Venugopal Manghat, fund manager, L&T India Value Fund gives his views on the midcap fund.
What is your investment universe?
We have a vast investment universe of around 1500 stocks as this fund does not have any sector or market cap restrictions. However, given the value focus of the fund, the number of stocks that qualify for including in the portfolio could vary across time as different stocks may fall in value zone at different points of time.
What attributes should a stock have for it to become a part of your portfolio?
The focus while picking stocks for this portfolio is on identifying valuation anomalies versus the economic potential of the business over a period of time. We look to own stocks with higher margin of safety – i.e. stocks where the assessed value is significantly higher than its current valuation. While assessing the value of a stock, we assess its growth potential, cash flows, dividend payouts, subsidiary valuations, sum of the parts, etc. Hence the focus of the fund is on buying good quality companies available at a discount to fair valuation and avoiding value traps. We look at the valuation of a stock vis-a-vis its (a) earnings growth prospects, (b) historical long period valuation, and (c) relative valuation compared to peers. The valuation model/metric used also vary across businesses.
What kind of stocks never enter your portfolio?
I typically avoid buying into stocks that have no or very low margin of safety. Momentum stocks - where prices factor in significantly higher business growth compared to market over a sustained period of time - is what I stay away from as even a small deviation from such high expectations could have significant negative impact on the prices of such stocks. Also, businesses, where we believe there are serious corporate governance issues, are unlikely to be part of my portfolio.
What will you attribute the relatively superior performance of your fund to in recent years?
I believe the consistency in performance of the fund is largely on account of our superior stock selection, which is a result of (a) our experienced investment team and (b) our strong focus on investment process and risk management. Our bottom-up investment approach with focus on investing in undervalued businesses has aided in significant alpha generation. Moreover, we have a very flexible approach in terms of fund’s exposure to sectors and market cap segments which help us explore value investment opportunities across the market spectrum.
Is there any tactical miss you regret (for instance, not owning a stock or not owning enough of it)?
Given the dynamic nature of the market, there will always be instances where you did your due diligence but missed buying altogether or buying enough at your price level for various reasons. In such cases, I re-evaluate the stock to see up to what price I can buy the stock with adequate margin of safety. If that is not possible one looks for other opportunities. Such misses do not affect me because I believe there are enough and more opportunities in the market and if one stock is missed there will be others which are better, provided one works hard to unearth them.
This article was originally published on May 25, 2017.
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