Krishna Sanghavi has over 24 years of work experience including 11 years in the mutual fund industry and eight years in life insurance industry. Prior to joining Mahindra MF, he was associated with Canara Robeco Asset Management Company Ltd, Kotak Mahindra Asset Management Company Ltd and Aviva Life Insurance Company India Ltd. In these roles, he was responsible for managing and overseeing the equity portfolios. Finapolis Conversation this week is with Sanghavi, Chief Investment Officer (equity) at Mahindra MF, talks to Kumar Shankar Roy about investing in large and mid-cap stocks. The Indian economy is expected to bounce back sooner than later on account of various fiscal and monetary stimulus announced by the Government of India and the Reserve Bank of India, says Sanghavi. Thus, the future direction of the markets looks promising on potential corporate earnings recovery and gradually steadying macroeconomic environment. Interview excerpts...
What is Mahindra Top-250 Nivesh Yojana?
This is our new open ended equity scheme. Mahindra Top-250 Nivesh Yojana is for investors who are seeking to generate long-term capital appreciation and income through investments in equity and equity-related securities of large and mid-cap companies. My colleague V Balasubramanian will be managing the fund for us. He is already managing important funds for us. The definition of large-cap stocks is that listed companies ranking from first to 100th level in terms of full market capitalization. Mid-cap companies are those among 101-250 listed companies in terms of full market capitalization.
The new fund offer opened on December 6, 2019, and will close on December 20, 2019. The scheme will reopen for continuous sale and repurchase within five business days from the date of allotment.
Mahindra Top-250 Nivesh Yojana aims at building a portfolio with nearly equal exposure in large and mid-cap, and take tactical calls based on market cycles. The stock selection process will be done through Quality, Outlook, and Valuation (QOV) process for superior return potential. The scheme plans to allocate funds across market caps with a mix of top down and bottom up strategies, based on research and outlook.
How do you assess Q i.e. Quality?
We look at Quality (Q) by monitoring corporate governance red flags. We have Internal threshold level of ROE (Return on Equity). We look at Promoter and Management, Quality of Business and Track Record.
If you are right about management quality, chances of losing money is quite low. While the stock may not perform sometimes, the downside support is there.
How would the scheme invest?
The scheme would invest minimum 80 per cent in equity and equity-related securities, and upto 65 per cent in large-cap and mid-cap companies. The scheme also has made provision to invest upto 20 per cent in debt and money market securities (including CBLO, reverse repo) and upto 10 per cent in units issued by REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts).
Mahindra Top-250 Nivesh Yojana will follow rule-based diversification for optimum performance in changing market cycles. The minimum allocation to large-cap and mid companies at all times has to be 35 per cent and 35 per cent each i.e. 70 per cent. We will typically not take any cash calls. We may take 1.5-2 months to build the portfolio.
Why are you bullish on large caps and mid caps?
The Indian economy is expected to bounce back sooner than later on account of various fiscal and monetary stimulus announced by the Government of India and the Reserve Bank of India. The future direction of the markets looks promising on potential corporate earnings recovery and gradually steadying macroeconomic environment. We believe the scheme will offer growth with stability approach to the equity portfolio, and is suitable for investors who are seeking long term wealth creation and income.
Tell us how are you going to assess the outlook i.e. O of your QOV process?
We prefer companies with earnings growth outlook higher than sector/industry average and peer company. We also look at cash flow generation versus capex.
What is your approach towards valuation?
We prefer companies with valuations below assessed market fair value. One should look at valuation ratios and compare to growth outlook. Additionally, valuation ratios are compared to peers and history to see the trend.
How do large cap and mid-cap stocks perform?
Over a long period if you, large cap, mid-cap and small-cap returns converge, but there are variations in the in-between periods. All this also depends on at what point do you evaluate the returns.
Do interest rates in the economy a factor that drive equity returns?
Yes, equity returns are linked to interest rates. When interest rates are very high, your expected returns from equities will be higher than interest rates. In the current context, inflation is trending down, and so the return expectation from equities also is changing.
How do mid caps look in terms of valuation currently?
Mid caps are low in valuation. In fact, mid-caps are trading lower than their average. Mid-caps are trading at 20 per cent discount to the Nifty-50 and this gap is the highest in the last 9-10 years. Underlying focus is in identifying mid-cap companies where growth will be there and the market will factor in that and eventually give a higher valuation to those stocks.
How important is sector preference to investing?
In India, there are some sectors like BFSI, metals, oil and gas, and IT, where we typically find only large companies. In metals and oil and gas, the capex requirements are so high that only a big company can do them. In banking, over the last 10-20 years, large companies keep on growing faster since the ability to grow on branch network helps. If you really have a sector choice, then possibly those sectors will mean that the portfolio will have a large-cap bias.