Fund Focus: Mirae Asset Emerging Bluechip Fund

Neighbour's envy, owner's pride!

Neelesh Surana, CIO - Equity, Mirae Asset India

13th July 2016

In a nutshell

Mirae Asset Emerging Bluechip Fund recently completed 6 years - and what a fantastic 6 years its been! Strong positive alpha every calendar year. 1st quartile or high 2nd quartile vs peer group every calendar year. That's a track record that brings to mind the popular catchy old ad strapline of Onida TVs - "neighbour's envy, owner's pride"! Which fund house would not want such a fund? And which investor would not want to have invested in such a fund? Neelesh Surana takes us through the more recent performance drivers, his take on whether midcaps are indeed overheating, and the themes that he is focusing on to maintain EBF's winning ways.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: Congratulations on completing 6 fantastic years of consistent wealth creation! There are few parallels in the industry to match this fund's consistent alpha generation year after year, and its consistent 1st/2nd quartile rank year after year. What in your opinion sets you apart from the others, which enables you to deliver this kind of performance?

Neelesh: Disciplined approach to investing, with focus on quality up to a reasonable price along with diversification, has helped us deliver satisfactory returns. Overall, alpha was generated by being in the right pockets as divergence was significant, both across sectors, as well as stocks within a sector.

WF: I would like to draw your attention in particular to 2013 and 2015 - both years which were tough for markets and for midcaps. You have not only posted strong alpha in these tough years, but also delivered healthy absolute positive returns. Looking specifically at these 2 years, what did you do differently, to enable you to deliver this performance?

Neelesh: The alpha is primarily generated from stock selection. Also, over the years, we have not taken any aggressive call on a particularly theme, style, sector or stock. This construct help reduce the risks. While the alpha is dispersed across sectors and stocks, both in 2013 and 2015, stocks within Healthcare and Auto ancillaries help generate better returns.

The fund also has flexibility to invest in large size companies, which has been typically at about 30%. This helps us to deploy in large size companies, depending on the merit of business. This flexibility is important, as we believe that investments should be made based on the individual merit of businesses like quality, growth etc. and not by size. An additional advantage is that it improves the liquidity of the fund.

WF: What does your attribution analysis show for 2015 as the key alpha drivers?

Neelesh: As a sectoral level, we have focused on companies which have delivered earnings growth in a difficult environment. Also, we have been focused on not overpaying growth, i.e. risk of high valuation. At an overall level, alpha is dispersed across sectors and stocks, in 2015 - however, select stocks within Healthcare and Auto ancillaries help generate better returns.

WF: What proportion of your fund is invested in small caps? Is there a concern on too much money chasing inherently illiquid small caps?

Neelesh: We do not invest much in small caps - as of now, it would be less than 5%. Typically we look at businesses with 100cr cash flows. At current juncture, investors should be cautious of risk associated with smaller companies particularly related to liquidity.

WF: Midcap valuations are at a sizeable premium to largecaps. This does not normally happen at the beginning of a new economic cycle. How do you explain this and is this a cause for concern on midcaps?

Neelesh: Investing in midcaps ideally should be done when margin of safety is higher (gap between price and value). I would agree that the typical margin of safety is missing - however, an important point is that universe for mid-size businesses is large, and thus one can always hunt for opportunities within midcaps of businesses which are quality, scalable, and yet available at reasonable valuation.

WF: What are the themes that excite you most in the midcaps space now?

Neelesh: As a theme we prefer companies which have maximum overplay of broad themes like those related to - improvement in economy, consumption related, reforms like GST related, etc. We continue to like companies within Financials, Consumption, and Healthcare.

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