Gautam Sinha Roy of Motilal Oswal MOSt Focused Multicap 35 says rebalancing and avoiding value traps have resulted in the fund's outperformance.
The fund has contained downside well over one year. How have you managed this?
A year back, the valuations of a few of our stocks hit stratospheric levels. Hence, I rebalanced the portfolio towards stocks which had good earnings growth but were still available at reasonable valuations. Staying out of hope-based value traps also helped.
The fund has also consistently beaten its benchmark since launch. What is the reason for this?
Stock selection is the key reason for the fund's performance. I avoided short-term traps, which look alluring but destroy value in the long term. I follow a qualitative cum quantitative process of portfolio construction, rebalancing and risk mitigation. The important thing is the diligent application of this process on a continuous basis.
What kind of stocks enter your portfolio? What kind of stocks never do?
Our stock selection itself is based on our investment framework of QGLP (quality, growth, longevity and price). We underpin stock selection with our understanding of long-term macro trends. Any company which does not pass our QGLP filter is not deemed to be a long-term wealth creator and cannot enter our portfolio. We also shun short-term trading ideas as a rule.
When do you decide to sell a stock?
We like to remain invested in a stock which continues to fit into our investment framework of QGLP. We continuously monitor our holdings for their adherence to the framework and trim allocation if some deviation to our benchmarks happens in terms of quality, growth, longevity or valuation. In the case of a sustained major divergence, we decide to sell. For example, if the longevity of a franchise is threatened due to a certain disruption, we might sell the stock. Also, if the valuation sky-rockets and I feel that return expectations from the stock have hence become negative over the coming year or two, I sell.
How do you determine allocation to large, mid and small caps? Does it vary or stay constant?
Our stock selection as well as allocation is purely bottom-up. We allocate funds in the order of our conviction in the long-term return potential of the stock. We have no set benchmarks for market-cap categories, and, historically, our allocation to mid versus large caps has varied a lot and it will be so in the future, too.
Your current portfolio has no small caps. Is there any specific reason for that?
We find enough opportunities for superior long-term returns in the broader market because we can invest in any market-cap categories. We also want the portfolio to be scalable and hence do our stock selection accordingly.
How have you positioned your portfolio for the future? Are you interested in any particular themes?
We look for deep and growing profit pools and businesses that have huge competitive advantages. We are great believers in consumption as a theme and within that especially the growth in aspirational consumption with increasing per capita GDP levels in the country. We also see long-term wealth creation in companies benefiting from value migration from the old to the new. Banking is one such space where we see accelerating value migration to strong private banks which have no legacy NPA issues and are leveraging fintech to grow profitably. We like companies which will benefit from some of the ongoing disruptions in the internet-of-things space and increasing automation in IT. The home-building space (with its allied sectors) is a long-term favourite, too. The government's focus on structural upliftment of the rural economy makes that segment attractive for stock picking.
This interview appeared in the July 2016 Issue of Mutual Fund Insight.