6 funds with a large-cap mandate

Associate director of manager research Himanshu Srivastava, and senior research analysts Kavitha Krishnan and Nehal Meshram share their views.
By Himanshu Srivastava |  11-09-22 | 
 

Kotak Bluechip

  • CATEGORY: Large Cap
  • DATE OF ANALYSIS: January 2022
  • ANALYST NAME: Kavitha Krishnan
  • ANALYST RATING: Bronze (Direct), Neutral (Regular)
  • FUND MANAGER: Harish Krishnan

The growth-at-a-reasonable price (GARP) strategy uses the model portfolio created by the analyst team as his initial reference when choosing stocks. The model portfolio is compiled from sector-based portfolios prepared by analysts, who use a combination of quant models using relevant ratios such as P/BV, P/E, EV/ EBITDA, and so on, and other valuation methodologies such as replacement costs and DCF models to evaluate stocks.

Krishnan runs a few broad themes across this fund and applies a qualitative overlay, investing in the top companies in each sector that have sustainable and scalable businesses, have good management capabilities, and trade at reasonable valuations. A combination of top-down and bottom-up approaches is evident and is used to determine under- and overweightings versus the benchmark. Krishnan maintains a core portfolio (70%-80% of assets), with holdings largely coming from the benchmark, while the rest is used for tactical plays, making the portfolio predominantly aligned with the benchmark. Significant stock overlaps with the benchmark make sector bets the primary source of alpha, in line with Krishnan's strategy to generate performance through concentrated sector bets. However, firmwide portfolio constraints (for sector exposures) may limit the potential of this strategy.

He avoids making short-term calls/ cash calls, with an average holding period of about 24-36 months.

Related Reading: Why must a large-cap fund be a core holding

Kotak Equity Opportunities

  • CATEGORY: Large & Mid Cap
  • DATE OF ANALYSIS: January 2022
  • ANALYST NAME: Kavitha Krishnan
  • ANALYST RATING: Bronze
  • FUND MANAGER: Harsha Upadhyaya

Harsha Upadhyaya uses the model portfolio created by analysts as his initial reference.

The model portfolio is compiled from sector-based portfolios prepared by analysts who use a combination of DCF models and quantitative measures to evaluate companies. However, portfolio managers are the chief decision-makers and have adequate leeway to deviate from the model portfolios. Upadhyaya favors growth companies having sustainable competitive advantages such as brand names, business capabilities, or market share that generate steady cash flow, have capable management teams, and trade at reasonable valuations.

He combines absolute and relative valuation measures to determine the fair value of stocks. He invests based on a stock's intrinsic value, valuations versus industry peers, and historical valuations.

The top-down approach is well-integrated into the process as Upadhyaya over- or underweights sectors based on their growth prospects and relative valuations compared with the broader index and itself on a historical basis. While stock picks in the small/mid-cap space are largely a residual of bottom-up stock[1]picking, Upadhyaya also uses relative valuations between large and small/mid-caps to over- or underweight the same. He also considers downside risk, corporate governance, and liquidity. The portfolio is rebalanced at regular intervals to ensure alignment with the benchmark as well as the manager's views. His long-term approach and focus on quality and growth is evident in his investment style.

Related Reading: 5 tax-saving funds our analysts cover

ICICI Prudential Large & Mid Cap

  • CATEGORY: Large & Mid Cap
  • DATE OF ANALYSIS: May 2022
  • ANALYST NAME: Nehal Meshram
  • ANALYST RATING: Neutral
  • FUND MANAGER: Ihab Dalwai

The fund has witnessed frequent changes in the portfolio manager. Sankaran Naren and Prakash Goel previously comanaged the fund. Parag Thakkar joined as a comanager in June 2021, replacing Prakash. In November 2021, Thakkar took the reins of the fund. After he quit in June 2022, Ihab Dalwai was appointed as the fund's lead manager.

