Mirae AMC's new fund hopes to cash in on midcap buzz

Below is a verbatim transcript of the interview. Also watch the video.

Q: Tell us about your Mirae Asset Emerging Bluechip Fund?

A: As a fund house, this is our fourth equity offering and second pure domestic equity fund offering. This is going to augment our initial product basket as well as going to complement the India Opportunities Fund, which is the largecap fund. Apart from this, it is also going to help us to slide down the market capitalization curve and help offer our investors a broader investment opportunity across a wider risk/return spectrum.

The way we have constructed the product is that we have a fairly extensive investment universe where we have excluded the top 100 stocks by marketcap and we have also excluded companies with marketcap less than Rs 100 crore. So that would give the research team a lot of bandwidth to delve deep and dig deep and try to bring to the surface companies, which we believe are going to be the potential winners of tomorrow.

The basic construct of this product is on the underlying belief that what is yesterday’s smallcap is possibly today’s midcap and they are going to be possibly the largecap of tomorrow.

Q: What kind of earnings traction are you seeing in the broader market because last quarter the broader market earnings outperform the Sensex company earnings? Do you think that will continue to be in place, that kind of construct where midcaps and smallcaps show you much greater earnings traction than some of the larger index companies?

A: Our research clearly shows that there are many companies, which are showing tremendous amount of earnings momentum, margin expansion. The underlying optimism also is extremely high. In fact, there have been many companies which have been able to significantly increase their EBITA in spite of the fact that there has been fair amount of increase in raw material and input cost. That is largely because they have been able to keep the other cost low and the interest cost also have been pretty flat.

Clearly, if we have to compare between the broader market and the narrower market, there is a distinct attractiveness for the broader market largely because the multiples are lower and the prospects of earnings are much higher.

Q: The one thing that keeps investors away from investing in midcaps is the prospect of market volatility because midcaps generally tend to underperform significantly when global and local markets go through bouts of volatility. We saw one in May and June. Do you think that is behind us and the turf is set for midcap outperformance from here?

A: Volatility is something that we have to learn to live with and that is largely because of global factors. We have seen excessive fear and endless pessimism. There have been doomsayers across the world who has been trying to latch on to every piece of bad news and try to magnify them and that is what has led to whether you look at the VIX or whether you look at the volatility across markets to be the order of today and possibly tomorrow. We have to learn to live with that.

But coming back to midcap if you have to compare them with how they compare with largecaps, you will see that midcaps have the possibility of outperforming across different time periods. If you look at on a six months basis or on a one year basis, different time periods, you will see that the outperformance has been significant.

If I have to pick up a one year data and look at April and go backwards by 12 months, you will see that the outperformance over Sensex or Nifty by the CNX Midcap has been as high as 50% and if I have to pick up on a little longer-term perspective, a data which has been compiled by a product theme and go back to April of 2002, an investor who would have invested Rs 10,000 would have yielded Rs 75,000 in CNX Midcap as opposed to 48,000 or thereabouts in Nifty. The outperformance for CNX Midcap and the potential to outperform in spite of the volatility is extremely high.

In fact, we did a very interesting stimulation where we threw in different weights of largecaps and midcaps. We saw that at 50 midcaps and at 50 largecap, one is able to optimize the portfolio on the efficiency front here.

Q: The one positive that tends to work towards the midcaps is the fact that they sometimes have a greater valuation cushion compared to their larger peers. Are you comfortable though with where valuations are at right now for the midcap universe generally?

A: If you look from a sectoral top-down point of view, the valuations appear to be little rich. But if you look at it from a pure bottom-up stock picking point of view, I think the opportunities are enormous. When we look at companies, we are going to be looking at companies, which are going to be at the very early stages of their business cycle. We would look at companies, which are relatively young companies, which run scalable business model and companies, which will be able to take advantage of macro-economic trends and will be able to build competitive business going forward in the future.