7 large-cap funds across the rating spectrum

By Kaustubh Belapurkar |  07-12-22 | 
 

Our analysts rate some of the large-cap funds. You can read what the rating indicates. The funds are listed in the order of the analysis, the latest ones given predominance.

SBI BLUECHIP

The AMC differentiates its funds based on absolute and relative return frameworks. This fund is a relative return strategy focused on finding incremental fundamental change, positive market expectations, and relative valuations, as measured by sales growth, EBITDA margins, and market share changes.

The managers look at companies in terms of their visibility of growth and undertake company visits with a view to evaluate their business models.

They have an active universe of stocks that are reviewed quarterly. While the filters for relative and absolute funds are clearly defined, stocks could fall into either of the frameworks, and the differentiation could blur. The fund has largely maintained an orientation towards growth stocks and is focused on long-term (three- to five-year) visibility.

The team tends to stay away from momentum-based ideas and focuses on bottom-up stock picking, which overlooks short-term market aberrations. This could lead to some short-term underperformance. The in-house model portfolio forms the basis for stock picks and consists of the analysts' best ideas. Valuations are looked at on an absolute basis relative to the stock's 10-year history. While they avoid event-based investing (possibility of a merger/acquisition, etc.), they do tend to invest in IPOs.

MIRAE ASSET LARGE CAP

The fund was re-categorised as a large-cap offering in May 2019. However, the change is not a concern given the fund's historical large-cap tilt with a focus on high-growth companies at reasonable prices.

The investment philosophy of the fund is built on three core principles: quality businesses with stable earnings, strong management, and attractive valuation. The process includes both quantitative and qualitative stock screening with bottom-up stock-picking. The sector selection is done through a top-down approach mainly based on growth prospects. Analysts then assess stocks at the industry and company levels and focus on key drivers such as returns on capital employed, returns on equity, and EBITDA margin. Within the framework, there is a lot of emphasis on qualitative analyses like management quality and execution capabilities.

These are quantified by evaluating the trailing 10-year track record, which helps in removing subjectivity.

There is a further focus on valuation, which becomes a key driver behind entry and exit timing. This valuation process along with quantitative factors drive the conviction level in the stock, which helps to exclude companies where business fundamentals are not solid. Meeting with company management is vital here to gain company-specific and industry information. The strategy holds a well-diversified portfolio with a long-term perspective, helping performance.

NIPPON INDIA LARGE CAP

Sailesh Raj Bhan plies a growth at a reasonable price strategy. Typically, he prefers companies with healthy or rising ROEs. He does not mind paying more for a stock if he believes it has sustainable advantages and good growth prospects. But that is not to suggest he is indifferent to valuations. For instance, he has either steered clear of/maintained an underweight position in the consumer defensives sector for a long time due to valuation concerns.

Bhan pays heed to qualitative issues when evaluating a company. He uses fundamental research to scout for companies with sustainable business models, strong management teams and durable competitive advantages. The top-down approach isn't ignored as factors such as interest rates and currency movement are considered, especially while investing in sectors such as technology, healthcare, and financial services. Sell-side research is used in the large-cap space, whereas there is a dedicated in-house four-member analyst team to research small/mid-cap stocks.

At its core, the process is uncomplicated. However, Bhan's free flowing investment approach and his willingness to be patient with his high conviction yet underperforming holdings, contribute to this being a unique process. While the strategy has the potential to deliver superior performance over the long haul, it will be tagged with higher volatility and that needs to be accounted for.

ICICI PRUDENTIAL BLUECHIP

The portfolio managers ply a benchmark-conscious strategy, and sector weights are aligned to those of the IISL Nifty 100 Index, subject to a deviation of plus or minus 5%. Hence, the top-down approach has little relevance. They use an in-house large-cap model portfolio as the initial reference point when choosing stocks. Although the managers also use the firm's internal fair value approach and the alpha alert, the model portfolio remains the most important part of the security-section process.

