Mid caps yes, small caps no

It was small. It had no cosy tie-ups with bank distributors. Its sponsor, a financial-services group in South Korea, wasn't a familiar name in India. And to top it all off, Mirae Asset Global Investments kicked off its India foray at a very rocky time for the markets - November 2007.

But if you thought all the odds stacked against it would have prevented this AMC from making it big, that is not the case. Mirae Asset has turned out to be one of the dark horses among newer AMCs and is leading the race. Both its large-cap fund Mirae Asset India Opportunities and mid-cap fund Mirae Asset Emerging Bluechip have climbed on the popularity charts and have retained a five-star rating from Value Research quite consistently.

Curious about the man behind the fund performance, I decided to interview Neelesh Surana, Chief Investment Officer - Equities at Mirae Asset.

Performance comes first
I quiz him about the story of Mirae first. Given that Neelesh has been with Mirae since 2008, was the debut year very hard for the newbie AMC?

"Yes it was," recalls Neelesh. "The assumptions of any business which was conceptualised in 2007 were challenged strongly by the slowdown in 2008," he says, putting it in his sober fashion. "When the fund was launched, no one anticipated that domestic equity flows would be negative for six years after that. This business in any case requires a long gestation period to build the brand, perception and performance. So we didn't acquire AUM easily. It all the came the hard way. It took four-and-a-half years for India Opportunities Fund to grow to a Rs 200 crore size, but in the next four-and-a-half years we have seen good growth, with the fund AUM crossing Rs 3,500 crore."

He adds, "We found that after we were able to demonstrate three- and five-year performance, we got traction on inflows. If you look back at our performance, you will find that our funds have never had a phase where they slipped into either the third or fourth quartile. They have mostly been in the first quartile and occasionally in the second."

So what did Neelesh do before his nine-year stint with Mirae? He explains that he has been in equity research throughout. Prior to Mirae, he worked for ASK Investment Managers, managing money for high-net-worth clients for about five years. The eight years before that saw him on the sell side with broking firms.

Mid caps yes, small caps no
So getting down to the brass tacks, does he think the valuations of mid-cap stocks are frothy? I have read up from previous interviews that he is not as bearish on mid caps as a category as some of his colleagues.

"See, we cannot say that money will not be made in mid caps. There continue to be selective opportunities. But that said, some pockets are getting overvalued," he begins cautiously. "The mid- and small-cap basket is 400 or 500 stocks. Even if 10 or 15 per cent of that is investment worthy, a fund like ours still has enough opportunities. We also expect IPOs to expand the mid-cap basket, though stocks like D-Mart have gone straight into the large-cap space," he rues.

"While we wouldn't recommend anyone to be overweight on the category, we don't think the weight should be zero either. An allocation of 20 or 30 per cent in the portfolio would be fine. In our own mid-cap fund, we do have a one-third allocation to large caps or larger mid caps," he explains.

Despite being quite a strong contender in the mid-cap space, Mirae prefers to limit exposure to the fancied micro-cap segment of the market. The fund house likes to invest in companies with a minimum Rs 100 crore EBITDA. Why is this?

Neelesh cautions, "This is not an official mandate that we have; it is not in the offer documents of our schemes. But yes, we do prefer businesses with a minimum Rs 80-100 crore EBITDA. The whole idea in mid-cap investing is to identify businesses that can make the journey from a small to mid to large cap. We find that very tiny companies really struggle to make that journey. A lot can go wrong even as they scale up. Typically, when companies reach a reasonable size, say, Rs 100 crore in EBITDA, that scalability becomes easier. Plus, we would not like to get stuck on the liquidity front with tiny caps in the current market."

He believes that in 2013, microcap investing made a lot of sense because even reasonably good businesses were available in that market-cap range. "In 2013, small-cap stocks were quite cheap after five years of underperformance. That's why many of them have delivered multi-bagger returns. But now people are looking at past returns to conclude that micro caps are the segments to find multi-baggers. That is incorrect as such returns are only possible from a very low base."

Price is important, too
Mirae is among the Indian AMCs which have a quality-oriented framework to select stocks. But many of the quality-chasing AMCs have faltered and slipped sharply in the return rankings since 2015. How come Mirae, despite being quality oriented, has outperformed in the last two years, I ask curiously.

Neelesh attributes this to a timely shift in the fund's strategy two years ago. "We have had a lot of internal conversations on this. A couple of years ago, we took the view that the quality space was quite overcrowded. As we see it, there are three aspects to the investment strategy. You look for stocks with an extraordinary business, extraordinary management and reasonable valuations. A year ago, the third piece went for a toss - many investors were not looking too closely at valuations if they found a great business. In effect, they were unwilling to take business or financial risk, but in the process they ended up taking on a lot of valuation risk!" It was that risk which played out adversely for investors, feels Neelesh.

"A quality stock cannot be a good investment at a 30 P/E and also again at a 60 P/E. We saw many quality stocks moving into that zone. We also saw a turnaround in the macros and felt that the polarisation in valuations has to revert to mean at some point in time. We saw a similar situation in 1999 when FMCGs were at stretched valuations and for the next decade, you didn't make much money on FMCG stocks. When the starting point on valuations is wrong, long-term returns will suffer."

This decision to stay away from quality stocks with rich P/Es, helped Mirae participate strongly in the rally over the last two years.

