Government's aspiration for Housing for All and doubling of farm income is likely to drive consumption in the long term, believes Ankit Jain, Equity Fund Manager at Mirae Asset Consumer Fund.
In an e-mail interview to Moneycontrol, Jain said lower inflation and, in turn, lower interest rates along with implementation of Seventh Pay Commission and higher rural income are the factors which may boost consumption in the near to medium term.
Speaking about his stock-selection strategy, Jain said there are attractive opportunities to invest in growth companies at a reasonable price, although selectively.
The fund house is largely upbeat on consumer durable companies because of high growth potential and relative valuation merit as against consumer non-durables.
Jain envisages markets to be driven by significant improvement in macro-economic conditions, and also flows particularly from domestic investors.
Below are the verbatim excerpts from the interview:
Mirae Asset's Great Consumer Fund has been a consistent performer in the last 3 years? Tell us what was the strategy you adopted for this fund. Also, we noticed that you refrained from buying lot of overvalued consumer stocks? Has that helped the fund?
Jain: First of all, let me tell you some bit about the structure of the Mirae Asset Great Consumer Fund. It is one of the most unique funds, which provides exposure to the long term consumption theme in India and Asia. Around 75percentof the portfolio is invested in companies which will directly or indirectly be benefitted from consumption demand in India, while 25percentwill be invested in Mirae Asset Asia Great Consumer Equity Fund, which in turn invests in consumption oriented stocks across Asia. Yes as you mentioned, the fund has been consistent performer and has given return of 26.6 percent, 17 percent and 20.4 percent over 1/3/5 year period respectively, in against scheme benchmark return of 18.85 percent/10.3 percent/15.7 percent respectively.
Our stock selection process has three key aspects: business selection, management analysis and valuation. We look at quality businesses with decent growth prospects as well as return on capital employed. The second filter is management analysis, which is a bit subjective. This has to look at historical track record and capital efficiency. The last factor is to arrive at a particular value, which should be more than the price to have enough “margin of safety”. We are quite particular about investing in quality growth businesses at a reasonable value and don’t shy away from exiting once the price exceeds value by a certain margin. This strategy has helped immensely in managing the fund.
A large part of the scheme's portfolio is tilted towards banking and financial sector? What is the rationale behind it?
Jain: Characteristic of this fund is not to confine itself to invest in traditional consumer space, rather we have adopted an approach to invest in sectors which will benefit directly or indirectly from consumption led demand – It includes sectors like auto, consumer durables, FMCG, media, retail oriented banking franchise etc. which are going to benefit from increasing consumption in the country. On the basis of valuation merit, we would like to diversify our portfolio by investing in companies which generates at least 50 percent of the profits from India. Yes, presently ~20 percentallocation of the portfolio is towards banking and financial sector, especially companies whose major business is retail.
Which are the two key factors which are expected to boost the consumption on a large scale?
Jain: Lower inflation and hence lower interest rate, implementation of 7th pay commission and higher rural income backed by higher produce due to good monsoon are some of the strong factors for the near to medium term. Over the long term, Government aspiration of housing for all by 2022, power for all and doubling of farm income are some of the key factors which will drive consumption in the longer term.
Where are you more bullish on--consumer durable or non-durables?
Jain: We are relatively overweight on consumer durable in comparison to consumer non-durable because of high growth potential and relative valuation merit. Increasing per capita income will drive aspirational level and hence higher spend towards discretionary items.
What is your outlook on the overall consumption sector?
Jain: India consumption is a very powerful long term theme strongly backed by favorable demographics. ~50 percent of the India population is <25 years and ~65 percent of the population is <35 years. Country median age is 26 years, which is 10 year lower than the countries like China/US etc. Proportion of working age population (15-64 years), which is presently 64 percent is further set to rise for India in against most of the countries like China, Brazil which will see a decline. Given all of these structural demand drivers, India is expected to become 3rd largest consumer market in the world by 2030.
Are you sitting on huge cash pile up in your scheme? If not...what are the cash levels at this point and time?
Jain: As a strategy our fund house never takes cash calls, as we believe that decision lies between the advisor and the investor. We are not sitting on cash pile as we continue to identify enough opportunities to invest it. Presently, cash levels would be ~2 percent of the fund size.
What is your assessment on consumer discretionary space with respect to GST and its implications?
Jain: First of all, we have to understand that GST is a massive tax reform implemented by the Govt which simplifies indirect tax structure and will be structurally positive in the longer run. While it has caused near term impact in the form of channel de-stocking because of cut-overs and first time execution and likely loss because of limited input credit on the tax paid. However, in the long run it will help in consumption to shift more towards organized channels benefitting companies.
What is your take on the markets? Do you think market will consolidate hereon?
Jain: We believe that markets are driven by significant improvement in macro-economic conditions, and also flows particularly domestic. Domestic flows are now very sticky as seen in the consistent increase in SIP contribution. In this context, we believe that markets are reasonably priced.
Presently, Nifty is trading at 17x FY19E EPS, which is at premium to historical range. Though, higher PE should be seen in context with earnings improvement and relatively lower interest rates going forward. Stock selection will remain important to generate returns. We believe there are attractive opportunities to invest in growth companies at a reasonable price, albeit selectively.
How are the inflows in your schemes?
Jain: We are seeing robust inflows in most of our equity funds, considering the credible track record that we have created for our funds. With respect to Mirae Asset Great Consumer Fund, since it’s a thematic fund, inflows have been moderate.
What is your advice to retail investors at this point and time?
Jain: Consumption theme in India has very strong long term growth driver and provides relatively lower volatility. Hence, we would suggest investors to be invested for as long as possible.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
