A look at 3 multi-cap funds

By Morningstar Analysts |  21-12-18 | 
 

IDFC Multi Cap

  • Date of Analysis: November 2018
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Anoop Bhaskar’s presence at the helm should bring the fund out of the woods.

The fund has been through tumultuous times ever since its erstwhile manager Kenneth Andrade exited the fund house in September 2015. Andrade was a small/mid-cap specialist and an accomplished manager. He helmed this fund since June 2006 and it had built an impeccable track record under him. After Andrade, the fund was under Aniruddha Naha for a brief period (September 2015 to March 2016), before Anoop Bhaskar took over its mantle in April 2016.

Bhaskar, like Andrade, is a seasoned manager. He has managed both large and mid/small-cap funds with a reasonably good degree of success. Therefore, in our opinion, he is an apt replacement for Andrade. But the investment team witnessed significant turnover after Andrade’s exit. The current team is new, and except for Bhaskar, other members of the team lack a long-term portfolio management track record. Hence, we see a key-man risk in him.

There has been a shift in the fund’s investment strategy, too. Earlier it was run with a rather unique investment strategy. The mandate was to identify companies which are niche, emerging, and different from the mainstream. As a result, it didn’t allow the manager to invest in conventional names. Initially Bhaskar tried retaining this feature. However, over the years, such investment opportunities, which can also make a grade on his qualitative parameters, have substantially dwindled. The fund's size also has increased

significantly, making it difficult for the manager to run this approach in the current market scenario. Although it continues to be a part of the strategy, it is no more the mainstay of the fund.

Going ahead, this will be run like a conventional multi-cap fund with one third of exposure ideally in each market segment--that is, large-,mid-, and small-cap. The alignment of the portfolio in line with the new approach is a work in progress and would be gradual. We believe the change in the investment approach is the step in the right direction and will make the strategy more scalable going ahead.

Notwithstanding the changes in the fund’s strategy and intermittent hiccups that it may witness, under Bhaskar, the fund has the means to deliver outperformance over the long haul.

UTI Equity

  • Date of Analysis: September 2018
  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • The fund manager is still to establish a long track record.
  • UTI Equity Fund, launched in 1992, is one of the oldest funds in the Indian mutual fund industry.

There has been a change at the helm. Ajay Tyagi took over as manager in January 2016, following Anoop Baskar’s exit. Tyagi has been with the fund house for the past 18 years. He is an able portfolio manager, and we like his distinctive long-term investment style, which has delivered superior performance for the fund in the past two years.

The fund was historically managed as a large-cap-oriented fund, but with the recent regulatory changes, it was merged with UTI Bluechip, retaining the characteristics of UTI Bluechip, which is a multicap fund. Despite this, the fund continues to position itself in the growth quadrant, with Tyagi following a bottom-up driven approach while picking stocks. His style is driven mainly by quality, growth, and valuation, where quality signifies a high and sustainable return on capital employed, growth by reinvestment of internal cash flows, and valuations determined by consistency in cash flow generation. Relying on relative valuations to make investment decisions, the team prefers stocks that are cheaper than peers' and their historical valuations. They focus on parameters such as enterprise value/earnings before interest, price/equity, price/book, return on assets, and return on equity, but are willing to be flexible with valuations, especially in rising markets.

The fund maintains a diversified portfolio, but in 2016 brought down the number of stocks to about 50, which is still higher than the median count of the category. Despite this, the turnover of about 13%, as of 2017, demonstrates the manager’s patience and conviction in the outcomes of the investment process. Moreover, the restructuring in process and portfolio tweaking have started showing a positive outcome in the fund’s recent performance. The fund displayed phenomenal performance on a year-to-date basis, outperforming 100% of its Morningstar Category peers.

Our conviction in the strategy remains high, underpinned by our confidence in the portfolio manager, and the consistent application of a strong investment process. However, we continue to maintain a cautious stance and would want to closely monitor the fund for a while longer under the new peer set, before we draw our conclusions.

Mirae Asset India Equity

  • Date of Analysis: July 2018
  • Star Rating: 5 stars
  • Analyst Rating: Silver
  • The fund is managed by an astute manager, which continues to hold its long-term appeal

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 categorized 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 co-manager 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 rigourous 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.

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