Here are some multi-cap funds that our analysts looked at over the past months. These funds can invest across large-, mid-and small-cap stocks. While they have complete flexibility when it comes to market capitalization of the stocks, the mandate is to invest a minimum of 65%of their total assets in stocks.
Mirae Asset India Equity Fund
- Brief: The fund is managed by an astute manager, which continues to hold its long-term appeal.
- Investment Style: Large Growth
- Fund Manager: Neelesh Surana
- Star Rating: 5 stars
- Analyst Rating: Silver
- Analyst: Nehal Meshram
- Date of Analysis: July 2018
A highly competent manager adopting a time-tested investment approach resulting in steady returns across the market cycle drives our favourable view on Mirae Asset India Equity.
Mirae Asset India Opportunities has been renamed as Mirae Asset India Equity and categorised as a multi-cap fund. The rebranding is just a change in nomenclature, and there was no material change in the fund’s features. The manager predominantly invests in large-cap stocks at reasonable prices.
The fund is managed by Neelesh Surana and Harshad Borawake. Surana is the lead manager and has been associated with the fund since inception. Our confidence mainly stems from Surana's presence. Borawake, who also heads the research function, stepped in to manage the portfolio last year after comanager Sumit Agrawal's departure on September 2016. Leveraging Borawake’s research background, we believe the fund is backed by managers with complementary skill sets.
The fund’s long-standing process relies on proprietary models and research. Its strategy is based on fundamental bottom-up analysis and results in a well-diversified portfolio, with no sector, stock, theme, or style being disproportionate.
Alpha generation is driven mainly by superior stock selection and not sector rotation. The fund’s process combines qualitative parameters and rigorous company analysis with quantitative parameters. The investment philosophy of the fund is built on three core principles: quality businesses with stable earnings, strong management, and attractive valuation. Detailed company financial modelling focussing on revenue drivers and margins is used while calculating company valuations, but with an emphasis on long-term earnings.
The fund has a solid record of consistently delivering better risk-adjusted returns than its benchmark, the BSE 200 Index, and the multicap Morningstar Category average, in almost all years since inception. The manager’s focus on capital preservation has led to less volatility and lower drawdowns through the cycle.
We have a lot of comfort around the manager and his research-intensive investment approach but believe there is a huge key-person risk. Nevertheless, the fund has a well-considered process, which has resulted in outstanding performance, a trend we expect to endure.
L&T Equity Fund
- Brief: Lahiri’s skill is reflected in the fund’s execution, but we would expect to see long-term performance.
- Investment Style: Large Growth
- Fund Manager: Soumendra Nath Lahiri
- Star Rating: 4 stars
- Analyst Rating: Bronze
- Analyst: Kavitha Krishnan
- Date of Analysis: March 2018
The fund is managed by head of equities Soumendra Nath Lahiri, who has about 20 years of experience on the investment side and has been managing or advising on portfolios for over nine years. The experience and knowledge that the core team of Lahiri (CIO), Venugopal Mangat (head of equities), and Vihang Naik (fund manager) bring to the table is crucial, as the research team that supports the investment team is smaller than some of its peers.
We think that Lahiri’s distinct style of investing stands out but also adds an element of key-person risk. The portfolio reflects his high conviction stock picks, typically companies that are backed by strong promoters and are efficient allocators of capital. The investment process aims to find companies through bottom-up stock-picking.
The fund can witness significant underweight or overweight positions at a sector level given the benchmark-agnostic style of investing.
The manager tends to invest in a lot of fresh ideas and this can tend to give rise to a portfolio that is distinct compared with its peers. Internal risk management at the fund house plays an important role in mitigating portfolio risk. Lahiri prefers running portfolios of 50-60 stocks and mitigates concentration risk by maintaining a maximum individual stock exposure of about 6% in the portfolio.
In our opinion, the processes at the fund house have been structured in line with their goals. The investment team has remained fairly stable and seems to work well together. While we are watchful of how the AMC builds on their existing resources and structure over the long term, we are convicted about Lahiri’s stock-picking ability and his skill in executing the strategy.
HDFC Equity Fund
- Brief: A best-in-class offering.
- Investment Style: Large Blend
- Fund Manager: Prashant Jain
- Star Rating: 3 stars
- Analyst Rating: Gold
- Analyst: Himanshu Srivastava
- Date of Analysis: February 2018
An unwavering focus on the long term and willingness to back conviction bets are integral to manager Prashant Jain’s investment approach. Hence he doesn’t shy away from trading near-term pain for long-term gains. This approach was on display in 2015 when Jain held on to his investments in public-sector banks (particularly SBI) despite it running into rough weather, and the fund languishing in the bottom performance quartile. This was not surprising as the manager has long favoured public-sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth.
Notwithstanding short-term blips, Jain has demonstrated considerable skill in navigating the fund through varying market conditions over the years. Expectedly, he made a promising comeback in 2016 as his conviction in public-sector banks paid off well, helping it to record top quartile performance for the year. Pleasingly, the fund’s good run under Jain’s able stewardship continued in 2017 as well.
Research is central to the investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. He pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods. While constructing the portfolio, Jain is mindful of the benchmark index weights, but is not benchmark aligned.
His willingness to be disciplined and adhere to his investment style even when it is out of favour is noteworthy.
Admittedly, the process has its biases. The valuation consciousness coupled with aversion to speculative fare may cause the fund to lag peers in momentum-driven markets. Further, in a downturn, Jain’s policy of staying fully invested could lead to underperformance versus peers that get their cash calls right. Yet, we believe the process will hold long-term investors in good stead.
An exceptional manager backed by a strong team, a robust investment approach, and one of the best asset managers in the industry add up to a best-in-class offering.
