personal finance

Diversification is in-built in the large & mid cap category, says Miyush Gandhi of Canara Robeco Mutual Fund


“We try to mitigate risk through portfolio diversification and avoid concentrated bets. Exposure to any individual mid or small cap stock is restricted to not more than 3.50% of the portfolio,” says
Miyush Gandhi, Fund Manager, Canara Robeco Mutual Fund, in an interview to
ETMutualFunds.Com.

Canara Robeco Emerging Equities Fund has recently seen some changes in the fund management team. The scheme is known for its consistent performance. Will the change in fund management disrupt the performance of the scheme?

While we have seen some changes in the fund management team, the underlying investment philosophy and process continues to remain the same. We believe it is companies and not stocks that create wealth over long term and therefore our endeavour continues to remain the same, which is to invest in companies that have robust growth-oriented business model which are managed by competent management and are available at reasonable valuation.

Canara Robeco Emerging Equities Fund has been the topper in the last five- and 10-year periods with 13% and 18% CAGR returns respectively. In fact, the scheme managed to remain in the top quartile in six out of the 10 calendar years in the past. How did the scheme manage this?
We believe the portfolio returns are an outcome of the strategy you follow. We follow a combination of top down (macro economy, sector outlook) and bottom up (stock specific) approach. Macroeconomic indicators are analysed and evaluated for their impact on sectors to decide on overweight and underweight positions. Individual companies are evaluated on the BMV framework (Business strength, Management quality and Valuations vis a vis growth) to create the actual portfolio that is best positioned to benefit from the expected macro/sector outlook. In line with our philosophy, the fund has a bias for growth over value in terms of stock selections. Because of our quality bias, we are able to hold well during draw downs. Our strategy continues to remain the same, while outcomes may vary over time

Even though Canara Robeco Emerging Equities Fund has been a consistent performer, it failed to manage the market downside in the last three years, shows Morningstar data. The scheme has a downside ratio of more than 100, which shows that the scheme has lost more than the index in the down-markets in the last three years. Given the importance of downside protection, how do you explain this? Won’t it pull down the long-term returns of the scheme?

In the last three years, the fund has outperformed the index and remained in the 1st quartile. If you see mid and small cap stocks, where the fund has higher allocation, have underperformed meaningfully their large cap peers. Further, we have restricted cash to a maximum of 5% of portfolio. We try to mitigate risk through portfolio diversification and avoid concentrated bets. Exposure to any individual mid or small cap stock is restricted to not more than 3.50% of the portfolio.

Canara Robeco Emerging Equities Fund is heavily invested in banks with 26% portfolio in them, followed by 8% in pharma companies. Among banks, the tilt is towards private sector. Kindly comment.
While the economic slowdown is not good for banking sector as such, we believe within banks, private sector banks are in a sweet spot. On the liability side, the liquidity in the system is abundant and cost of fund is reducing while on the asset side competition from NBFC’s for retail assets and PSU banks for corporate assets is moderating. With improving asset quality and abundant capital available, we expect the market share gains to accelerate going forward. While in pharmaceutical sector the US generics business has seen deterioration in fundamentals with price declines and increasing working capital, the Active Ingredients/Contract Research space continues to grow and look good. We also like domestic focused pharma companies where we are seeing acceleration in growth while valuations are still reasonable.

The scheme’s factsheet mentions, ‘The fund endeavors to identify the stars of tomorrow within the large and mid cap segment.’ What is your strategy to identify the stars of tomorrow?
Empirical evidence suggests companies that have distinctive competitive advantage (which implies business moat) that are gaining market share (which implies higher growth), are able to generate its own growth capital (implies good ROCE) and are backed by competent management have been able to successfully transform themselves over time from being small to mid to large. While growth is an essential condition, sustainability and longevity of growth is equally important from a long-term value creation perspective.

The large & mid cap category that Canara Robeco Emerging Equities Fund belongs to is not fully understood by investors and to an extent by advisors. Who do you think should invest in the large & mid cap category? What kind of precautions should they take, considering the category is mandated to invest 35% in mid cap stocks?

Most investors invest in multiple schemes to diversify their investments across market caps based on their individual risk appetite. This diversification is in-built in the large & mid cap category as it requires the fund manager to invest minimum 35% in large cap stocks, 35% in mid cap stocks, and the rest 30% allocation is market cap agnostic.

What do you want to tell the investors in Canara Robeco Emerging Equities Fund?

Emerging Equity Fund provides an opportunity to invest in a diversified portfolio of growth-oriented large & mid cap companies. It has a successful track record of generating alpha over long periods of time and hence it is suitable for investors who are willing to take moderately high risk with an investment horizon of 3 to 5 years with SIP as a preferred investment tool.





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