Ankit Agarwal, who is a fund manager at UTI AMC Ltd, is more of a Test player than a Twenty20 hitter when it comes to investment. He favours a long-term view and tells investors not to fret too much over short-term volatility.
An IIM-Bangalore alumnus, Agarwal, who has had stints with Lehman Brothers and Barclays, has about 12 years of experience managing funds. He sees a lot of potential in midcaps and in an interview to Moneycontrol’s Kshitij Anand, he says investors should focus on companies that exhibit largecap like characteristics such as market leadership, well-managed balance sheets and quality management. Edited excerpts:
Q) The Indian market turned volatile after reclaiming 12,000 earlier in October. What is your outlook for the near term? Which are the factors weighing on markets?
A) We have a long-term horizon while investing in stocks and are not really concerned by shorter-term volatility. Forecasting market movements is not part of our investment process.
Any intrinsic value estimate would give less weightage to the immediate future earnings but a lot more to the lifelong growth trajectory.
As a fund, our focus is to find long-term investment winners that would either compound earnings over time or can mean revert owing to a turnaround in fundamentals. We don’t claim to understand or attempt to derive meaning into market movements.
Q) A global brokerage firm in a recent note said a broader market rally is here to stay. Though we have seen small and midcaps underperform in October, do you think it makes sense to go long/overweight on the portfolio?
A) Our investment philosophy is focused more on identifying companies that have a long runway of growth and a durable business model. We focus less on market-cap segmentation.
We believe that within midcaps also one can find companies that exhibit large-cap like characteristics in the form of market leadership, well-managed balance sheets, access to capital, and run by good quality management. Such companies tend to outperform in the long term and hence remain the focus of our investment strategy.
Investors should follow basic principles of asset allocation and within equities diversification across market capitalisation and styles.
Ideally flows should go where there are better risk-adjusted returns; midcaps are in neutral to attractive territory relative to largecaps.
Q) What does the mutual fund data say? Do you think flows are increasing or reversing from the mid & smallcap funds? If yes, what is causing the shuffle?
A) In September, we saw net outflows in the equity MFs but the pace of outflows has reduced and much more in the midcap segment.
It is difficult to glean anything from shorter-term flow trends but in the longer term, midcaps can provide an opportunity to create higher alpha, as they are much earlier in their growth cycle and have a longer runway ahead of them.
However, success is contingent on identifying bottom-up opportunities that earn a high return on invested capital, lean balance sheets, leadership qualities and run by able management.
We think investors should be guided by valuations and attractiveness of risk-reward in making allocations rather than trying to second guess flows.
Q We are trading at the upper end of the valuation curve, which could result in a technical adjustment in markets. Which sectors or stocks are a good buy on dips?
A) We have a more bottom-up approach to investing and we believe that one can find investment opportunities in even sectors where we might have a negative view. However, currently, our portfolio is positioned to benefit from a recovery in the auto and consumer discretionary plays.
The portfolio is also well-positioned in the currently outperforming themes in IT, specialty chemicals and rural space. As regards market valuations the price to book valuations are in fair-value territory.
The price to earnings multiples are elevated but they may not be the appropriate indicator given the impact of the pandemic on earnings in FY21.
Q) Any big themes that you are pinning hopes on for the next two-three years?
A) Some of the opportunities where we could see some sectoral tailwinds are the ones that benefit from the shift in global supply chains to India.
There are also opportunities in some of the underpenetrated segments in the consumer discretionary space that also benefit from formalisation trends. Some of the non-lending financials also benefit from long-term trends in financialisation of savings.
Q) Any contra idea which you think could work but is not yet discovered?
A) At any given time, we have a portion of our portfolio positioned in some turnaround opportunities. These are businesses that have strong credentials but are currently going through a temporary cyclical downturn.
We believe auto could be one sector where the near-term looks bleak but we believe there are still legs to claim long-term growth.
Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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