The fund managers follow a disciplined investment process with a mix of value and growth styles. With mostly a large-cap bias, they evaluate sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from ones where they think valuations are stretched. Within the sectors, they use relative valuation parameters to invest in stocks that are attractively priced relative to their growth prospects. Companies favoured by the investment process typically display quality management, strong financial strength, and growth prospects. The resulting investment style can be best characterised as having a slight value tilt. In addition, the manager looks for stocks and sectors which are experiencing a temporary problem and are being overlooked by the larger market. The manager invests in large- and mid-cap companies, with a preference for large cap, using a rigorous investment process and an active portfolio management approach. It also takes opportunistic investments in small-cap companies. They have a proprietary price/book model that helps the manager in assessing the valuation differential between large-, mid-, and small-cap stocks and increasing exposure accordingly.

We had a high conviction on the former lead manager and his execution skills. We'll need time to gain confidence in the new manager as he makes huge sector bets while keeping a dynamic mid-cap allocation. We think that execution is critical to the fund's success, so we take a conservative approach on the investment process.

Related Reading: 6 smaller fare funds to consider

ICICI Prudential Bluechip

  • CATEGORY: Large Cap
  • DATE OF ANALYSIS: April 2022
  • ANALYST NAME: Nehal Meshram
  • ANALYST RATING: Bronze
  • FUND MANAGER: Anish Tawakley

The portfolio managers ply a benchmark-conscious strategy, and sector weights are aligned to those of the IISL Nifty 100 Index, subject to a deviation of plus or minus 5%. Hence, the top-down approach has little relevance. They use an in-house large-cap model portfolio as the initial reference point when choosing stocks. Although the managers also use the firm's internal fair value approach and the alpha alert, the model portfolio remains the most important part of the security-section process.

Within a sector, the managers perform business analysis to identify the best ideas. In addition, they use free cash flow/enterprise value ratio (three-year average) as an appropriate parameter, along with price/book value and return on equity, among others, to determine a company's fair value. Typically, the fund will invest only in the top 100 stocks by full market cap.

The managers have a quality bias when choosing stocks. They favour companies with robust business models, strong entry barriers, and the ability to scale up without eroding profit margins. However, they are not averse to investing in firms that do not fulfill all the qualitative criteria if the stock offers a trade-off against valuations. This way they follow a barbell strategy and either pay more for high-growth stocks or focus on fundamentally strong companies at attractive valuations.

Related Reading: Why we like these 3 funds from ICICI Prudential Mutual Fund

Large Cap: Franklin India Bluechip

Large & Mid Cap: Franklin India Equity Advantage

(Information below is applicable for each of the above two funds)

  • DATE OF ANALYSIS: January 2022
  • ANALYST NAME: Himanshu Srivastava
  • ANALYST RATING: Neutral
  • FUND MANAGER: Venkatesh Sanjeevi took over both these funds in the second half of CY21

The investment process for each fund is research-intensive and largely relies on bottom-up approach with a top-down overlay. Venkatesh Sanjeevi prefers stocks that meets his quality and valuation requirement.

On the quality front, he runs hygiene checks on the company's management quality, competency of the team, corporate governance issues, their track record of capital misallocation and whether it can make long term decisions. He selects companies with clean balance sheets, strong business models, and sustainable competitive strengths. To make a cut, the company must have a good runway for a profitable growth over the long term. He doesn't like companies which can grow for two to three years and then plateau.

On the quantitative side, he prefers companies which over a cycle can generate around a 12%-13% return on capital over the cost of capital. From a valuation perspective, he would look at metrics that are apt for a given company and sector, such as price/earnings, price/book, or price/enterprise value (for insurance companies) and cash flow-based metrics. He can be flexible with valuation in case he sees strong growth ahead, but the quality framework would be more sacrosanct. The investment approach is thorough and Sanjeevi has clarity in terms of how he would like to take the fund going forward.

However, the efficacy of his thought process, investment approach, consistency in portfolio construction, and execution of the strategy can be evaluated over time.

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