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New stock ideas fuel superior performance

We focus on companies that are going through a transitional phase of weak earnings though their past operational history has been above average, says Lalit Nambiar, fund manager, UTI Mid Cap

As stock market movements are cyclical in nature, no stock will remain a permanent "pariah". However, we would limit our enthusiasm for "perpetual" turnaround candidates, says Lalit Nambiar, fund manager, UTI Mid Cap.

New stock ideas fuel superior performance

What is your investment universe?
Stocks excluding those part of the Sensex, Nifty and outside top 50 in terms of market cap form the investment universe for this fund. As an internal norm, we rarely go below ₹.500 crs. market cap. Our focus area is companies with market cap of ₹5,000 crs. to ₹20,000 crs.

What attributes should a stock have for it to become a part of your portfolio?
At the portfolio level, we would focus on companies which are going through a transitional phase of weak earnings though their past operational history has been above average. We generally focus on companies where earnings growth could surprise positively. At times, if factors positive for a company are generic to the industry, then we take an industry based approach and buy a cluster of companies of the same industry, rather than building a large position in a single stock.

The company should have a track record of generating positive operating cash flow (PAT plus Depreciation less change in working capital) for at least 3 out of 5 years on a historic basis. We will also be conscious of liquidity of the fund and limit exposures in individual companies to reasonable levels in order to minimize impact cost.

What kind of stocks never enter your portfolio?
As stock market movements are cyclical in nature, hence no stock will remain a permanent "pariah". However, we would limit our enthusiasm for "perpetual" turnaround candidates, which usually sprout when markets are positive on mid caps. While it is possible that we may invest in companies which do not generate positive operating cash flow consistently, if we do succumb to such temptation, we would limit such stocks to less than 1% - 1.5% of the portfolio on an individual basis.

What will you attribute the relatively superior performance of your fund to in recent years?
It could be attributed to our focus on stock selection. Also that we added new stock ideas rather than to existing stocks beyond a threshold, made the fund strategy scalable and returns consistent over time. The stability of our research team and the maturity of their skill also helped in identifying new opportunities.

Is there any tactical miss you regret (for instance, not owning a stock or not owning enough of it)?
NBFCs and Oil marketing companies have outperformed in last 1 year. For various reasons, our investment in these segments was lower than what we should have ideally held.

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