Buying Quality at Reasonable Prices

Neelesh Surana, fund manager, Mirae Asset India Opportunities, talks about the fund's investment strategy that is driven by a focus on holding high quality stocks for an extended period.

What is the Investment strategy for the fund? (Including internal rules investment universe, capitalization orientation and on maximum cash allocation)
Our investment philosophy is centred on participating in high quality businesses upto a reasonable price, and holding the same over an extended period. Focus is on stock selection driven by individual merit of business. Our team has a disciplined approach to investing, with focus on quality up to a reasonable price, i.e., avoiding very expensive stocks or cheap stocks where quality (of business/management is compromised). From portfolio construct perspective, the approach is to have diversification across sectors and stocks for an optimal risk-adjusted return. In terms of market capitalization, the large cap ratio (i.e, top-100 companies) is usually between 70-80%, while the remaining is midcaps. We do not keep cash balance, which since inception has not exceeded 5%.

What are the essential attributes for the stocks to be in our portfolio?
Stock selection process has three aspects: Business selection, Management analysis, and Valuation. We look for quality businesses with decent growth prospects as well as return characteristics (i.e. Return on capital employed). These two parameters are crucial initial filters. Second aspect is with respect to management analysis, which is a bit subjective but you have to look at the track record and corporate governance. A well-managed company will have better capital efficiency so the ROE's tend to be better than in the same sector. The last factor is to arrive at a particular value. Value has to be more than the market price so that there is enough 'margin of safety'.

What kind of stocks never enters your portfolio?
We would avoid stocks which do not meet basic criteria of Growth, Return on Capital Employed (ROCE), comfort with management etc. We avoid companies where minimum operating profit is less than ₹80-100cr.

What will you attribute the relative consistent performance of your fund in recent years?
Mirae Asset India Opportunities Fund (MAIOF) has since inception, i.e., over the last 7 years, delivered a return on return of 18% compared to the benchmark return of 9.5%, thereby generating alpha of about 8.5% CAGR. We have generated returns over the benchmark, by being in the right pockets, as divergence across sectors and stocks with sector was significant in the last seven years. Disciplined approach to investing, with focus on quality up to a reasonable price along with diversification, has helped us deliver this satisfactory track record.

Any tactical miss you regret (not having, or not having enough or holding something) in your portfolio?
Regrets are more related to errors of omission - these are mainly stock specific, wherein we did not participated in a good business for varied reasons primarily being understanding related to the potential of business.

Please click here to read the analysis of this fund.