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ANUPAM: Hi listeners, we at Aditya Birla Sun life Mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realise your investment goals.
I’m your host Anupam Gupta, B50 on twitter and in this episode, we are going to discover the recipe behind small and midcap funds from our guest chef Jayesh Gandhi, senior portfolio manager at Aditya Birla Sun life mutual fund
Jayesh bhai welcome to the show!
JAYESH: It is my pleasure and privilege to be on the show and talking to the investor community on this forum.
ANUPAM: Tell us something about yourself. You are a veteran, you’ve seen the market for such a long period of time. Tell us about your background, your education and how long have you been doing this. And let’s start from there.
JAYESH: In terms of my background and education, let me start with that I’m a chartered accountant, I also have a CFA charter and have done my masters from Thunderbird Global University, U.S.A. In terms of work experience, it’s been around fifteen years. Seven years with Morgan Stanley, six years now with Aditya Birla Sun Life Mutual Fund. So, I have been professionally working in the mutual fund/risk management industry for over fifteen plus years and my passion is small and mid-cap, which is what I love to talk about all the time.
ANUPAM: Jayesh bhai, you are a C.A and a C.F.A, both are very important degrees, for our young listeners out there who are just starting off on their education and if they’re interested in stock markets, tell us why both these degrees are important.
JAYESH: Well both the degrees and many other degrees are fairly important. My chartered accounting really helped me to understand balance sheets better, it really helped me to make financial statement analysis much better in my early days in order to understand companies and business models better, but my CFA charter helped me to construct better portfolios, understand the risks and understand the dynamics of sector allocation within the portfolio. I would say that only education will not really help, it may be an entry point, but you really need to use the theory into practice, put all the learnings of theory into practical world and when you are able to do that you generally end up being fairly successful at your work.
ANUPAM: Can you tell us what are small and mid-cap stocks? And how are they fundamentally different from large cap stocks, let’s get into that.
JAYESH: Earlier, there were not many bifurcations that were given but SEBI has actually done a very nice job of segregating now with the new definitions, It’s very clear that the top 100 stocks are large caps, 101 to 250 stocks are categorized as mid cap and stocks beyond 250 come under the small cap category. In future we will have the micro-cap category has well. But what is the cut off? Today average would be around thirty thousand crores between the large caps and the mid-caps and around ten thousand crores between the mid-caps and small caps. So, to put it simply mid cap stocks are stocks which have a market capitalization between thirty thousand crores and ten thousand crores and small cap stocks have a market capitalization below ten thousand crores.
ANUPAM: Jayesh bhai, how does one really choose these stocks? You’re a fund manager, you enjoy doing this, this is something that you really like. Large caps however have a very different way of selection, if someone is choosing a Reliance or TCS, the way of selection of that is very different. Tell us what is the selection process for a small and mid-cap stock?
JAYESH: You have couple of questions and let me see if I can answer all of them, first of all the entire universe of mid and small cap stocks is really large, if you see in India Today, there would be around 700 to a 1,000 stocks actively traded. That means you are talking about 500-600 stocks in this space, mid and small cap space. So, the selection criteria or the number of sectors and stocks to choose from is very large! It’s in 1:6 ratio. The key aspect of investing in this segment is the choice. Now a combination of stop down and bottom up has to be there for us to put the stock in the portfolio. In the sense, if the top down is fine but the bottom up is not good in the sense you don’t have good quality companies then you don’t buy into the sector and at the same time you also do the reverse in the sense, we may have great companies but the sector outlook is not that great and hence we’d avoid those companies and sectors as well so it’s really a combination of top down and bottom up that really brings the stock into our portfolio.
ANUPAM: What kind of a time horizon should and investor in a small and a mid-cap mutual fund look at, if he wants to get that return because I believe past data shows you that a small and mid-cap fund typically gives you one or two percentage higher return than a large cap or NIFTY or some similar fund. So, to actually get that entire return over a fairly long period of time, I assume, what kind of time horizon should an investor look at once he puts down his money whether it’s lumpsum or SIP into a small and mid-cap mutual fund ideally?
