Interview

This fund has been blowing its rivals out of the water. The fund manager explains why.

We interview with Mahindra Manulife MF's Fatema Pacha

This fund has been blowing its rivals out of the water. The fund manager explains why.

dhanak हिंदी में भी पढ़ें read-in-hindi

Forty-eight per cent of investor money in Mahindra Manulife MF's equity and hybrid categories rests on Fatema Pacha's shoulders. A fund manager at Mahindra Manulife Mutual Fund since October 2020, she co-leads eight funds - of which three have a Value Research Rating of 4 stars. One such fund is the Mahindra Manulife Aggressive Hybrid, which has consistently outperformed its average peer.

During our recent conversation, we asked her about the reasons behind the fund's amazing consistency. Beyond that, we also learnt about the fund house's investment philosophy and the sectors they currently favour.

Here is an edited excerpt from the interview.

Help us understand your investment framework. Mainly, how are stock ideas generated? And, are there any non-negotiables built into the framework?

We follow the GCMV process while evaluating every company. GCMV analyses every company Growth potential, Cash flow capabilities, Management quality and valuation comfort. Considering that Indian economy & markets are growth oriented, greater emphasis is placed on GCM while Valuations becomes a bit subjective.

A philosophy across all our funds is that we run portfolios using a blend of both growth & value. We don't have a set philosophy (Value or Growth). Reason being, the Indian economy and markets offer investment opportunities across companies to capture both earning growth as well valuation re-rating. The blend approach can result in a portfolio holding both, a Nykaa (currently a non-profit making company) and a Coal India (high dividend yield stock), at the same time.

Stock selection tends to be more bottom-up. Analysts and fund managers cover baskets of stocks based on macro themes viz. Consumption, Financials, Industrials, Exports and Commodities.

The entire electronic manufacturing theme recently got listed, and we saw an opportunity there and invested in some of the companies at time of IPO listing and they contributed significantly to the fund alpha.

Another theme is textiles, where we believe that growth in this sector can significantly add to India's exports and also aid employment generation. Investment yielded good returns in FY22 while FY23 was a tough year but we held on and at first sign of a revival in industry dynamics, we doubled the weights on these companies.

Besides such niche themes, there are broader themes like commodities, power, defence, and PSUs, all of which have been significantly played out in our funds.

On the risk management front, we have risk limits on sectoral weights as well to allocation to individual mid- and small-cap stocks. The limits are 2.5 per cent for small-caps and 3.5 per cent for mid-caps at the point of investment. Sectorally, sectors with index weights below 15 per cent, fund managers can be overweight or underweight by more than 5 per cent and for sectors with index weights above 15 per cent, it is +/- 8 per cent.

These limits are internal to the team and if any fund manager wants to run higher deviation, CIO concurrence is needed. CIO also has a list of stocks that are a no-go based on the history of management and/or the accounting and other practices of the corporations.

What role does the benchmark play in stock selection?

The fund is actively managed with the portfolio constructed as a bottom-up stock selection with macro sectoral overlay.

For top 5-6 stocks in benchmark where the weight is material one may need to check the benchmark to ensure the fund is running material active weight which can help generate material alpha when the view plays out.

However, beyond these few names it's very much a benchmark agnostic construct, incorporating the blend of stock and sectoral view of the fund manager.

Since its inception, your aggressive hybrid fund has been handsomely outperforming its peers. What has been working well for the fund?

Aggressive Hybrid Fund is a unique fund which allows the fund manager the flexibility of running an aggressively managed equity portion with the downside buffer provided by the 20-25 per cent debt portion. During the bullish market, the fund structure automatically forces the fund manager to do profit booking and similarly during bearish markets the fund manager is able to add more to existing positions to high conviction stock bets.

My thought process of running the aggressive hybrid fund is to have good alpha during the bull markets years and during the bear phase the objective is to protect the alpha created. For a consistent outperformance versus the peers, the bear market performance is critical as any underperformance in this phase can be difficult to recover.

The fund has benefited from a blend of top-down sectoral bets like Industrials, PSUs & Materials and bottom-up selection of mid & small cap ideas. FY21 & FY22 were very good years for the market and the fund. However, FY23, we had the overhang of the Russian war, crude and commodities spiked and caused an environment of high inflation globally forcing central banks to start hiking rates. As a result, FY23 was a year of negative return for the market but the fund generated alpha in that year as well. In a way it was a year of consolidation for the markets before it started the big rally of FY24, led primarily by the mid-and small-caps.

The fund had started to double up the weight to the mid & small cap segments by end FY23 as the valuations had corrected and we believed that the rate hike cycle was over. This significantly helped the fund generate material alpha in FY24 as well.

However, now the small-cap valuations look on the higher side and we are looking to trim, mostly small caps. Mid caps are still fine.

In Mahindra Manulife Aggressive Hybrid Fund, we see a mix of buy and hold and short-term bets in the portfolio. Are there any internally defined allocations across the two approaches (core vs satellite portfolio)?

The fund is managed as a mix of core portfolio which can have allocations to stocks where one doesn't have to worry about quarterly fluctuations and then there is a satellite piece where one can easily churn and there tends to be material volatility in the corporate profitability within the year based on underlying business segment.

The general thought process is that mostly cyclical stocks tend to have high churn. The best example is commodities. You may find a large-cap stock like Hindalco being traded in & out after making material returns in a short period of time as the volatility in its earnings allows the fund manager to trade.

Simultaneously, you will find some small-cap names held in the portfolio for nearly two years or more where there is a belief of a long term compounding story. However, it will be managed actively by adjusting the weights in the portfolio.

Basically, the churn is at a healthy level so, the weights keep changing based on the thought process and where the stock is in the cycle. It's not necessarily the market cap angle but the position sizing. A lot of mid and small caps have been held for nearly three years. The churn is more based on how the themes play out.

Our back-of-the-envelope calculation shows that the major contributors to the aggressive hybrid fund's outperformance in the last four years appear to be smaller holdings held for relatively shorter periods. How sustainable is it to generate alpha in such a manner?

Last 3-4 years the biggest alpha has been generated in the mid and small cap space, with the top heavyweight stocks barely managing to generate any material alpha over the index.

The fund has gained materially from the mid and small-cap selections where the lot of the stocks have become 3-4x.

But there have been times when bluechips (large caps) do well, and you make money when they generate material alpha over the wider market. For example, large caps like Tata Power and Coal India doubled last year in a very short period of time. Hindustan Aeronautics has also quadrupled. It's a large-cap company now, but when it first entered, it was a mid cap. So, some of these themes are there but it's mostly PSU within large-caps that have done well in the last 3 odd years.

My objective is to keep my ears to the ground and capture any attractive pockets in the market where a catalyst can lead to a narrative change for the sector or stock and give material outperformance for the fund.


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