Neelesh Surana, chief investment officer, Mirae Asset Global Investment, believes that the biggest challenge for investment professionals in the current environment is that, even with the given externalities, they have to find businesses that can face the current market headwinds and still deliver decent growth in the long term. Talking to Mint, he added that if the valuation is too steep, then there’s a missing margin of safety
What accounts for the outperformance of Mirae’s equity schemes?
Disciplined approach to investing, with focus on “quality up to a reasonable price", has helped us deliver a satisfactory track record. Our attribution analysis suggests that, at an aggregate level, alpha generation has been from stock selection rather than sectoral calls. The focus is more on stock selection through the bottom-up approach in growth companies available at a reasonable valuation.
The two key aspects of investment decisions are stock selection and portfolio construction. In stock selection, our philosophy is centered around participating in quality businesses with reasonable valuation. Analysis of all three buckets—business, management and valuation—is important from a risk-reward matrix and outliers are avoided. These outliers include businesses or managements of sub-par quality and great businesses with an expensive price tag. In portfolio construction, discipline and adequate diversification is important. We seek to construct diversified portfolios, which can handle mistakes and deliver decent risk-adjusted returns.
Is there a system in place for spotting errors in investment decisions and correcting them?
We have an internal universe of stocks, which is vigilantly monitored by the investment team. We avoid companies, which have sub-optimal returns on capital employed and lack basic quality of management with respect to governance, capital allocation, and so on. We also try to avoid companies which lack a minimum size of, say, ₹100 crore operating profit.
There is a framework for constant review of investment decisions and taking corrective action, if required. We work on the assumption that in the long-term, “price" and “value" would converge. However, there are situations when the value of business could change either due to the changing dynamics of the industry or our assumptions could be wrong. In such cases, the appropriate corrective action is taken.
Mirae has launched many products recently. Is it about filling the gaps in product offering or taking advantage of the market situation?
It is more about completing the gaps in our offerings. Post the two launches in calendar year 2019, we now have five equity-diversified funds: a large-cap, large-and-mid-cap, mid-cap, focused (multi-cap) and ELSS (also a multi-cap). We also have two hybrid products and two sector funds—consumer and healthcare. We are now done with our core equity offerings.
You have had great success in active funds. Why the sudden foray into passive funds?
We are not encouraging a debate between active versus passive with the launch of the exchange-traded fund (ETF). The industry still has a solid three-decade record of generating alpha. Despite some aberration, we believe that our markets still offer a strong case of decent alpha creation.
The role of passive product should be seen independently as it evolves as a separate bucket in the long term. Passive funds in India are at a nascent stage and the market is evolving. It is known globally that as markets evolve, ETFs gain popularity and they do have cost advantages. For us, it is not active versus passive but our passive strategy versus the future share of passive industry. At this stage, passive is meaningful only for large-caps for better liquidity and lower tracking error. Over time, the industry could evolve with sophisticated products.
That the economy is slowing down is no more a debate. Is it structural or cyclical?
Currently, the economy is witnessing short-term challenges of growth arising from liquidity issues and slowdown in the consumer sector. However, the fundamentals of India’s long-term structural growth drivers are intact.
We don’t see the slowdown as long-lasting, deep-rooted structural. The structural legs to grow are intact which are the demographic dividend and the potential in infrastructure spending. However, certain elements have to be taken care of such as creating jobs for the demographics to remain a dividend and not become a challenge.
We believe that the Indian economy will recover from the ongoing challenges related to liquidity and a few sectors need to be addressed. Concerted efforts by the government to iron the challenges will help revive growth in corporate earnings, which has been muted for a few years.
What sectors and segments of the market are attractive currently?
We are getting enough choices in the market because of the significant correction. Post the ongoing correction, a lot of pockets are looking attractive across sectors and size. We are positive on private banks (both retail and corporate lenders), insurance, auto, healthcare, gas utilities, building materials, particularly where the share of unorganized is large, and so on. It’s always better to pick stocks when the going is tough (for example, consumer discretionary now) as the valuation is in favour. Only near-term earnings are impaired, but the long-term potential in the space is intact. We have added a few stocks which are deep in value like public sector enterprises.
What should an investor’s strategy be in such markets?
We would advise them to invest in a disciplined way in equities within the earmarked asset allocation, with a long-term time frame. We don’t see a reason to be underweight on equity at these valuations. Only when you invest in bad times will you get better returns when things improve. Investors should not try to time the market at these valuations. Systematic plans are the most efficient way of capturing volatility or downside.