WF: You have been recently appointed as the fund manager (w.e.f Jul, 2017) of this fund. What are the key strategic changes that you propose to bring into the fund?

Akash: Over the past 1 year, many strategic changes have been brought into the fund. The changes aims to increase the earnings growth trajectory of the portfolio. For the last 3 quarters, the fund has garnered a CAGR of 35%. While the debt / equity ratio of the portfolio has reduced, the returns ratios and free cash flow pertaining to the fund have increased.

WF: You have a highly concentrated portfolio (fund size Rs. 1272 Crores with 29 stocks) - what are the advantages/disadvantages of such a focused portfolio especially in the more volatile midcaps space?

Akash: The fund follows the focused style of investing, which we believe will lead to higher returns in the long term. On the downside, the objective of achieving superior returns in long term combined with inherent volatility in midcaps may reduce the consistency of returns over the short term. If the investment’s time horizon is long, the volatility gets neutralized which ensure that there is no permanent loss of capital.

WF: You are 98.34% invested in the market as of date. What is your policy on cash calls? Will you be looking at profit-booking as markets seek higher levels?

Akash: There are no significant cash calls which we practice in the portfolio. Cash position in the fund is low, since our philosophy is to invest in businesses for longer term rather than taking opportunistic positions based on market timing and trading.

WF: Medium term performance (1 yr and 3 yr) are disappointing, however the fund seems to have held up better than others in the recent severe correction (6 mth performance). What has contributed to the medium term underperformance and what, on the flip side, helped you protect capital on the downside?

Akash: As stated earlier, our philosophy is to invest in businesses over the long haul, thereby we buy-right and sit-tight. Typically, a complete business cycle extends over a couple of years, hence, we consider our performance measures over the longer term. The short-term performance is not considered by us, since it does not align with our focused style of investing. The returns in the shorter time periods may not be consistent, we do not subscribe to taking actions based on intermediate inconsistencies in performance over specific intervals / time periods.

WF: Your exposure in Giant & Large cap (total 28%) is higher than Benchmark (13.5%) and peers (17%). What is the rationale for being overweight on large / giant cap?

Akash: Our endeavor is to invest in high growth and quality businesses at reasonable valuations. Some of the key factors that we look at before investing are – good business model, long term sustainable competitive advantages, capital efficiency, structural growth drivers and competent management at the helm of the company etc., Midcap composition in the portfolio is held between 65% - 70%, the balance constitutes large caps and small caps. We use the bottom-up approach for choosing businesses, the companies included in the portfolio qualify based on their individual merits.

WF: You are considerably overweight on financials compared to benchmark (39.5% vs. 30%) with many smaller players in the banking space (CUB, IndusInd, RBL), how do you expect the valuations for this sector to pan out over the next 12 months?

Akash: Given the demographic spread and the income levels in the country, the consumption sector looks promising. The consumption sector reflects the secular and structural growth story of India. From our perspective retail-oriented banks and NBFCs which are involved in lending for consumption activity look more promising (compared to the PSUs and others in the financial services space) over the long term. The valuations for most of the midcap banks is fair and we expect them to be steady compounders in the long term based on their earnings and book value accretion trajectory.

WF: Would you characterize the recent sharp correction in midcaps as the end of the cycle or a healthy correction in a longer bull market?

Akash: The recent correction in midcaps can be characterized as a running correction, which is always healthy for equity markets. It gives an opportunity for long term investors to plough in idle cash. The correction does not alter the long-term fundamentals and structural story of the midcaps. This correction should be viewed as a buying opportunity by long term investors in the markets.

WF: In which themes within the midcaps space do you see the best investment opportunities today?

Akash: We believe that the consumption sector including housing and consumer discretionary will remain a strong theme to play over the long term. The secular nature of this sector, ensures that the companies operating in this space continue to garner higher and longer business / earnings growth. They also exhibit higher stability and consistency in growth with lower volatility in stock price performance. Retail oriented banking and finance companies which fund consumption expenditure should also benefit.

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