WF: Over the past 6 months – 1 year, the fund posted significant outperformance compared to peers and benchmark. What were the key investment decisions which helped the fund gain such outperformance?

Pranav - The fund was helped by active stock selection. Our exposure to select stocks in consumer discretionary, materials, financials and industrials has led to outperformance. We have seen a wide variation in performance within the mid-cap space wherein the weak business models and select stocks that had run ahead of their fundamental growth over the past couple of years corrected sharper than the others, in the recent market correction. However, in our case, the earnings’ traction, in our universe of selected stocks, continued to remain robust for most of our portfolio companies. The fund’s outperformance can thus be attributed to both, our active stock selection as well as our conscious call to avoid investing in select companies.

WF: You have taken up the reins of the fund recently, what are some of the strategic or tactical changes that you are making in the fund?

Pranav - We have stuck to the core thesis of growth at reasonable price. We continue to buy quality stocks which have potential to scale up their business model with strong cash flows and return ratios. While we are willing to invest in companies which may have near term pains in their P&L, we shy away from taking balance sheet risks in the portfolio. In terms of tactical changes, we have made the portfolio more growth centric over the last six months.

WF: Midcaps are generally regarded as more vulnerable to macro pressures. With the uncertain macro scenario (currency rates, global trade-wars etc.,), on-coming election and likely inflationary (populist) announcements, how do you perceive the midcap segment to pan out over the next 12 months?

Pranav: While we do agree that the midcap companies are more vulnerable to both macro and micro factors, the key is to identify business that have inherent ability to withstand shocks. On a positive side these uncertain times also provide opportunities to invest in companies that could be beneficiaries of the changing economic/ geo political scenario. A case in point here is the ongoing depreciation in the rupee that has also provided a tailwind to businesses which have dollar earnings. We believe mid-caps have a larger runway for growth and have historically provided a higher alpha over the longer term. However, they continue to remain volatile and their return profile is non-linear. We believe any further correction in mid cap stocks should be seen as a buying opportunity to create long term wealth.

WF: What is your core investment philosophy in terms of stock picking and risk management in the midcap / smallcap space? How is the same aligned to the current portfolio / holding?

Pranav: We look for companies with scalable business models, healthy return ratios and positive cash flows as key attributes in identifying stocks. While we are willing to invest in companies which may have near term P&L pains, we shy away from taking balance sheet risks in our funds.

In terms of portfolio construction, we use a growth bias strategy but also try to weave in valuation to growth and accordingly apply a more of ‘Growth at Reasonable Price’ approach while identifying stocks. To manage volatility/risk, we have a reasonably diversified portfolio and we control the exposure of our top 5 weights. Our top ten holding are currently below 40% which makes it lesser prone to shocks. The portfolio has a better Return on Equity (ROE) and growth profile and has lower weighted average PE as compared to the benchmark.

WF: You are overweight on Energy and Engineering (perceived to be slow moving stocks) – How do you see this space panning out over the next 12 months?

Pranav - As stated earlier, while we do use macro themes to identify potential beneficiaries, the stocks are selected purely on their own merit and favorable risk reward propositions. The resultant sector weights are thus purely an outcome of our stock selection.

The engineering names in the portfolio are mix of companies that are beneficiaries of ongoing government capex and overall improvement in industrial demand with good earnings’ traction. The energy companies are largely utility centric business models which are not fully regulated and are available at attractive valuation despite reasonable growth in earnings.

WF: Is the pick up in earnings momentum sufficient to support current valuations? Should we temper our returns expectations from midcaps going forward?

Pranav - Despite the recent correction, mid cap companies have given robust returns over the last few years and return expectations need to be moderated going ahead. Midcap index still trades at a premium to its large cap peers but many companies in mid cap index are currently operating at low level of profitability/loss making and hence their PE multiple look elevated. The premium shrinks considerably, after adjusting for the same, and the valuations look reasonable considering mid-caps would have higher earnings’ growth versus its large cap peers over the medium term. Mid cap investing is more stock specific in nature and the strength of respective business models and valuations matter more than the collective index. While near term volatility may persist in mid cap stocks for some time, these corrections should be used as opportunities to invest for long term wealth creation.

DISCLAIMER: The views are expressed by Mr. Pranav Gokhale, Fund Manager, Invesco Asset Management (India) Private Limited. The views and opinions contained herein are for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. The sectors referred above should not be construed as recommendations from Invesco Asset Management (India) Private Limited and/or Invesco Mutual Fund. The Scheme may or may not have any present or future positions in these sectors. The views and opinions are rendered as of the date and may change without notice. The recipient should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein. Invesco Mutual Fund/ Invesco Asset Management (India) Private Limited does not warrant the completeness or accuracy of the information disclosed in this section and disclaims all liabilities, losses and damages arising out of the use of this information.

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