s Best Fund Award in the large cap category for 2019.
Congratulations on winning the Best Large Cap Fund Category Award for Reliance Large Cap Fund. What worked in your favor?
Reliance Large Cap Fund strategy is driven by a few key pillars: 1) Buying sustainable growth businesses at reasonable price as an investment philosophy 2) avoiding momentum investing and 3) discipline on valuations. The emphasis on right businesses along with right valuations with a medium-term investment horizon has been critical to its wealth creation journey.
During this journey, the fund has consciously avoided overpaying for growth, while giving high importance to longevity of growth.
Do you think the fund’s mandate has become more constrained after the SEBI re-categorization? Have you made any specific changes to manner in which you construct the portfolio?
Reliance Large Fund has always invested predominantly in large cap companies since its launch in June 2007. Hence, the recent changes have not impacted the character of the fund nor the portfolio construction process. The emphasis on growth at reasonable prices and avoiding unjustified valuations in the markets have been the cornerstone of the fund’s philosophy. This has remained constant throughout its 12 years journey.
Generating alpha in the large cap space is becoming increasingly difficult. How are you overcoming this challenge?
Reliance large cap universe comprises of leaders and emerging leaders. The fund’s focus is to create a portfolio which can offer superior sustainable earnings growth profile, at valuations which are relatively attractive. A combination of top down and bottom up analysis to construct the portfolio to manage risks by appropriate and not excessive diversification.
The fund generates alpha by “not mirroring the index”, while keeping the risk parameters under control to moderate volatility. Given the diverse sectors and subsegments and their differential growth rates opportunity to create alpha is significant. Additionally, market and earnings’ shifts have been exploited to generate alpha over the last several years.
In the non-large cap universe (emerging leaders), the fund invests a maximum of 20% in companies with long term operating history and leadership characteristics in fast growing market segments.
Do you think passive funds will gain popularity in the days to come, especially in the large cap space?
India is still a large alpha market given the diverse nature of businesses and multi-year multi-fold growth opportunities. Indian market offers businesses which can grow much faster than nominal GDP growth rates for several years given the under penetration. Active fund managers can exploit these advantages of the Indian market and continue to create alpha even in large cap space. Passive investing is at a nascent stage in India and has its own independent opportunity for growth.
What are some of the key risks you are seeing to the markets currently?
Global macro uncertainty and election-led volatility are near term detractors in an improving fundamental environment. However, given the recovery phase of the earnings and benefits from key reforms (Insolvency and Bankruptcy Code and Goods & Services Tax) which are yet to fructify, near term detractors like the above are opportunities to participate in equities.
