Riding on Growth Ideas

Taurus Discovery had a blockbuster run in 2012. Sadanand Shetty, fund manager, Taurus AMC, speaks to Varun Chabba on the tactics and strategy adopted for the fund's successful run. To what factors do you attribute the blockbuster performance of Taurus Discovery in 2012? In 2012, the BSE Sensex was up 25.7 per cent but the real story was told across mid-cap companies. The CNX Midcap index delivered 39.16 per cent and 42 per cent of the CNX midcap companies delivered more than 50 per cent and up to 173 per cent returns. At least 50 per cent of these are of high quality, well managed mid-cap companies with good institutional presence and track record. Taurus Discovery has been able to identify and hold many of these high quality companies in its portfolio in a turbulent market. Our team's ability to spot winners in difficult market situations has helped Discovery reach the top slot. These are all absolute bottom up ideas and one can characterise them as re-rating stories, earnings surprises, distress valuations, turnaround stories, reforms and policy beneficiaries. What factors do you keep in mind when selecting a stock for this fund? Our identification of mid-cap ideas is entirely dependent on where we stand in a cycle of economic growth, and what that means for the mid-cap cycle. It is never an isolated effort. We do not indentify bottom-up stories without taking cognisance of the underlying cycle of larger economy and themes that can be played in the cycle. While in 2011, our focus was to protect the capital and generate absolute return in a falling market, we changed that strategy in the latter part of 2012. We were able to indentify growth stocks in falling markets, re-rating stories on the back of specific reform initiatives; we looked at companies with sound business but at stressed valuations. We also took many short-term opportunistic calls in a volatile market. It is extremely important to understand the underlying cycle in the case of mid-cap companies, because all market rallies do not result in outperformance for mid-caps. There were three instances in 2005, 2006 and 2011, when the CNX Mid Cap significantly underperformed the Sensex in the past 9 years. Periods of slowdown not only cause damage to earnings but also inflict far greater damage to valuations of mid-cap companies as allocation of assets moves towards relatively safer large-cap companies and also weaken the exits from these companies. Such market dynamics cause substantial damage to stock prices, even for the most well managed companies. This gets exactly reversed in a recovery or growth market. We take cognisance of many such historical trends while building the mid-cap portfolio. Identification of the underlying economic cycle helps us decide about the portfolio composition; whether it should be concentrated or diversified. We decided to take a relatively concentrated bet in 2012 as we thought high conviction and