Recently completing 10 years in India, Mirae Asset Mutual Fund has delivered remarkably consistent performance across both its flagship funds — Mirae Asset India Opportunities and Mirae Asset Emerging Bluechip Fund. Neelesh Surana, CIO (Equities), at Mirae Asset Management spoke to BusinessLine on what made the funds click. Excerpts:

Has the steep correction in some mid- and small-cap stocks led to buying opportunities? If so, in which segments?

The year-to-date correction of about 12 per cent in mid-caps should be seen in the context of its outperformance last year. During CY17, the Midcap Index was up 47 per cent versus 28 per cent on the Nifty.

Mid-caps have outperformed large-caps by over 40 per cent in the last three years from 2015 to 2017. So, some part of the decline is to do with the earlier outperformance, the correction of excess valuation in many low-quality businesses. Overall, we haven’t seen any change in the underlying fundamentals and, in fact, are seeing signs of a pick-up in macro indicators and earnings.

Why are you launching a healthcare fund now, at a time when the earnings visibility on pharma stocks is so low? What about regulatory risks?

In our opinion, sectoral funds can have an allocation in one’s portfolio provided the theme has longevity, that is, there should be secular growth potential for a few decades. We already have a Consumption fund and we now propose to launch a Healthcare fund.

Over the next few decades, the requirement of healthcare will continue to grow globally, and more so in India. The recent headwinds, in our opinion, are largely factored into valuations. We are getting many growth businesses at reasonable valuations.

Mirae Asset’s equity schemes have managed very consistent benchmark outperformance for 10 years. That’s rare in the industry. How did you do that?

We would attribute the satisfactory track record to avoiding big errors. Mistakes in equity investing happen on two counts — stock selection and portfolio construction. We try to avoid taking very skewed or aggressive calls in terms of allocation to one particular stock, style or theme. While stock selection is the key to deliver a consistent performance, portfolio construction is equally important.

You are also very valuation-conscious. One of your regrets is that you booked profits too early in some of your multi-bagger holdings.

Yes, some of our omissions were linked to our conservative view on valuations. Post the global financial crisis, many weaker businesses collapsed, and didn’t deliver earnings. Simultaneously, there have been a few high-quality businesses with sustainable competitive advantage, which despite the macro-headwinds, delivered on earnings growth.

But considering earnings visibility alone can lead to missed opportunities. We have seen that whenever an earnings recovery takes place in value-oriented stocks, they deliver disproportionate returns.

Oil marketing companies five years ago, metals two years ago, or IT about one-and-half years ago, all of these didn’t have earnings visibility, but turned out to be very rewarding bets when there was a turnaround in earnings.

Such stocks also have better ‘margin of safety’ on valuations. The flip side to this approach is that you may either sell early, or miss out on some of the growth names.

On the SEBI categorisation, Mirae Asset Emerging Blue-chip has become a large- and mid-cap fund. Does that mean that the proportion of large-cap stocks will increase?

The fund was launched in July 2010, and since inception had 25-30 per cent exposure in large-caps, for three reasons. The investment should be based on the merit of business fundamentals of growth, quality and the size of the firm should not deter the decision. The earlier benchmark for the fund had about 40 per cent in large-caps; and large-caps do bring stability and liquidity to the portfolio.

Additionally, sector leaders have a better sustainable competitive advantage.

When the categorisation was contemplated, we had a choice to move either to the mid-cap category or move into the newly-defined Large and Mid-cap category.

Considering the size, flexibility, risk-adjusted return, and also the existing portfolio, we chose to move to the newly-created category of Large and Mid-cap. Mid-caps will still be more than 50 per cent, but the proportion of large-caps in the fund could increase by about 15 per cent.

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