Metal miss
But I'm keen to know if Mirae managed to buy the one dark-horse sector that has simply galloped. Metals have been the top-performing sector in the last one year and, let's admit it, very few fund houses have participated in this cyclical opportunity.
I pop the question. Neelesh admits that though Mirae did spot the best time to buy metal stocks, it didn't own a large exposure. "We did participate, but not to the extent we would have liked. Early last year, metal prices had collapsed below the cost of production. It was a good time to buy. You buy commodity stocks at a high P/E when earnings are depressed. But the problem was that we didn't find too many investment-worthy names in the space without balance-sheet risks. We did own Tata Steel but not much else," he says with some regret but "because we do peg our portfolios to the benchmarks, our weight in metals never went to zero at any time."

I ask the uncomfortable question. How is Mirae coping with the exit of Gopal Agarwal, whose great perspectives on the macros and clear views on strategy, have helped Mirae ascend the popularity charts?

Neelesh explains that Gopal's exit hasn't been as disruptive as it could have been because of his role change at the AMC. "For about a year, Gopal had been handling the role of a chief strategist and CIO for both debt and equity. So he was more involved with aspects such as broad strategy and business development and wasn't hands-on with fund management. We have a six-member research and investment team, headed by me, which has been managing the equity funds since inception."

He further adds, "This is not to say that his exit is easy to handle as his inputs and insights to fund management were really valuable. But we have been adding to the fund-management team to cope with such eventualities. We have hired a new fund manager and a head of research. We are constantly investing and improving our processes."

Errors of omission
So getting down to the personal stuff, I ask Neelesh about his own investment mistakes from his long stint in equity research.

Neelesh is a little vague on this. "In my case, the mistakes are more stock related. I can't think of industries on which we went overboard and which went wrong. I have made quite a few mistakes, of course, but these were mostly errors of omission, not commission," he says.

This is a little-talked-about aspect, he feels. "In our industry, there is a tendency to talk about stocks that have worked and those that haven't. But if a stock has delivered and you didn't buy it, that is an error of omission and is definitely worth evaluating. In our case, I would say that not participating in stocks like Eicher Motors early enough was a mistake. When we took note of the stock, we didn't find comfort on valuations and had to let the opportunity go. Frankly, at any point in time in this business, you would find eight-ten stocks in the market that you have missed out on and eight-ten stocks in your portfolios that you didn't buy enough! It's a constant dilemma that we have, especially when we can only hold 90 or 100 stocks across our funds."

So how does he cherry-pick these 90 or 100 stocks from the vast Indian listed universe of 6,000 companies?

"We keep our investment universe to 250 stocks, for which we do actual financial models and projections. These stocks are primarily selected through a BMV framework (Business, Management, Valuation). We look for a 15 per cent ROI, growth that is in line with P/E and weights relative to the benchmark. We try to arrive at a single number that represents each stock's intrinsic value. If the price is lower than that value, then we actively consider buying it."

The 'M' part of the BMV is a combination of qualitative and quantitative factors, he explains. "There are quantitative ways to evaluate management - you can look at dividend payouts, capital-allocation policies. But a lot of qualitative judgement is also involved. Your perception of 'good' management may not be mine. This is very important in India. So with each company, we debate whether the management has the ability to spot trends in the industry ahead of others, the energy to execute and the ability to capitalise on opportunities."

So where does Neelesh invest his personal wealth? I get the standard answer: "here." Almost all of his money is in equities and almost all of it is Mirae funds. With all his money invested in equities, how does he cope with emergencies?

That draws a laugh from this very serious money manager for the first time. "Well, there is the salary every month to handle it!"

But he gets back into official mode again by saying, "But seriously speaking, all of my investment is in open-end funds, so I do get liquidity when I need it. You always have older investments that are in profits which you can redeem in case of need. As a fund manager, you cannot invest directly in stocks due to compliance issues. And in any case, in India, you do have the confidence that over the long term equity funds can deliver 15 per cent. Actual returns have been at even 18 or 20 per cent. So why would you consider anything else?"

He tends to maintain equal allocations across Mirae funds like Mirae Asset India Opportunities Fund, Mirae Asset Emerging Bluechip and Mirae Asset Taxsaver Fund. "I invest whenever I have surpluses. I don't wait for the market to fall, etc., because I have found one can't really manage that timing," he admits.

Like many other money managers, Neelesh believes that low rental yields make renting a vastly better option than buying property in India. But he is pragmatic enough to have bought one piece of property, which is under construction. "See, rental yields in India are extremely attractive. But the problem is that you don't usually get rental contracts for ten or 15 years; you only get short-term contracts that make you move around a lot. If we had long-term rentals, it would make a lot of sense to live in rented homes all the time."

Hobbies
So what does Neelesh do to unwind? What are his hobbies? He is nerdy enough to admit that he doesn't get enough time outside of work to pursue hobbies.
But after a very straight-laced interview, I discover that there's one unexpected subject that gets Neelesh really animated - Bollywood. "I watch quite a number of Hindi movies," he says, adding that he recently watched Badrinath Ki Dulhania, Lion and Mukti Bhawan. He goes on, "There are now quite a few Indian directors I really like. The quality of Indian movies has really improved in the recent years. The subjects are so diverse and refreshing compared to those in Hollywood. The kind of directing talent India has is amazing!"

I am overjoyed to find that Neelesh is down-to-earth and doesn't pretend, like some snobbish folk, that everything Hollywood churns out is superior compared to Indian movies. We have a long chat about Hindi movies and conclude that even masala movies in Bollywood are quite slickly taken and sometimes Hollywood movies seem over-dramatised.

But true to his profession, Neelesh believes in doing his homework before spending his precious time on a movie. He checks out all the movie reviews and only watches those with good star ratings.

Well, that diligence is probably the reason why Mirae funds have also retained their stars with such consistency!