Within a sector, the managers perform business analysis to identify the best ideas. In addition, they use free cash flow/enterprise value ratio (three-year average) as an appropriate parameter, along with price/book value and return on equity, among others, to determine a company's fair value. Typically, the fund will invest only in the top 100 stocks by full market cap. The managers have a quality bias when choosing stocks.

They favour companies with robust business models, strong entry barriers, and the ability to scale up without eroding profit margins. However, they are not averse to investing in firms that do not fulfill all the qualitative criteria if the stock offers a trade-off against valuations. This way they follow a barbell strategy and either pay more for high-growth stocks or focus on fundamentally strong companies at attractive valuations.

ABSL FRONTLINE EQUITY

Mahesh Patil studies macroeconomic factors such as the domestic interest-rate cycle, government policies, and developments in the global economy to determine the sector overweight/underweight positions. Having said that, a benchmark-aware approach leads to a portfolio that does not reflect significant over\underweights. Patil considers the fund house's investment universe and the IISL Nifty 50 Index when constructing the portfolio.

Typically, he will invest in companies that display strong earnings growth potential, while focusing on parameters such as ROE and ROCE. Patil makes use of relative valuation measures, such as price/ earnings, price/book value, and EV/EBITDA vis-a-vis comparable peers when selecting stocks. The manager isn't valuation-conscious in the strictest sense but, is willing to be flexible if he is convinced of the growth prospects. Patil has used short-term tactical plays to good effect on several occasions. He is not averse to increasing and reducing his allocation to the same stocks routinely based on price momentum and valuations. This pattern is perceptible in his long-held investments as well.

Given that sector weights are aligned loosely to those of the benchmark index, the top-down approach is less significant than the bottom-up approach, but it isn't ignored. In our opinion, the investment strategy is uncomplicated, but it acquires an edge owing to Patil's execution.

FRANKLIN INDIA BLUECHIP

The investment process is research intensive and largely bottom-up approach with a top-down overlay. Venkatesh Sanjeevi prefers stocks that meets his quality and valuation requirement.

On the quality front, he runs hygiene checks on the company's management quality, competency of the team, corporate governance issues, their track record of capital misallocation and whether it can make long term decisions. He would select companies with clean balance sheets, strong business models, and sustainable competitive strengths. To make a cut, the company must have a good runway for a profitable growth over the long term. He doesn't like companies which can grow for two to three years and then plateau.

On the quantitative side, he prefers companies which over a cycle can generate around a 12%-13% return on capital over the cost of capital. From a valuation perspective, he would look at metrics that are apt for a given company and sector, such as price/earnings, price/book, or price/enterprise value (for insurance companies) and cash flow-based metrics. He can be flexible with valuation in case he sees strong growth ahead, but the quality framework would be more sacrosanct.

The investment approach is thorough and Sanjeevi has clarity in terms of how he would like to take the fund going forward. However, the efficacy of his thought process, investment approach, consistency in portfolio construction, and execution of the strategy can be evaluated over time.

KOTAK BLUECHIP

Harish Krishnan's growth-at-a-reasonable price strategy uses the model portfolio created by the analyst team as his initial reference when choosing stocks. The model portfolio is compiled from sector-based portfolios prepared by analysts, who use a combination of quant models using relevant ratios such as P/BV, P/E, EV/ EBITDA, and so on, and other valuation methodologies such as replacement costs and DCF models to evaluate stocks.

Krishnan runs a few broad themes across this fund and applies a qualitative overlay, investing in the top companies in each sector that have sustainable and scalable businesses, have good management capabilities, and trade at reasonable valuations. A combination of top-down and bottom-up approaches is evident and is used to determine under- and overweightings versus the benchmark.

Krishnan maintains a core portfolio (70%-80% of assets), with holdings largely coming from the benchmark, while the rest is used for tactical plays, making the portfolio predominantly aligned with the benchmark. Significant stock overlaps with the benchmark make sector bets the primary source of alpha, in line with Krishnan's strategy to generate performance through concentrated sector bets. However, firmwide portfolio constraints (for sector exposures) may limit the potential of this strategy. He avoids making short-term calls/ cash calls, with an average holding period of about 24-36 months.

Check out other category ratings

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