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Ideal allocation: 70% multicaps, 30% midcap funds

Neelesh Surana, CIO (Equities), Mirae Asset

21st March 2017

In a nutshell

Neelesh believes an ideal equity allocation now will be 70% in multicap funds and 30% in midcap funds

The midcap universe is 5 times bigger than large caps - which offers greater stock picking opportunities even when segment valuations appear stretched

Consumption and select export segments look most promising going forward

After a decade post financial crisis, we are finally seeing a broad based global economic upswing which augur well for investment growth in 2017 and 2018.

WF: Congratulations on your Emerging Blue-chip Fund winning the Best Mid/Small Cap Fund award from Morningstar! This category is very competitive and has been the focal point for the industry in recent times. What in your view are the factors that enabled you to deliver robust performance and get ahead of the pack?

Neelesh: Disciplined approach to investing, with focus on quality up to a reasonable price along with diversification, has helped us deliver satisfactory returns. Its important to be in the right pockets to generate alpha, as divergence is significant, both across sectors, as well as stocks within a sector.

WF: Mid and small cap valuations (from a historical perspective) are clearly in bubble zone, yet fund managers tell us that strong earnings growth prospects in the coming years justify these PE numbers. We are also being told that GST implementation is a structural booster for midcaps. Sceptics argue that these are only rationalizations. What in your view is a balanced and objective view on mid and small cap valuations?

Neelesh: An important point is that universe for mid-size businesses is large - almost 4 to 5 times that of large cap companies, which are typically classified as top-100. Thus, the ability to choose from wider universe, as well as improving trend in economy offers decent opportunities within midcaps even at the current levels. We would advise balanced allocation between multi-cap funds and midcaps funds in ratio of say 70:30. Over longer time frame (3-5yr+), midcap segment would continue to do well. However, we would continue to see divergence in performance of stocks, driven by individual merit of business.

WF: For advisors interested in tactical asset allocation, would you now recommend incremental allocations into the large caps space or the midcaps space?

Neelesh: Investors with about 3-year time frame should make judicious allocation in such funds. We would recommend about 30% allocation in well-managed midcap schemes, and the remaining 70% in multi-caps. It is not a case to cut back exposure given the basic traits of the product is good as it help participate in companies at an early stage.

WF: There is growing disquiet about the tepid pace of India's cyclical recovery, no sight of capex cycle pickup and rising concerns on slow growth in jobs. Is the macro picture something that worries you? Are these concerns overblown?

Neelesh: Private capex is likely to remain subdued in FY18 due to low capacity utilization, stretched balance sheet and gradual resolution of NPA. Regarding capex, it will continue to be driven by Government, including public sector undertakings.

WF: Global markets are cheering what seems to be finally a coordinated and broad-based economic revival across continents. However, at the same time, liquidity and zero interest rate steroids that propped up the markets all these years are being steadily withdrawn. The big question is whether fundamentals can sustain markets as these steroids are withdrawn. What is your perspective?

Neelesh: After a decade post financial crisis, global economy is exhibiting a broad-based upswing. Data points like - Fed rate increase, Euro area sentiments index best since 2011, Japan fastest growth in capex, and rebound in exports in South Korea, Taiwan, and even India - these are indicators reflecting that the recovery. Developed markets (DMs), led by USA, has seen positive impact of reflationary policy yielding results with inflation inching up. In case of most Emerging markets (Ems), there is overall macro stability which creates room for fiscal support to lift growth. Overall, we anticipate a meaningful and synchronous recovery in investment growth in both DM and EM in 2017 and 2018.

WF: What are the key themes you are betting on with a 1-2 year perspective?

Neelesh: From a sector perspective, we continue to remain positive on the consumption side of the economy, and select export oriented businesses. Many factors would help accelerate growth - these are related to higher real wages fall in interest rates, impact of pay commission, and likelihood of decent monsoons on the rural economy. Sectors, which will benefit are retail-banking, consumer goods like autos durables, consumer staples, building materials, etc.

WF: What is your advice for the retail Mutual Fund Investors? What they should do now?

Neelesh: We would advise investors is to invest in a disciplined way in equities within the earmarked asset allocation. Many a times the action required is "nothing" i.e. simply following a well-disciplined asset allocation with planned diversification. We expect meaningful returns to investors with patience.

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