When we revisited the fund last month, we reiterated the Silver rating. A few readers wrote in to us complaining that the fund’s performance did not merit this rating. Hence, we decided to explain our stance in a more detailed fashion.
This fund was earlier a part of the small/mid-cap category. The changes in the fund’s portfolio and its management style warranted a shift to the flexicap category. As a result, this makes its past performance less relevant. Since July 2014 (when the strategy began to evolve) till October 2017, the fund clocked an annualised return of 14.7%, underperforming 67% of the category peers and languishing in the third performance quartile. However, it managed to outperform the benchmark index (12.5%) during this period.
Compared with peers, the fund’s year-to-date return has been disappointing, which essentially pulled its overall performance down. This year (till October 2017), the fund returned 19.3%, thus significantly underperforming the category average (30.6%) and the benchmark index (31.1%).
What has contributed to this dismal performance?
Let’s explain with relation to the fund’s strategy.
Mrinal Singh’s investment approach entails scouting for stocks he believes are trading at a significant discount to their fair value. He relies on a combination of absolute and relative valuation parameters (such as P/E, P/BV, and EV/EBITDA) for picking stocks. In the current scenario, he is selecting stocks largely based on relative valuations. Additionally, he looks for differentiating factors (technological prowess, cost advantage) that can give the company a sustainable edge.
Until mid-2014, Singh invested predominantly in the small/mid-cap segment. However, stretched valuations in that space and surging assets prompted him to expand his investment universe to accommodate large-cap stocks, almost 83% of October’s portfolio.
While a bottom-up approach is more prominent, top-down factors aren’t ignored. For instance, Singh continues to focus on the businesses driven by domestic factors rather than global factors given persistent concerns in the
global markets. He is patient with his stock picks, especially from the small/mid-cap segment, a strategy that gels well with his investment philosophy.
While he does not shy away from following his convictions and taking big sector bets, his focus on valuations is apparent. For a long time, rich valuations led him to underweight the consumer defensives sector versus both the benchmark index (now S&P BSE 500) and the category average. Subsequently, he has been building exposure in Healthcare and Technology, which have been facing headwinds for some time and trade at relatively attractive valuations.
In conclusion
- The fund’s dismal showing this year so far could be largely attributed to the value strategy being out of favour in the Indian context.
- The fund’s strategy can result in the fund holding back in rising and momentum driven markets.
- The overweight positions in healthcare (about 13% versus 5.5% in the benchmark index) and technology (roughly 16% versus 9% in the benchmark index); combined with a cash allocation at a little less than 10% of assets in a predominantly large-cap and liquid portfolio will be counterproductive in a rising market.
- The fund’s long-term success will depend in no small measure on the manager’s execution capabilities. On that count, we believe Singh is equipped to successfully ply the strategy.
Do note, every strategy will not succeed in every market. Given this fund’s strategy, the current underperformance should not be surprising. But just because this strategy is out of favour, does not mean the fund is not doing what it has promised to do.
Given all these factors, we reiterated our Silver rating.