Aditya Birla Sun Life Equity
- Brief: Shah’s confident execution and ability to deliver consistently drive our rating.
- Investment Style: Large Growth
- Fund Manager: Anil Shah
- Star Rating: 4 stars
- Analyst Rating: Bronze
- Analyst: Kavitha Krishnan
- Date of Analysis: January 2018
Anil Shah’s execution of the strategy stands out, and is reflected in the fund’s performance. Our conviction in his ability to remain true to the fund’s mandate and the increased stability on the equity team drive our confidence in this fund. Shah has managed the fund since he joined the company in October 2012.
While this is Shah's first stint at running a public mutual fund, the fund has managed to deliver positive and consistent returns under his leadership.
Shah’s portfolio is based on an investment style that draws more from the top-down approach. He will focus on sectors that he believes are attractively valued with growth prospects.
Although stock selection is based on fundamental research, the manager will not invest in stocks from sectors on which he has a negative view. Shah’s portfolio typically maintains the small/mid-cap allocation between 30% and 40%.
While picking stocks, Shah considers a combination of absolute and relative valuations.
He seeks to invest in companies with competitive advantages such as technology prowess and market share. Shah is willing to be flexible with valuations, so long as he sees earnings visibility. The manager is not averse to taking cash calls depending on the macroeconomic environment. It must be noted that taking cash calls entails timing risk.
Overall, the investment process is a growth-oriented one that combines top-down and bottom-up approaches. However, Shah’s skill in being able to allocate across market caps and sectors stands out. Since taking over the fund, Shah has been able to execute the strategy well.
Under his watch till November 2017, the fund’s performance has remained in the top quartile amongst peers. We view Shah’s execution of the strategy in a positive light and would like to monitor the fund over the long haul before we develop an even higher level of confidence.
DSP BlackRock Equity Fund
- Brief: Yet to build the same level of conviction in the new manager as we had in the earlier one.
- Investment Style: Large Growth
- Fund Manager: Atul Bhole
- Star Rating: 3 stars
- Analyst Rating: Neutral
- Analyst: Himanshu Srivastava
- Date of Analysis: December 2017
The fund saw two manager changes since Apoorva Shah relinquished its management responsibilities in July 2015. After him, the fund was jointly managed by Harish Zaveri and Vinit Sambre for a short while before finally landing in the hands of new manager Atul Bhole in June 2016. Bhole joined DSP BlackRock’s equity investment team from Tata Mutual Fund in May 2016. He comes from a research background and has four years of portfolio management experience in his stint with Tata. Most of the funds managed by him had a decent track record.
Pleasingly, the fund’s broader investment strategy of managing it with a flexicap approach remains unchanged. However, Bhole has a different style of investing than his predecessor Shah. Shah used to combine his in-depth understanding of companies with factors like market sentiment, news flows, and momentum while making investments, which used to result in high portfolio turnover for the fund. Bhole, on the other hand, prefers a buy-and-hold approach.
Broadly, the process is simple, straightforward, and not really distinctive in nature. Hence, the success of the fund would largely depend in Bhole’s execution capabilities. On that front, he is yet to make his mark on the fund. The fund was previously a part of the large-cap Morningstar Category, and its higher-than-average exposure to mid/small-cap stocks used to provide it an edge over peers.
However, now it is a part of the Flexicap category, where it is competing with similar offerings.
Under Shah, the fund had a Morningstar Analyst Rating of Gold based on our conviction in his management skills and execution capabilities within the large-cap category. But these are early days for Bhole as lead manager here. While he shows promise, we are yet to build the level of conviction in him that is required to assign a positive rating to the fund. Hence, in last year’s review (Dec. 27, 2016), we downgraded the fund’s rating to Neutral from Gold. We continue to maintain the same stance on the fund and retain its Neutral rating until we gain more conviction in Bhole’s investment skills, execution capabilities, and ability to deliver outperformance within the Flexicap category over the long term.
Franklin India Equity Fund
- Brief: This fund stands on top of the podium.
- Investment Style: Large Growth
- Fund Manager: Anand Radhakrishnan
- Star Rating: 4 stars
- Analyst Rating: Gold
- Analyst: Himanshu Srivastava
- Date of Analysis: December 2017
The fund has all the ingredients to be investors’ preferred choice.
There are many factors that give Franklin India Prima Plus an edge over its competition. The foremost is manager Anand Radhakrishnan and his investment team, which, in our opinion, rank among the best in the industry. This is followed by intensive research that underpins a robust investment process. Radhakrishnan works closely with his team to uncover quality companies capable of delivering sustainable growth.
Plying a bottom-up approach, he scouts for companies with clean balance sheets, strong business models, sustainable competitive strengths, and high corporate governance standards. Over time, he has proved himself to be an astute stock-picker.
Admitting that the stocks meeting his criteria need not be cheap, Radhakrishnan will pay what he believes is a fair price and has shown this in small/mid-caps where he has displayed a willingness to pay a higher price for incremental growth. Despite the growth orientation, the fund isn’t a commonplace growth offering. The manager often displays a rather contrarian streak in his picks--for instance, his exposure to the telecom sector this year. He is also conscious of rich valuations and will exit stocks/reduce allocation to stocks which he believes are fully valued (for instance cement stocks in 2014).
However, the investment style has a few caveats. The penchant for concentrated and contrarian bets can expose the fund to above-average volatility and result in a divergent showing versus the norm in the short term. Also, the quality bias and valuation-consciousness may hold the fund back when speculative fare is in favour.
Clearly, investors must have an investment horizon spanning a market cycle.
Having said that, an able manager backed by a solid team, a strong process, and one of the best fund companies in the industry add up to a top-class offering.
