Early signs of another winner from this equity powerhouse


Fund Managers: Equity - Sudhir Kedia and Neelesh Surana; Debt - Mahendra Jajoo

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Mirae Asset Prudence is now 2 years old - and the early signs clearly seem to suggest that the fund house has yet another winner in its stable, given the strong performance vs benchmark and peers in the keenly contested balanced funds space. Sudhir Kedia shares fund positioning and strategy of this young champion from Mirae Asset.

WF: What is your strategy for the equity component of the fund and what proportion of the fund is typically invested in equities?

Sudhir: About 73-76% of the fund is in invested in equities of which 65% in invested in top 100 companies by market capitalization (as per scheme mandate). The remaining 8-10% is invested in mid-small caps. Our investment orientation is mainly towards growth businesses with focus on capital efficiency and quality management. We follow a bottom up approach of investing. We prefer those businesses where the growth opportunity is large, earnings growth visibility is upwards of 15% with emphasis of capital return ratios, management quality is comfortable and at a reasonable price. Sector-wise allocation of the portfolio will broadly track the benchmark (depending our view on the sector) while the stock specific allocation will be different.

WF: What is your strategy for the debt portion of the fund?

Sudhir: Debt Strategy for Prudence fund is largely divided in two parts. The first part, is managed on a relatively static basis and is typically invested in govt. securities and corporate bonds. For the 2nd part, a more active strategy is adopted with appropriate changes in duration in line with the outlook on interest rates. Thus, the aggregate strategy provides in a balanced and consistent manner, benefit of both a directional return in line with underlying market environment as well as that of an active management strategy.

WF: To what do you attribute your fund's consistent alpha delivery and strong peer group performance in its initial couple of years since inception?

Sudhir: Disciplined approach to investing, with focus on quality up to a reasonable price along with diversification, has helped us deliver satisfactory returns. It's important to be in the right pockets to generate alpha, as divergence is significant, both across sectors, as well as stocks within a sector. At times, we also take a couple of tactical calls which has helped improve the overall returns.

WF: What are the sectors and themes you are most convinced about from a 2-3 year perspective?

Sudhir: We believe consumer facing businesses (both direct and enablers) will deliver superior earnings growth. Additionally, there is going to be a gradual shift from unorganized to organized sector across the industry led by GST. We will participate in such business/sectors as the growth rate of the organized players will be ahead of the industry growth rate. Such business will command better pricing power and hence higher margins. Broadly speaking, sectors, we are positive upon are Retail Banking, Auto, Metals, Consumer and housing finance and related building materials.

WF: Balanced funds are at the centre of action in the industry today - huge flows on one hand but niggling worries about them being perhaps misrepresented as "safe" due to the term "balanced" when in fact over 65% is allocated to equity. Is the rapid growth of the category a source of joy or worry for you?

Sudhir: Balanced funds certainly has a lower risk than a pure equity fund. Since these are 'equity oriented balanced fund', equity component is higher and that should be made clear to the investor at the time of entry. Balanced funds are very good from the asset allocation perspective as there is automatic rebalancing between equity and debt depending upon the market cycles. An individual investor does not have to worry about the asset allocation strategy.

The category growth should be viewed in the positive sense. This category will be mentally more comforting for many investors, as the volatility of the returns will be lower than a pure equity fund. I think, the category will play a key role in enhancing the equity culture in the country. However one piece of caution it has to be pitched to the correct segment of investors.

WF: Markets seem to have paused for breath last month, and recent newsflow on earnings and GDP growth are not very encouraging. In this context, what is your take on markets from a 12-18 month perspective?

Sudhir: From next 12-18 months view, there are many levers for earnings growth. From Q3FY18, low base effect will kick in and will continue for 3-4 quarters. Secondly, organized sectors will start reaping benefits of GST both from the perspective of market share gains and cost efficiency. Thirdly, demand recovery will boosted by 2 consecutive years of decent monsoon. Fourth, Government's impetus towards rural recovery through rural housing schemes, farm loan waiver and infrastructure projects will start showing some results.

I believe that markets are pricing in some amount of that recovery and will wait for the confirmation of the same. Overall, we are positive on the India growth story from longer term perspective.

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