We caught up with Rupesh Patel, Fund Manager, Tata Midcap Growth Fund to get an idea of the factors responsible for the fund's performance as well as the strategy used in buying and selling stocks as well as in dealing with volatility in the markets.
What are the main factors responsible for the outperformance by your fund in the last one year?
The outperformance by the fund can be primarily attributed to our focus on quality businesses. Overweight position in consumer discretionary and underweight stance in banking and financial services helped the fund significantly in the last one year.
How do you pick stocks?
Our stock-selection strategy is primarily focused on understanding the quality of underlying businesses and their value drivers. We believe that, over a longer period of time, businesses which have compounding characteristics, strong growth potential, market leadership, high capital efficiency and good management teams tend to create wealth for their shareholders. Companies with aforesaid characteristics form the core of our portfolio.
When do you sell a stock?
The decision to sell is triggered when the initial investment argument goes wrong, valuations become uncomfortable or there is a better opportunity available where the risk-reward is relatively more favourable.
What kind of stocks do you generally avoid?
In investing one never says never. However, we generally desist from investing in companies which show scant regard for minority shareholders' interest and the ones which have a history of bad capital allocations.
How do you contain volatility?
Constructing a diversified portfolio across sectors and stocks is one way to reduce volatility. However, we believe that equity markets are by nature, volatile and hence, to some extent, you cannot wish it away.
How do you allocate the non-mid-cap portion of your portfolio?
The portfolio of Tata Midcap growth is constructed on bottom-up basis. Beyond 65 per cent threshold, the approach is completely market-cap-agnostic. However, since it is a mid-cap fund, the inclination is always towards mid and small caps.
What are your favourite sectors? What are the ones that you would stay away from?
As mentioned earlier, Tata Midcap Growth fund essentially follows bottom-up approach to stock picking. At this point in time, the fund is overweight on stocks from the consumer-discretionary category, wherein the opportunity size is expected to remain significant for years to come. The fund also has exposure to capital goods, chemicals and construction sectors.
When do you see a broad-based recovery in mid caps?
As they say, stock prices are slaves of earnings. We believe that as the economic recovery widens and earnings growth accelerates across multiple sectors, the market breadth should widen, leading to more broad-based recovery.
How do you determine the right valuations while buying a mid-cap stock?
We believe that valuations are a function of visibility of cash flows in terms of growth and expected volatility. It has been historically seen that companies which can grow their cash flows sustainably over longer periods of time tend to be big wealth creators. In such instances, we take a longer-term view of the business to avoid getting carried away by near-term valuations.
What can investors expect from your fund in the next one year?
One year is too short a period while investing in equities, particularly in mid and small caps. We believe that long-term wealth is created by buying businesses which can compound at a reasonable rate over long periods of time and by remaining invested in them. Hence, investors would be well advised to follow longer-term approach to equity investing.