4 things to note about Reliance Growth Fund

By Morningstar Analysts |  08-05-18 | 

Reliance Growth has gone through many ups and downs in its long history. Now, with a new manager and a redefined strategy, it embarks into a new journey wherein it must establish itself all over again. Our analyst revisited the fund and still goes with the Neutral rating. He explains why.

  • Fund Manager: Manish Gunwani
  • Fund Category: Flexi Cap
  • Star Rating: 3 stars
  • Morningstar Analyst: Himanshu Srivastava
  • Date of Analysis: May 2018
  • Analyst Rating: Neutral
  • Investment Style: Mid Blend

The fund’s investment strategy has changed. Again.

Prior to 2010, it was a mid-cap-focused fund. But the increase in its asset size prompted the manager to adopt a flexi-cap approach to accommodate more large-cap stocks. However, recently it was again converted into a mid-cap offering by the fund house in line with the SEBI’s new guideline on categorisation.

We need time to build conviction in this fund.

The change in strategy is recent. The fund’s track record under current fund manager Manish Gunwani is too short to draw any meaningful conclusion for its performance.

Given this is Gunwani’s first stint at managing a mid-cap fund, the execution here needs to be evaluated over time before gaining conviction.

We would rather wait for the fund to build a long-term track record under Gunwani with the new strategy before gaining confidence.

The investment strategy is a typical bottom-up, growth-oriented one.

Gunwani prefers focussing more on businesses and their growth prospects than valuations. But then again, he would typically avoid investing in stocks that are at the peak of their cycles.

While selecting stocks, he prefers companies having strong terminal value, robust business models, high corporate governance standards, better execution quality, strong entry barriers, and ability to keep getting market share to scale up without eroding profit margins. He also tries to gauge a stock’s profit after tax, EBIDTA, and return on equity over a period of 3 to 5 years before investing.

We think the process is commonplace and its long-term success will depend on how well it is executed.

He is conversant of the risks associated with running a mid-cap strategy and considers liquidity as one of the major risks.

He invests around 10%-15% of assets in large caps and between 5% and 7% in cash, which is used to address liquidity requirements. The allocation to mid/small-cap stocks hovers in the range of 75%-80% with more focus on midcaps (65%-70%). Further, he adopts a benchmark aware approach to avoid exposing the fund to higher risk by deviating too much from the index.

He constructs a diversified portfolio of 60-75 stocks and doesn’t take big stock-specific bets.

Gunwani bifurcates the portfolio into two parts.

The first part is structural, which would largely comprise mid/small-cap stocks. This portion would be less liquid; here, Gunwani has an investment horizon of 3 to 5 years.

The second part of the portfolio is constructed to handle a cycle based on manager’s macro views. Currently, this part is focused on cyclical sectors such as metals, corporate banks, and capital goods as Gunwani expects them to benefit from economic recovery. He doesn’t mind being a bit tactical in this portion of the portfolio. For instance, because of the stress in the banking space, he has tactically trimmed exposure in corporate banks.

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