Morningstar's analysts look at these multi-cap funds over the past seven months. Here's a brief write-up on each.
- Fund: Nippon India Multi Cap
- Star Rating: 3 stars
- Analyst Rating: Silver for the direct scheme, Bronze for the regular scheme
- Name of Analyst: Himanshu Srivastava
- Date of Analysis: December 2019
This fund differentiates itself from peers in its manager’s resolve to manage it like a true-blue multi-cap offering, with investments in large- and small/mid-cap stocks being made in almost equal proportions. This approach could help the fund pip its peers when mid- and small-cap stocks hit a purple patch, but could lead to underperformance when they lose steam.
Its underperformance in 2019 is a case in point. Prior to this, the fund tripped on its performance run in 2015 and 2016. Yet, Sailesh Raj Bhan’s strong credentials and superior execution capabilities buoy confidence that the fund can keep producing top flight results over the long term. He is an accomplished manager who has helmed this fund for over 14 years.
Bhan adopts a free-flowing and multipronged approach to stock selection, which gels well with his skill set. He scouts for issues that show strong growth prospects and have healthy or rising returns on equity. He invests in stocks across market segments (i.e. large- and mid/small-cap), allocating about 40%-60% to large caps. Bhan has a penchant for emerging/niche themes and sunshine sectors as he believes they have significant upside potential.
He also invests in value propositions to balance the portfolio’s growth bias with a value tilt. Taking big sector/thematic bets also forms an integral part of the strategy.
However, investing in emerging/niche themes, which largely have untested business models and value propositions, is a risky affair. Bhan’s large sector/thematic bets are also not without risks as a failed call may result in huge underperformance for the fund. Broadly, the strategy courts higher risk than a typical peer and the benchmark index.
We draw comfort from the fact that the process is robust with research at its core. Further, Bhan’s research-intensive investment approach reduces the risk associated with investing in smaller caps and emerging/niche themes. The time-tested nature of the investment process and the strategy’s fine execution reinforce our conviction in the fund.
- Fund: UTI Equity
- Star Rating: 4 stars
- Analyst Rating: Bronze
- Name of Analyst: Nehal Meshram
- Date of Analysis: October 2019
UTI Equity Fund, launched in 1992, is one of the oldest funds in the Indian mutual fund industry. 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 multi-cap 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 with about 50-60 stocks, which is still higher than the median count of the category. The turnover of about 30% as of 2018 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. The fund displayed above-average returns during the manager’s tenure and is ranked as a second quartile performer. Our conviction in the strategy remains high, underpinned by our confidence in the portfolio manager, and the consistent application of a strong investment process. The execution of the fund has been good since the time Tyagi started managing the fund.
Moreover, the restructuring in process and portfolio tweaking have started showing a positive outcome. We believe by continuing to focus on quality and with a competitive expense ratio it will lead to the best risk-adjusted return in the long run.
- Fund: Kotak Standard Multicap
- Star Rating: 5 stars
- Analyst Rating: Silver
- Name of Analyst: Kavitha Krishnan
- Date of Analysis: June 2019
The Kotak Standard Multicap Fund was known as the Select Focus Fund prior to SEBI’s categorisation and is currently the largest fund in its category. The fund has been managed by Harsha Upadhyaya since 2012 and has been run with a predominant focus on large-cap companies.
The manager has been buying into a few mid-cap stocks more recently, with exposures lower than 2% to better align the fund to its multi-cap mandate. Having said that, we expect the fund to retain its large-cap bias going forward.
We think that Upadhyaya is a very efficient stock-picker and has executed this strategy with a lot of finesse. The investment team has remained stable since 2012 except for one departure in 2013 and the fund’s performance under its current manager has remained above average.
Upadhyaya brings in a lot of dependability on the process front and we expect his execution to yield a consistent performance on a forward-looking basis. His stock-picking leads him to remain loosely aligned to the benchmark. The model portfolio created by the analyst team forms his initial reference when choosing stocks. The manager applies a qualitative overlay to this output to pick stocks that form a part of his portfolio.
The focus is on growth stocks that have sustainable competitive advantages. He scouts for companies with a strong brand name, business, and market share. The focus is on protecting the downside risk by paying special attention to capital efficiency, corporate governance, and liquidity while constructing the portfolio. Upadhyaya typically avoids stocks with corporate governance issues and prefers to invest in businesses that are scalable, with the ability to generate steady cash flow, have good management capabilities, and trade at reasonable valuations.
Upadhyaya claims that internal limits don’t hinder his intrinsic investment style, which tends to be fluid and unconstrained. In our opinion, Upadhyaya is an able manager and his presence at the fund's helm is a positive. While sector constraints on the fund can help limit relative risk during downturns, we note that they can restrict the level of outperformance by forcing the manager to retain exposure to benchmark-heavy sectors, irrespective of his conviction levels.
