Sachin Relekar, Fund Manager at LIC MF Midcap Fund gives us his view on stock selection and mid-cap valuations
What has resulted in the outperformance by your fund in the last one year?
A process-driven approach and a clearly articulated investment framework have helped us deliver consistent performance over the long term; our process typically identifies the opportunity set, along with the risks involved.
How do you select stocks for this fund?
The Midcap Fund is managed as per the growth philosophy. It consists of five parameters:
The first two parameters are about risk management. After the stock clears them, we look at the next three. Once a stock has cleared these parameters, we look at what the reasonable price for it is.
When do you sell a stock?
We review our investment universe quarterly. We also conduct a rigorous annual review. The objective of the review is to look for changes in the investment as per the parameters outlined. When the parameters are expected to deteriorate, we start reducing and exiting the position.
What do you do to contain volatility in the fund?
This needs to be viewed in the context of time frame. Over the long term, returns will track quality and growth in earnings. We focus more on this aspect.
Our fund is comparatively more concentrated. Our concentration is higher in the top 10 holdings. We think allocating meaningfully to conviction calls is important. At the same time, we like to give time for the investment argument to play out. On a risk-adjusted basis, this should result in better performance.
Are mid-cap valuations stretched?
I agree with you on valuations. If we look at outperformance of mid caps over large caps over the last three-four years, it is significant. This has driven the valuations of some of the companies to unattractive territory. Therefore, as a category, one needs to be cognizant of this fact. We think that going ahead, category outperformance over large caps will not be as large as it was in the last three-four years.
However, the mid-cap universe is very large; there will be many undiscovered or less understood businesses. Business landscape is changing very fast, and there will be businesses which will be at the core of this change. Large winners will come from this space. One should remain on the lookout for such ideas.
As compared to the category, you are overweight on large caps. Do they look attractive now?
We have discussed valuations and outperformance of mid caps above. However, it should not be interpreted to imply large caps are now more attractive as a category. It is important to evaluate an investment on an individual basis.
What sectors are you bullish on and why?
We follow a bottom-up approach. Sector allocation is outcome of the stock-selection process.
We have a comparatively positive view of the domestic-economy-oriented businesses. This is a very wide spectrum, comprising automotive, aviation, infrastructure, logistics, consumer, agri-input and financials. These sectors are expected to have tailwinds driven by favourable policies as well as a positive macro landscape. At the same time, export oriented-sectors like chemicals and textile are benefiting from improving competitiveness. These sectors also have some of the highly competitive businesses which we think can create long-term wealth.
What's your advice to investors at a time when the Nifty has crossed 10,000?
The advice to investors is to have clarity about their financial goals. Have clear understanding of where you stand as far as your risk-taking ability is concerned. Build in reasonable return expectations. And finally try to get your asset allocation as much right as possible.