Our interaction with Lalit Nambiar, fund manager, UTI Mid Cap Fund
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 Rs 500 crs. market cap. Our focus area is companies with market cap of Rs 3,000 crs. to Rs 25,000 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 ideally 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 and experience 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)?
We would have preferred to have more exposure to small finance bank IPOs given the attractive growth prospects and predictably these did particularly well in the last few months post IPO. However at UTI MF we follow a fair and non-discriminatory allocation practice across fund schemes, and the share and thus concentration in, these IPOs was lower than few of the peers.
This article was originally published on May 29, 2017.
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