AjayTyagi

Leading the pack in the multicap space

Ajay Tyagi

Fund Manager

UTI Equity Fund

UTI Equity Fund’s robust recent performance has taken it to the top of the competitive multicap funds league table. Ajay attributes outperformance to pure bottom-up focus, steadfast long term outlook on businesses he buys into with a view to hold for 5-10 years and a sharp focus on strong RoCE and sustainable cash flows which makes him naturally veer towards quality consumer facing businesses rather than cyclicals.

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WF: What factors have driven the sharp improvement in your fund performance that now sees your fund at the top of the 1 Yr performance league table? How do you propose to sustain the leadership in your category over the long haul?

Ajay: In terms of sectors, during the last one year, positions in Banking & Financial services, IT, and consumer goods have contributed positively to the out-performance of the fund. As a part of portfolio’s general philosophy, there has been effort to stay clear of businesses that have poor cash flows and a weak growth trajectory. This has helped significantly in the last few months since the indiscriminate mid-cap rally got punctured.

The Fund would continue to follow its investment philosophy that focuses on businesses with high RoCEs and that have steady and predictable growth trajectory rather than cyclical and unpredictable growth, even if it means short term pain, when there is momentary spike on certain occasions.

WF: What is your outlook for the next 12 months, given the global / local cues?

Ajay: There is focus on the fundamental attributes of the company like its growth prospects, industry outlook, margin profile, and competitive dynamics of the industry, cash flows and RoCEs etc. For a true bottom up focused approach the role of macros is really very limited and insignificant. Since I follow an undiluted bottom up approach, I focus all my energies on evaluating the business albeit with different prisms to build a robust hypothesis. As a corollary, the impact of inflation, interest rates, fiscal deficit etc is very limited in my investment approach. I like investing into a business as if I am a part owner of the business and hence would be holding it for a long period of time. Once your investment framework is aligned towards investing into a business rather than investing into a stock, the relevance of macros and cycles reduces considerably.

WF: You are considerably overweight on midcap segment (~32% vs. 12.62% benchmark) – Reasons for being overweight on midcap segment?

Ajay: The fund is a multi-cap fund as per the SEBI categorization and will have a judicious mix of large, mid & small cap companies. Furthermore the fund is a bottom up fund, wherein selection of stocks is done with a vision of 5-10 years. The strongest businesses, with the most-convincing growth outlook, are the ones which carry the highest weightage in the portfolio. Having said that, we are aware that carefully chosen mid and small caps provide a longer growth run-way and hence the portfolio always has a reasonable mix of them. Overweight position relative to the benchmark is purely an outcome of fund’s philosophy.

WF: What is the market cap mix that you maintain for this fund? On what basis is the market cap mix deduced for this fund?

Ajay: We feel comfortable with a 60 – 70% allocation to large cap and balance of 30 – 40% allocation to mid and small caps in the portfolio. The portfolio follows a purely bottom-up philosophy and therefore when it comes to either sector weightages or market-cap weightages, the specific merits of the underlying business decides whether it warrants a place in the portfolio or not. The portfolio is built with extremely long-term orientation.

WF: Why have you chosen to be overweight on healthcare and services sectors?

Ajay: Again, rule book remains the same. It is a Bottom-Up approach. Pharma and Healthcare services are one good example for the basket of companies that comes with quality businesses, run by seasoned managements and has ability to compound wealth. The portfolio has about 10 stocks in pharma space, some of them are US generic focused, and a few are India focused. Two of them are basically CRAMS (Contract Research and Manufacturing Services) players. Each of the stocks has unique business models. Each one of them over the last 10-15 years have figured out, what works best for them.

Last 2 years US generics has seen an intense pricing pressure but the opportunity that lies in the US is too big to completely ignore. Many businesses are moving up the value chain from vanilla generics to complex generics, speciality pharma and eventually branded drugs would still be able to generate economic value over the coming years. Further the Indian formulations market and the emerging markets are strong secular growth opportunities.

Within the healthcare space, diagnostics sector looks promising. Given the poor penetration of diagnostics services in the country there can be a long runway of growth if companies execute well. You make money in the long term because you were buying on the underlying business and its future growth path and the ability of the business to generate positive cash flows. We feel that the healthcare sector provides this opportunity.

WF: Are you currently tilting more towards cyclicals or defensives?

Ajay: As mentioned above, the primary premise is to establish the quality attribute of a business. In other words, businesses with high RoCEs and high cashflows. At the same time predictability of the business is very important in the portfolio’s framework, since it provides a better understanding of how the business would look like a few years down the line. It is for this reason that businesses with poor or average RoCEs and a cyclical characteristic are the typical businesses that are avoided. Which basically means that businesses with commodity kind of attributes like Metals, Oil & gas, Construction etc. are usually avoided. On the other hand a lot of consumer facing businesses across sectors like Banking, Consumer Staples, Pharmaceuticals and Autos are the ones where majority of the fund holdings come from.

WF: With market valuations appearing stretched, are you looking at taking a cash call or booking profits to declare a dividend or any other strategy to lock in some gains and protect against downside risk?

Ajay: As a principle, we generally believe in being invested in the portfolio and avoid speculative cash calls. Furthermore, given the long-term orientation of the fund, cash levels will be relatively lower, typically not more than 3-4% of the portfolio. This is mainly to meet the liquidity needs of the fund. Booking profits is a continuous process depending on the opportunities available and is not a “cash call” play in the portfolio.

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