WF: How concentrated will your Focused Fund be in terms of number of stocks and exposure to single sectors? How different will it be from your other flagship equity schemes?

Gaurav: As per SEBI’s mandate, a focused fund can invest in a maximum of 30 stocks with a minimum exposure of 65% of the portfolio in equity and equity-related instruments. Hence Mirae Asset Focused Fund will be investing in a max of 30 stocks. The fund has flexibility to invest across market capitalization. (Large, Mid and Small Caps) – Allocation is based on bottoms up stock selection and we chose stocks based on merit of business and not whether they are large cap or mid cap etc.

This will be our 4th pure equity fund – Mirae Asset Focused Fund. As you would be aware from our existing product offering Mirae Asset India Equity Fund is our Large Cap Fund now, Mirae Asset Emerging Bluechip Fund is our Large and Midcap Fund and Mirae Asset Tax Saver Fund provides our investors a tax saving solution. We also have an Aggressive Balanced Fund – Mirae Asset Hybrid Equity Fund and 2 Thematic Funds which address a large market opportunity in India (Mirae Asset Great Consumer Fund and Mirae Asset Healthcare Fund).

There are 18-20 AMFI classification sectors. Since the fund can invest only in 30 stocks, we will have participation from key 10-12 sectors. We will follow a “Benchmark Aware” strategy. The aim to build a portfolio of strong growth companies, reflecting our most attractive investment ideas.

WF: Focused funds are seen as double-edged swords – capable of delivering superior alpha, but also carrying significantly higher risk. How do you propose to manage risk while pursuing alpha opportunities?

Gaurav: Studies have shown that unsystematic risk as evaluated through standard deviation reaches optimum levels once a portfolio is diversified across 20-25 stocks[1]. (1 : An introduction to risk and return concepts and evidences by Franco Modigliani and Gerald A.Pogue).

Concentration does not necessarily mean high risk. Despite a concentrated approach, focused funds strive for optimal diversification across a limited number of stocks, sectors and market cap.

As seen in the next chart, focus funds have better Sharpe ratio, a risk adjusted measure, as compared with large cap and multicap funds across horizon.

Risk-adjusted performance (Sharpe ratio)

Category average based on CRISIL’s classification
Data as on March 29, 2019
Source: CRISIL Research
We believe if stock selection is done well that itself is the biggest way to mitigate risk. Risk is mitigated by picking up quality businesses at a good enough margin of safety. The focused funds can be volatile but volatility is not the same as increase in risk.
The cap on number of stocks means forced displacement – Only best ideas remain in the portfolio – if we want to add a stock, a stock needs to be exited, and this makes it align with our best investment ideas

WF: Within the multicap framework, do you veer more towards a buy-and-hold or do you look for sector rotation opportunities from time to time to creating continuing alpha?

Gaurav: This a function of how new opportunities present themselves in a certain time frame. Lot of opportunities in the country are secular in nature and stocks within these segments will have a low churn. Our portfolio strategy is centred around maximum 30 stocks with a flexibility to invest across market capitalization with an aim to generate long term capital appreciation. On an overall basis we expect portfolio churns to be moderate.

WF: How do you read markets now? What is your prognosis from a 12-18 month perspective?

Gaurav: Markets can be volatile in the short term given the event of General Elections. However short term volatility will not matter for investors who have a longer investment horizon. Over a 2-3 year time period equities should give better annualized returns than other asset classes.

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