Super Fund Manager 2024: The growth-driven formula that powered this mid cap fund manager’s success

The LIC Mid Cap Fund has delivered returns of around 37 percent over the past year. Dikshit Mittal, Fund Manager & Senior Equity Research Analyst attributes the returns to the fund's focused strategy.

“We focus on companies growing above the nominal GDP growth rate, with some indexing to growth as well, while keeping an eye on valuations. Essentially, we build the portfolio around the PEG ratio, which means we’re willing to pay high multiples as long as growth backs it up,” he says.

This includes significant investments in sectors like retail, hotels, power, and renewable energy, with strong contributions from companies like Trent and Indian Hotels.

The strategy for 2025, according to Mittal, remains growth. “The strategy remains the same: focus on companies growing higher than the nominal GDP growth. The current portfolio PEG ratio is around 1.5–1.6, which keeps sanity in valuations. Otherwise, the focus will be on finding sectors expected to do well, with more case studies and stock-specific opportunities,” he says

Edited excerpts: 

What has worked for your MidCap fund this year?

We focus on companies growing above the nominal GDP growth rate, with some indexing to growth as well, while keeping an eye on valuations. Essentially, we build the portfolio around the PEG ratio, which means we are willing to pay high multiples as long as growth backs it up. This has led to focus positions in consumer distribution sectors like retail, hotels, and the power sector. We have also invested in stocks or sectors benefiting from the private capex cycle, the power sector, and manufacturing. We have also targeted beneficiaries of the government’s renewable energy push, particularly companies in the solar space, which have performed well. Being underweight on financial services and IT has also helped us.

Midcaps as a segment have done well overall, and sentiment remains optimistic about their progression. Do you think it would be relatively easier to maintain a mid-cap fund this year?

At the index level, midcaps have delivered over 25 percent CAGR returns over the last five years, while earnings growth has been around 15 percent. This indicates valuation expansion. Going forward, the market is factoring in over 20 percent CAGR growth for the next two to three years, and as long as these expectations are met, good returns can still be expected. However, we should moderate our return expectations. We cannot sustain the 25 percent CAGR returns seen in the last five years. But, given the growth prospects and diversified nature of the mid-cap index, moderate returns are still likely.

What have been the biggest contributors to your portfolio this year?

Our portfolio is diversified, with around 65 stocks. Top contributors include companies in retail like Trent and Indian Hotels, which have delivered strong performance. These stocks have grown in weight within our portfolio because of their continued performance, and we have let the winners run as long as growth sustains.

Compared to other mid-cap funds, your AUM is relatively small. Why is that?

We acquired IDBI Mutual Fund last year, and this fund emerged from that acquisition. While the fund has grown well in the past year, it’s still relatively small compared to the category. We are optimistic about scaling it up based on performance.

What is your outlook for mid-caps next year?

Valuations are slightly premium to the last five-year averages and large-cap indices. However, the structural flows into mid-caps, driven by a limited pool of 150 stocks, may sustain valuation premiums. With strong earnings growth at 25 percent CAGR, we expect good double-digit returns for investors with a three-to-five-year horizon, even if valuations moderate.

How do you differentiate your fund from others?

We actively take sectoral calls, such as being underweight on financial services last year, which worked well. We also focus on niche, smaller stock ideas like renewable energy and healthcare, which have contributed positively. We rotate sectoral bets actively. For example, we are optimistic about auto components and slightly increasing IT exposure, while remaining underweight in sectors like financial services and oil & gas.

Has volatility been a challenge for mid-caps this year?

While mid-caps can be volatile, the market has absorbed significant global events over the past 12–18 months, including geopolitical tensions, rising interest rates, and banking crises. Incremental corrections would likely require new triggers.

What risks do you see for the market?

Key risks include currency volatility, particularly if U.S. policy leads to a significantly appreciating dollar, which could impact global currencies. Additionally, earnings downgrades in the mid-cap space could trigger corrections.

What is your outlook for 2025?

Markets should remain stable, with double-digit earnings growth and supportive macroeconomic factors like reasonable interest rates and strong corporate balance sheets. While a time correction or shallow price correction is possible, we expect stability barring unforeseen events.

What sectors/companies are you optimistic about in 2025?

We are contrarian bullish on companies in the chemical space as well as the auto and ancillary space such as all the companies casting and forging. We believe that these sectors can come back very strong. Going forward, capex as a theme will continue. Asset financiers and asset enablers will also continue to do well. Power capex as a theme has just started, so we have some investments in companies providing equipment or parts for power plants. Those companies will continue to do well.

Another sector we believe can come back is building material. The real estate sector has done well, but building material companies haven't seen growth yet. We think it's only a matter of time.

How are you approaching strategy going into 2025? 
The strategy remains the same: focus on companies growing higher than the nominal GDP growth. The current portfolio PEG ratio is around 1.5–1.6, which keeps sanity in valuations. Otherwise, the focus will be on finding sectors expected to do well, with more case studies and stock-specific opportunities.

Disclaimer: The views and investment tips expressed by investment 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.