GARP is the Strategy to Follow

Since the market today is not cheap and the valuation differential between large caps and mid and small caps has narrowed, GARP is the strategy to follow, says Pradeep Gokhale, Fund Manager of Tata Tax Saving Fund, in this quick chat with Vibhu Vats. How do you select a stock? At Tata Mutual Fund there is a system of approved universe, which has some 400 stocks. A Tata fund manager has to select stocks from this approved universe. This universe is reviewed once a year for deletions. However, additions can be made to it anytime. The universe can be divided into two categories. First, we have core companies, in which the bulk of investment is made. Core companies typically have features such as compounding characteristics; strong growth potential; good management; good capital efficiency; strong entry barriers in business such as strong brands, a superior technology, etc. The advantage of investing in such companies is that even if your entry is mistimed, the downside is limited as these companies can grow well. Such businesses are what I call high-quality businesses. The second set of the universe is more opportunistic in nature. It comprises okay businesses, which could be a good investment at a certain valuation. We have certain parameters to evaluate a business. These are: Efficiency in use of capital and return on capital employed (ROCE): Over the long term, this parameter shows how good companies are in their areas of business. During a bad phase, the ROCE may decline but over a long term good companies maintain a decent ROCE. Management quality and corporate governance: How fair the management is with