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Mirae Asset Emerging Bluechip Fund: A Good Mid Cap Bet for the Long Term!
October 19, 2016

A detailed report on Mirae Asset Emerging Bluechip Fund.


Author : iFAST Research



Fund Focus - SBI Magnum Midcap

Mirae Asset Emerging Bluechip Fund

A Good Mid Cap Bet for the Long Term!

"Discover tomorrow's potential today", was the tag line of one of the best performing mid cap funds in the industry at the time of its launch in July 2010.We are referring to Mirae Asset Emerging Bluechip Fund (MAEBF) that made an entry into our recommended funds list for the first time in 2014.Since then, there has been no looking back as far as its ranking in the mid cap space is concerned. As we write this note, the fund has completed 6 years and is sticking to its mandate of scouting for medium sized companies which have the potential to become well-established in the future. Since its inception, the fund is being managed by Neelesh Surana who has been with the fund house since 2008 and has over 19 years of experience in the field of equity research and portfolio management. Our period of analysis is August 2013 to July 2016 and during this time, the corpus of the fund has grown from INR 133.46 crore to INR 2121.8 crore.

 Investment Strategy

The mandate of the fund clearly states that it will invest mainly into companies which are not part of the 100 stocks by market capitalization. The fund will invest into companies which, at the time of investment, have a market capitalization of at least INR 100 crore. The fund manager is given the flexibility to move across themes, sectors or styles and can even consider a focused approach while picking up stocks for the portfolio.

Fund Manager Speaks:

"Our Stock selection process has three aspects: Business selection, Management analysis, and valuation. We look for quality businesses with decent growth prospects as well as return characteristics (i.e. Return on capital employed - ROCE). This is a crucial initial filter. Second filter is with respect to management analysis, which is a bit subjective but you have to look at the track record and corporate governance. A well-managed company will have better capital efficiency so the (Return on Equity) ROE's tend to be better than other companies in the same sector. The last factor is to arrive at a particular value. Value has to be more than the market price so that there is enough 'Margin of Safety'. The idea is not to buy cheap companies, but good companies at reasonable valuation.We would avoid stocks which do not meet basic criteria of Growth, Return on capital employed (ROCE) and management track record."

 Portfolio Analysis

An interesting observation that was made initially while dissecting the portfolio step by step was that, as the fund grew in size the exposure into large cap stocks has also seen an increase.This can be seen from the fact that during the 36 months of analysis, the fund's allocation into large caps has increased from 23% in August 2013 to 41% in July 2016.On the other hand, the micro cap exposure has drastically reduced from 23% to 8% during the same time period.

Market Cap

Fund Manager Speaks:

"As per the offer document, the mandate it to invest minimum 65% in mid and small sized companies, i.e. companies which are not part of Top 100 companies by market capitalization. Our definition of mid-cap is companies which are not part of Top-100 by market capitalization. The fund has leeway to invest up to 35% in Top-100 companies. On the lower size, while the universe is quite wide, we prefer companies which generate operating profits of around Rs 100 crores. In this context, we try to avoid tiny businesses, i.e, micro-caps. "

"As per our definition, we don't go below 65% in Mid-cap category at any point in time. The levels also keep changing due to change in market capitalization and stocks shifting its category on account of outperformance or underperformance."

iFAST definition of Market Capitalization is given below:

Large Cap: Above INR 15,000 crore

Mid Cap: INR 15,000 - INR 5,500 crore

Small Cap: INR 5,500 - INR 3,000 crore

Micro Cap: Below INR 3,000 crore

The fund manager sticks to the mandate of having a diversified portfolio with the average number of stocks being at 61 during the 3 years of analysis. The diversification is done with the intention of avoiding concentration and liquidity risk.

As of July 2016, the total stocks in the portfolio are 64, out of which 17 of them have been held continuously during the entire period of study.

Stocks held in the portfolio continuously during August 2013-July 2016

Company Name Average Holding (36 Months)
ICICI Bank Ltd. 3.10%
Hindustan Petroleum Corporation Ltd. 3.05%
Sundaram Finance Ltd. 2.96%
Federal Bank Ltd. 2.83%
Gateway Distriparks Ltd 2.57%
Amara Raja Batteries Ltd. 2.53%
Ipca Laboratories Ltd. 2.31%
Exide Industries Ltd. 1.87%
Tata Chemicals Ltd. 1.82%
Vinati Organics Ltd. 1.64%
J.K.CementLtd. 1.62%
Crompton Greaves Ltd. 1.35%
CESC Ltd. 1.25%
Akzo Nobel India Ltd. 1.19%
eClerx Services Ltd. 1.18%
Petronet LNG Ltd. 1.15%
HT Media Ltd. 1.01%

4 among these 17 stocks have been a part of the portfolio since its inception and includes names like Federal Bank, Gateway Distriparks, Crompton Greaves and HT Media.

Fund Manager Speaks:

"We follow a buy and hold strategy for our key stocks and the time horizon is normally 1-2 years. We try to look at risk in terms of quality of our stocks and do not compromise on that. We would avoid stocks which do not meet basic criteria of Growth, Return on capital employed (ROCE) and management track record.This strategy seems to have paid off well and is likely to continue in the future as well."

The table below throws light on a few stocks that have contributed to the superlative performance of the fund during our period of study.

Alpha Generating Stocks in the portfolio

Stocks  Aug 31,2013 July 29,2016 Return (%)
Hindustan Petroleum Corporation Ltd              55.85            420.13 652
Vinati Organics              85.00            547.90 545
Amara Raja Batteries             256.40            936.95 265
Sundaram Finance             484.45        1,492.00 208
Federal Bank              25.72              64.70 152
Gateway Distriparks             107.55            262.95 144

The fund manager is religiously making all efforts to ensure that he picks up stocks from the mid/small/micro cap space which have the potential to become well established companies in the future. In this context, we are highlighting a few stocks that have grown in market capitalization during the period of our analysis. These stocks have been a part of the portfolio during the entire period of study.

Spot the Potential early

Market Cap

Sector Analysis

MAEBF is a fund that is based on the bottom up approach; however, a quick glance on the sectoral trends shows that Pharmaceuticals and Banks have continuously been among the top 5 sectors during the entire period of study. The average allocation into these 2 sectors has been to the tune of 13.83% and 13.80% respectively.

 Performance

If the investor had parked a surplus of INR 10,000 into the fund and the benchmark (Nifty Free Float Midcap 100) on August 1,2013, then the amount would be INR 29,419 and INR 21,797 respectively as on July 29,2016

Performance

Our Take:

From a valuation point of view, the mid cap indices are stretched, thereby making the investors apprehensive about investing into funds from this category.Our view has always been that the mid cap index might be on a roll and the valuation might look unattractive, yet the story of the fund from this category revolves around the ability of the fund manager in finding out the right gems from this space that have the potential to become the leaders of tomorrow.The consistent performance of MAEBF since the past 5 years is a proof that Surana knows how to play the game in the mid cap space. We have always held the view that, as a part of asset allocation, mid cap funds with a good pedigree and track record should ideally be a part of the portfolio of an investor having a moderately aggressive and aggressive risk profile. This will generate the extra alpha in the portfolio while subjecting it to huge volatility when the market decides to behave like a roller coaster. However, a prudent stock selection can help weather this storm; further it will also reward investors for their patience.

Disclaimer:
iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website.


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