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.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

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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