Among the top 15 performing funds on a 3-year time horizon, the diminutive Motilal Oswal MOSt Focused 25 Fund isn't as popular as some of the big schemes. Siddharth Bothra, Senior Vice President & Fund Manager, Motilal Oswal AMC, in an interview with Kumar Shankar Roy, explains the 'QGLP' investment philosophy that drives the fund. He also says why 25 stocks is all it takes to make a great portfolio, and how the fund's relatively high portfolio turnover signifies the evolution of the product. He also makes a strong case for large-caps compared to mid-caps in the current scenario.
Edited excerpts
Tell us about the investment objective and portfolio construct of Motilal Oswal MOSt Focussed 25 Fund.
The investment objective of Most Focused 25 fund is to create long term sustainable wealth for investors. We seek to achieve this investment objective by adhering to our investment philosophy and process, which we acronym as ‘QGLP’, wherein ‘Q’ stands for quality of business and management, ‘G’ for growth, ‘L’ for longevity and ‘P’ for price. Given, that the Q*G*L*P investment framework is a multiplicative one, if any of the four parameters fails and is a zero, it negates all the others.
Our fund construct is a focused and concentrated holding of around 18-20 stocks, with top five stock holdings accounting for almost ~40% of our holdings. Given that we are bottom-up investors, almost ~60% of our portfolio holdings by weights is in active investments viz-a- viz our benchmark CNX Nifty 50 Index. A high active investment ratio is a necessary prerequisite to our mind, for any fund targeting to generate alpha for investors.
Is there data to show that 25 stocks give the optimal 'focus' your fund needs?
We believe in the power of focused and concentrated investing. Hence, the strategy we have adopted precludes us from following standard diversification dogma. A concentrated and focused portfolio decreases risk, as it raises both the intensity with which an investor thinks about the business and the comfort level he must feel with its economic characteristics before buying it. Generally, if we don’t like something enough to own at least a 5% position in it, we wait to find some better idea. Put another way, if the only way one feels comfortable about an idea is to own less of it, it tells something about the quality of that idea.
Furthermore, empirical studies have shown that unsystematic risk as evaluated through standard deviation reaches optimum levels once one diversifies across 20-25 stocks. Post this any further diversification does not bring down the unsystematic risks much. In fact, it has been observed that in the event of excess diversification the unsystematic risk actually increases (Source: An introduction to risk and return concepts and evidences by Franco Modigliani and Gerald A.Pogue).
Both the fund manager and co-fund manager of this scheme are new at managing this particular product. Were there any challenges when you started managing Motilal Oswal MOSt Focussed 25 Fund?
I have been involved in managing this fund since inception and was a co-fund manager for the fund before I took over as the lead fund manager. Also the co-fund manager has been an integral part of our fund management team since inception and manages several other key funds. As such there was no particular challenge in this regard.
Typically what type of companies do you avoid for Motilal Oswal MOSt Focussed 25 Fund?
Firstly, given we are long-term investors, when we look for stock ideas we are looking for companies which we can hold for 5-10 years. Hence, for companies wherein we find it difficult to visualize and understand its business and economic characteristics over such time periods, we give it a pass. Secondly, for companies which pass our first filter, we pass it through our ‘QGLP’ framework. For all companies which pass through these two tests we then evaluate it against our existing or other portfolio ideas for investment attractiveness.
Motilal Oswal Asset Management Company (MOAMC) celebrates the 'Sit Tight Approach'. But then why is latest portfolio turnover for Motilal Oswal MOSt Focused 25 Fund so high (87%)?
You are right in pointing out this anomaly. But this has been largely due to the evolution of the fund. When the fund was initially incorporated it had a wide investment universe, as it was the first active investment fund of our AMC. Subsequently as the AMC evolved and we broadened our investment products, the investment universe and positioning of Most F25 fund underwent some transition. All this resulted in some undesired churn. Going forward, given that the fund now has a distinct positioning as a large cap fund we expect its churn rates to be more reflective of our style.
How do you select companies with long-term sustainable competitive advantage and growth potential for your portfolio?
To evaluate the ability of a company to generate long-term sustainable advantage, one needs to ascertain two parameters. Firstly, study its strategy to understand how the company aims to capture a share of the value it creates and secondly, how it plans to sustain its returns over a fairly long period of time.
An industry value chain analysis is helpful in getting an understanding on how well the company is positioned to create and capture value. For ascertaining the more challenging part of whether it would be able to sustain returns, one will need to do an economic moat analysis. From our past experiences, we have seen that successful companies, which have created sustainable wealth in the past, have ‘multiple’ and ‘widening’ moats.
The current expense ratio for the regular version of Motilal Oswal MOSt Focussed 25 Fund is 2.66%. Is there a roadmap to lower this because some peers have lower expense ratio while not slipping up on performance?
The fund size is currently small at (about) Rs 5 billion, hence the cost appears higher based on regulatory cost distribution based on size. As the fund becomes bigger the current cost expense will fall in line with our other products.
Why are you more bullish on large caps vs midcaps?
We believe for the medium term the risk-reward is more favourable for large caps vs the midcaps. Over, CY14-16, the CNX Midcap 100 Index has generated 21.2% CAGR returns, while the large cap CNX Nifty Index has generated 9.1% CAGR returns (Source: Bloomberg), which is a ~12% CAGR variance between the two indices over CY14-16. While, this variance can only be partly explained by factors such as superior companies composition in mid cap index or earnings disparity between the index, part of this divergence can also be attributed to more liquidity chasing midcaps during this time period. This is also reflected in the valuation ratios of the two indexes with CNX Midcap 100 Index trading at 29.3 times PER FY17, while the CNX Nifty is trading at 21.9 times PER FY17 (Source: NSE Website). We believe, as earnings trajectory for large cap gains traction, the large cap performance could mean revert.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