JAYESH: Ideally the time horizon has to be long. Much longer than what a typical investor would put for large cap stocks. There are multiple reasons for it. Typically if you see the history of the Indian capital market, mid and small caps have rallied and done well only during bull markets, in the bear markets actually, the volatility is really high and that’s precisely the reason why the time horizon has to be longer, also the fact that mid and small cap can give you the best return or the fund manager can deliver the best returns for you in this segment, over the market cycle and typically market cycles are 5 to 7 years. So, 2017 was a great year for small and mid-caps but it is the investors who invested in 2013 and 2012 and 2010 were the ones who made the maximum amount of returns and if you see the time horizons between these two periods, it is over five years. Look at the last two years, in 2017 the small cap rose by 60%, 100% more than the large cap and this year they are down by 25% so, we always advice our investors to come in with a five plus year long time horizon.
ANUPAM: So, what is the outlook for the Indian economy in general? And for this class of stocks, the small and mid-cap stocks, now going forward.
JAYESH: Again Anupam, two questions in one, I will try and answer both. You are absolutely right, the macro environment for the Indian economy actually turned pretty negative in early 2018 and continued till probably till the month of September - October of 2018. If you see various macro-economic factors such as interest rates, they’re going up, the crude oil price and energy cost were going up, you had forex volatility coming up and many of the smaller companies do not have bandwidth to manage their international exposure well. So there were wide variety of factors which affect equity as an asset class in 2018. Obviously, valuations were also not very cheap, coming from a very high base of 2017 and hence this negative return from equities in 2018. So, in very simple words, the outlook for the Indian economy is much brighter while going into 2019 than it was in the beginning of 2018 and that should argue really well for the equity markets in general but also mid and small cap segment in particular.
ANUPAM: Jayesh bhai last question, the most important from our listener’s perspective because I hope that after listening to this podcast they go and actively search for a great mutual fund, great small and mid-cap mutual fund to invest in, tell us three points which will help our listeners understand which is a good small and mid-cap scheme?
JAYESH: First and foremost, would be the quality of stocks and the quality of businesses which are the part of the portfolio. Our large research team and our large fundamental bottom up approach to investing allows us to demystify corporate balance sheets and identify the right candidates which can generate wealth over the long term and that is what is essential for a good small and mid-cap scheme to deliver in terms of good quality companies that can generate wealth over long term. The second key matrix is the risk management, again as I suggested before the segment has large number of stocks but the real investment universe is very small, within the investable universe as well, it is very important to ensure that a portfolio is well diversified into sectors and segments so there is avoidance of over reliance on few sectors or few stocks, or in a way to avoid company specific risk as far as possible and this can be done by large number of risk management measures which we at the mutual fund house are implementing on a very regular basis to ensure that the risk in the portfolio is very well maintained and is consistent with or lower than the benchmark risk and this is again a very important point that a mutual fund should bring to the table in particular, for small and mid-cap stocks. The third and a critical point that the investor should examine is, the tenure and the experience that the fund house has in managing the money in this space, clearly a long term track record in this area is critical as the returns are generated long over a long period of time for investors and this place typically the long term means five to seven years or five to ten years at least. The fund house’s experience and the ability to generate risk adjusted superior alpha over long period of time and demonstrated capabilities in this space becomes a critical-criteria for investors in choosing fund in this category.
ANUPAM: Folks, I hope you got that right. First point, quality of business and quality of promotors. Second point, risk management. Third point, liquidity and lookout for all these three when you are choosing your good, small and mid-cap fund to invest in and with that, it’s a wrap.
For more such interesting know how’s continue listening to our podcast MF 101 or simply follow the blog page of Aditya Birla Sunlife Mutual Fund, Bloomberg Quint, IVM podcast or wherever you get your podcast from, if you have any queries or some specific subject you want us to talk about, with regards to mutual fund investment, reach out to us on our Twitter handle @ABCABSLMF. Thank you for listening to this podcast.
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“The views and opinions expressed herein are personal and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). ABSLAMC/ the Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.”
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