imgbd Fund Focus: Motilal Oswal MOSt Focused Long Term Fund

Strong new competitor in the ELSS category

Gautam Sinha Roy, Fund Manager, Motilal Oswal AMC

24th October 2016

In a nutshell

Motilal Oswal's ELSS product - the MOSt Focused Long Term Fund, has muscled its way into advisor reckoning on the back of strong alpha generation and a top decile performance in its first year of existence.

Gautam takes us through his winning picks that drove this spectacular performance - an array of stocks from diverse sectors which demonstrate the true bottom up nature of his stock picking.

His favourite wealth creation theme for the next 5 years: select private sector banks with healthy balance sheets, which are well positioned to harness the leverage cycle that is commencing as the economy recovers.


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WF: Your fund's performance in its first year of existence has been stellar - in particular, the last two quarters. What does your attribution analysis suggest as the key alpha drivers?

Gautam: The MOSt Focus Long term Fund has delivered annualized outperformance of 15% in a market which has compounded at only ~3%. A lot of this has come from stock selection. I have tried to buy high quality stocks with strong growth at reasonable valuations. Healthy Alpha contribution has come from quite a few stocks in the portfolio, with Eicher Motors, HPCL, BPCL, Indusind Bank, Manpasand Beverages, Mahanagar Gas, Supreme Industries and Interglobe Aviation standing out.

WF: What is the break up of your portfolio between large caps and mid and small caps and how has this changed since inception? Is there a strategy in place in terms of market cap allocations or are you agnostic to this?

Gautam: MOSt Focused Long Term Fund is market-cap agnostic and completely focused on bottom-up stock picks where maximum upside is present. The portfolio now is 2/3rd Large & Giant Cap stocks and 1/3rd Mid and Small Caps. While, I do not actively use this data point from a portfolio construction perspective, I find this to be a fairly healthy mix. At inception, the mix was similar. The proportion of small & midcaps went down in between due to exits in a few stocks and one of them migrating to the large cap category. Due to some specific mid & small cap stocks entering the portfolio in the last six months, the share of this category has gone back up in that time period.

WF: In what ways does your fund management approach differ for this fund from your other equity funds given the 3 year lock in?

Gautam: There is no major difference in the fund management approach. All our funds are focused portfolios comprising pure bottom-up stock picks. However, the small size of the MOSt Focus Long Term Fund makes it more amenable for smaller market-capitalization companies to be bought in this fund as they are liquid enough for the smaller volume of buying required in the fund.

WF: There is a continuing worry that our market is paying too high a premium for quality as money flows are concentrated on few names in the absence of a visible broad based economic growth story. Is this a valid concern? How are you coping with this issue in building your portfolio?

Gautam: Yes, markets are pricing certainty and longevity of growth higher than they have done in the past. And the set of such companies has been pretty narrow off late. This has been accentuated by the continued disappointment in the rest of the market, where the expected growth recovery has not come about. Since we are mainly bottom-up investors running portfolios with a limited number of stocks in them, we are comfortably placed. We continue to be able to find enough ideas which are growing earnings at a rapid pace and offer attractive risk-return trade-off.

WF: If you were to pick one theme that you believe can create significant wealth over the next 5 years, what would it be and why?

Gautam: As the economy recovers and rebuilds itself, the leverage cycle will start building up, leading to faster expansion in credit. Some of the private sector banks, which have strong balance sheets and profitability levels, are strongly placed to gain market share and grow strongly in this environment. In terms of quantum of wealth creation, this should be the largest segment in the next five years.

WF: How concerned are you about all the global concerns around European banks, US rate hikes and the China situation? How significant are these risks and to what extent do you see them impacting our markets?

Gautam: Global flows have historically been the single largest source of liquidity for Indian markets. Global concerns can temporarily dry up if some of the concerns mentioned above materialize, as they have done in the past. Over the last almost three years, pick up in domestic flows has provided a healthy substitute for the foreign flows. So, we would expect limited impact of global concerns on our market saving a catastrophic event which dries up liquidity everywhere. I think the chances of this are remote currently. Any correction in Indian markets due to global concerns will provide an excellent entry point for Indian investors, as has been the case historically.

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