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Neelesh Surana is the Chief Investment Officer (CIO) at Mirae Asset Investment Managers. He oversees the Mirae Asset ELSS Tax Saver and co-manages the Mirae Asset Large
In this interview, he discusses his entry into the finance world, investment philosophy and the performance of the funds under his management. Here is the edited transcript of the interview.
You started with an engineering background and later pursued an MBA in finance. What sparked this shift? How did you embark on your journey in the financial world?
Despite having an engineering degree, my interest in the market started during my college days and essentially through the initial public offerings (IPOs) participation that coincided with the famous Harshad Mehta bull run. There were a few eureka moments at that time, and I developed a fascination with the equity markets. Without going into the specifics, there were two instances where I had unbelievable 10x and 20x returns in a matter of a few months. Subsequently, I entered the financial markets by choice and completed my MBA. After that, I came to Mumbai and started doing the sell-side research. After about seven years on the sell side, I moved to the buy side in a portfolio management services (PMS) role. Finally, in 2008, I moved to Mirae Asset.
Working alongside Bharat Shah at ASK Investment Managers must have been an enriching experience. Can you tell us what it was like working with him and how it impacted your career?
It was an excellent learning experience with him (Bharat Shah), and I enjoyed his rigour for research and his ability to look at growth-oriented business. And by the way, he is among the few investors who articulate exceptionally well, and this articulation probably shows the correct path to investing. So that helped fill gaps in terms of learning.
How would you describe your investment philosophy? Are there any specific types of stocks or market situations that particularly grab your attention?
The investment philosophy swiftly divides into two parts: stock selection and portfolio construction. The ultimate goal is to beat benchmarks. Firstly, I would say that we believe in picking up good-quality businesses and holding them for a longer period of time. There are some subcomponents that need to be analysed or filtered that are related to business analysis and management analysis. And lastly, the price that you're paying. So, on the business front, it is essentially about equity growth, wherein we have some basic filters that the business should have. For example, double-digit (earnings) growth - the higher, the better. Additionally, value-accretive growth should meet the return on capital employed, with an internal benchmark of around 14-15 per cent.
The emphasis is given in terms of management analysis, both on the basic hygiene part and in terms of forensic analysis. But more importantly, I think we put a lot of emphasis on leadership aspects, which include corporate governance and capital allocation.
Lastly, in terms of stock selection, we have very well-defined models, and we assign a value based on long-term discounted cash flow (DCF), so the idea is to buy at a discount. The price-value gap has to be there, and that's a long answer. However, diversification is important in stock selection and portfolio construction. And as I'd mentioned, the mandate is to outperform the benchmark. So, no sector, stock, or style should deviate significantly from the underlying constituents of the benchmark. All this put together, I would say the idea is to focus on our stock selection - not to buy cheap companies, but to buy good companies at a reasonable price and construct a risk-adjusted portfolio from a longer-term horizon.
Not for the sake of differential, but we have not shied away from taking some contrarian opportunities when good businesses pass through a bad patch. A bad patch is when near-term prospects are hazy or impaired, but the longer-term is intact. For example, an Auto major was going through a difficult time in 2009 when there were strikes. Earnings collapsed, prices came down, and valuations became attractive. In 2014-15, there were some opportunities in oil marketing companies, and five or six years ago, in public sector companies. Still, some stocks will always go through a rough patch, which helps us take a longer-term view and get a higher margin of safety. So I think that sort of excites not only me but, in fact, most of my team members, and we don't shy away from taking those opportunities.
What makes a stock stand out as a 'must-buy' when evaluating potential investments? For instance, despite its recent underperformance, one of the large private sector banks remains a top holding. What's the rationale behind such decisions?
Just looking at the top few holdings of the portfolio doesn't give you a clear picture. If you look at banking exposure, there are few that would be a mix of some of the names that have done exceedingly well, including the largest public sector bank. But to answer your question without going into a specific name, I would say that it probably ties up with the answer, which I mentioned earlier, that these are good, sustainable franchise businesses whose long-term viability is intact. However, in this case, there are near-term challenges because of certain issues related to an entity being merged. But in our opinion, it's not the three-five-year view regarding growth or return on equity (ROE). The management is intact, and the valuation has become cheaper because it has underperformed. That said, it's probably one of the cases where it still falls in that contrarian bucket - the long-term is intact, but the near-term is challenging, and we are longer-term investors.
To answer your question on must-buy, for us, the outlier in the stocks should have components such as high business growth, ROCEs over 20-25 per cent, exceptional management and very cheap valuations. Normally, you don't get all the combinations all the time. One gets the opportunity sometimes, like we saw during the March 2020 period. When you get a valuation in favour in terms of price value gap, then that sort of ticks the boxes in terms of meeting the investment framework one should invest in during that time.
The last few years have been tough for Mirae Large & Midcap and Mirae ELSS Tax Saver. What were the main hurdles, and how do you plan to make a turnaround?
If we look at the returns of the funds since inception and rolling five-year returns, they are fairly decent. But the performance over the last couple of years has been soft, particularly in the last 18 months. In investing, there are always errors of omission and commission. So, I would say that it has more to do with the errors of omission, where we have probably been conservative in sectors such as industrials and the capex that have done well. It's not that we didn't invest in those names, but the weights were less. At the same time, certain sectors that we own - like consumer discretionary - except for autos, have not done well.
Now, to answer the other part of the question - we firmly believe that the performance of the funds is an end result; the back end (stock selection and portfolio construction) remains the same. The lesson has been that we were underweight in industrials compared to the benchmark. Now, we are trying to see if there is an opportunity to look at some of the names and, at the same time, double down on some of the positions that have corrected in time and can make some sense in a risk-adjusted manner. So, I would say that a combination of omission and commission errors has come together in our environment, where the value (segment) moved significantly higher. So, it's a part of the learning journey.
Mirae Mutual Fund 's investment in new-age tech companies has certainly raised eyebrows, especially considering their current financials and challenges. How do you justify these investments to your investors, and what's your long-term view on these companies?
Firstly, I want to clarify that we have 4-5 per cent exposure across all of them, and it's a very calibrated risk. Secondly, we don't consider any company to be new or old-age. In our opinion, many of these companies are dominated by a few players and sectors, leading to an oligopolistic market structure that ticks the box regarding longevity or growth. Around one and half years back, there was a lot of selling in these stocks as private equity players (PEs) were exiting, and there was a significant price drop. Yes, valuations were challenging in 2021, but as said, around 18 months ago, when prices were corrected, we picked up some names.
You've been ahead of the curve - be it any big opportunity, trend, or scenario. What do you think is the next big thing?
In today's market, I don't see a significant trend that is totally under-priced or yet to be discovered. It's more of a market where one should take a longer-term secular growth approach. In the near term, trends could happen, like in the mass market consumption sector, which has not done well so far in the last two to three years. There could be a mean reversion in earnings at a couple of very large banks in the private sector segment. But again, these are not something like $1 for 50 cents type of opportunities in the market. Markets are fairly priced.
Also read: Interview with Charanjit Singh of DSP Mutual Fund
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