WF: Your fund has an enviable record of being at the top of the performance league tables across 3, 5 and 7 years, and top quartile over 10 years. What in your view are the key factors that have enabled this consistent outperformance?

Vihang: We have followed our 70:30 strategy across bull and bear phases. 70% of the fund is invested in high quality stocks. 30% of the fund is invested in deep value stocks with a visible catalyst. High quality protects downside and provides compounding. Deep value stocks provide the fund with aggressive returns when value gets priced appropriately.

WF: The fund seems to have run into some near term performance challenges. What’s impacting current performance and what is your strategy to maintain your long term performance track record?

Vihang: We do not have large cap exposure in the fund. We predominantly invest in mid and small caps companies. The SEBI circular allows Midcap funds to invest 35% of the AUM in either large, mid or small cap stocks. We believe our investors have chosen this fund to get an exposure in companies other than the top 100 by market cap i.e. large cap companies. Hence we choose to invest in mid and small cap companies. Over the last 12 months, large caps have performed better than small caps, hence the near term issues. However we will continue to be true to label and invest in other than top 100 companies.

WF: Midcaps have corrected sharply in 2018, but midcap valuations continue to look high relative to historical averages. Your portfolio PE at 25, is reflective of this. Should we be bracing for more pain until valuations correct further or is the correction now behind us?

Vihang: We have to be cognizant of the fact that the midcap rally which started in 2013, lasted for 5 years. The correction also could last longer than just a few months. However, after significant broad based correction we believe midcap valuations are reasonable. We believe there could be a period of ‘time correction’ before the beginning of a new rally. That said, we find enough opportunities in the space at reasonable valuations.

WF: You are significantly underweight financials, auto and energy and overweight construction and engineering. Can you please take us through your rationale for these positions?

Vihang: Our thesis was that financials was a consensus favourite and one of the easier ways to buy growth. We have shied away from being overweight financials for most of the last two years. After an extended delay in capex recovery, we believe that with utilizations firming up, engineering and construction could see earnings perk up. That said, we focus on constructing a bottom up portfolio which may significantly deviate from the benchmark.

WF: What do you see as the key risks of investing in the midcaps space now?

Vihang: The key risk right now is over paying for growth stocks. If growth assumptions in these stocks get adjusted downwards, there may be significant de-rating in growth stocks.

WF: If you were to bet on 2-3 sectors that you believe can create significant wealth over the next 5 years, which would these be?

Vihang: From a 5 year basis, we would be positive on capex related plays, also positive on cyclical consumption at reasonable valuations. We like sectors which have gone through a significant investment phase, where positive operating leverage may lead to meaningful uptick in earnings and multiples like Hotels and Hospitals.

Disclaimer

This document is for general information only and does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this information. Investments in mutual funds and secondary markets inherently involve risks and recipient should consult their legal, tax and financial advisors before investing. Recipient of this document should understand that statements made herein regarding future prospects may not be realized. Recipient should also understand that any reference to the indices/ sectors/ securities/ schemes etc. in the document is only for illustration purpose and should not be considered as recommendation(s) from the author or L&T Investment Management Limited, the asset management company of L&T Mutual Fund or any of its associates. Recipient of this information should understand that statements made herein regarding future prospects may or may not be realized or achieved. Neither this document nor the units of L&T Mutual Fund have been registered in any jurisdiction except India. The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

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