Canara Robeco Emerging Equities, one of the best performing mid cap funds on our platform has been a part of our Recommended Funds list since 2015. For the last three years, the fund, which uses bottom up stock picking, has aced all the parameters in our model to be among the top performing mid cap funds. This period also saw a change in the fund management team, but that has not impacted the performance of the fund and we continue to safely include the fund in our portfolios. The fund was launched in March 2005 and is being managed by Ravi Gopalakrishnan and Kartik Mehta.
The mandate of the fund is to invest into a basket of diversified mid cap stocks that have the potential to emerge as bigger corporates with higher performance. The fund manager thus scouts for companies that are reasonably valued and have high earnings growth potential.
As per the Scheme Information Document (SID), "A large part of the investment universe of the fund comprises of companies falling within the market capitalisation range of the largest and the smallest component companies of the benchmark, i.e., Nifty Free Float Midcap 100".
The strategy followed is a blend of growth and value and is known as 'GARP' (Growth at Reasonable Price) Investing. The stocks in the fund are selected based on the following characteristics:
(i) Value migration ii) Consistent Growth Potential (iii) Niche businesses with high and increasing profit margin (iv) Huge untapped market potential (v) Scope for increase in market share (vi) Scope for value added services and (vii) Opportunities on account of outsourcing namely, contract research and manufacturing (viii) Scope for PE expansion.
A close look at the market capitalisation trends of the fund shows that the average allocation into large caps has been 17% during the time period, June 2014 to May 2017.We are seeing this allocation increase to more than 25% since March 2017 and as on May 2017, the exposure into large cap stocks stood at 37%. An interesting observation is that during the course of the three years (June 2014-May 2017), the allocation into micro cap stocks has been drastically reduced from 24% to 10% respectively.
For the purpose of analysis, we have taken the definition of market capitalization in this way.
Large Cap: Above INR 15,000 crore
Mid Cap: INR 5,500 crore - INR 15,000
Small Cap: INR 3,000 crore - INR 5,500
Micro Cap: Below INR 3,000 crore
Fund Manager Speaks:
"As on June 30, 2017, considering the current definitions, the fund has 65.24% in mid caps, 24.95% in small caps and 7.22% in large caps. Further, given the rise in valuations of certain mid cap holdings, the fund manager has taken profits from a few midcap companies and re-deployed the funds temporarily in certain large cap companies, until better opportunities emerge."
We have recently observed that as the corpus of the mid cap/small cap funds increases, Fund Managers generally tend to allocate ~ 30% to 40% of the surplus into large cap stocks to infuse liquidity into the portfolio. Since the alpha in these portfolios is generated through small/mid cap stocks, we hope to see continued focus on this band. Fund management team needs to avoid veering towards multi cap portfolio strategies.
A review of the stocks included in the portfolio shows that as on May 2017, there were 70 stocks in the portfolio, of which only 11 were held continuously for the entire 36 months of analysis. However, the average allocation into these stocks was in the range of 1.38% to 2.76%. This clearly shows that the Fund Management team is actively managing the portfolio to create the desired alpha.
During the three years of study, the portfolio held an average of 66 stocks, with the May 2017 portfolio registering 70 stocks. The Fund Management team has consciously kept the average allocation in each stock in the range of 0.03% to 2.76%, which in turn helps avoid concentration of risk.
We dwelt deeper into the portfolio from August 2016, when Kartik Mehta took over the reins of the fund. Our quick observations are:
Mehta seems to be positive on Public Sector Banks (PSBs); since August 2016, State Bank of India (SBI) has been added into the portfolio with Punjab National Bank getting an entry in February 2017. As on May–end 2017, SBI is one of the top holdings in the portfolio.
Fund Manager Speaks:
"Once the government's 'Swachh Banks Abhiyan' initiative to clean up non-performing assets is completed, corporate lenders may benefit the most."
The focus of the portfolio is slowly shifting to rural themes with names like Mahindra & Mahindra Financial Services (rural NBFC providing finance to prospective buyers of Mahindra Utility vehicles and tractors), PI Industries (manufacturers of agricultural and fine chemicals and polymers), UPL (manufacturing, distribution and exports of off-patent agrochemicals), Monsanto India (manufacturing of agricultural chemicals as well as high yield and hybrid crop varieties), and Bayer CropScience (crop protection, non-agricultural pest control, seeds and plant biotechnology) being added into the portfolio since November 2016.
Fund Manager Speaks:
"Government focus on rural development and good monsoons are expected to benefit rural consumption and support this segment positively."
Since March 2017, we have seen the addition of Indian pharmaceutical companies like Piramal Enterprises, Suven Life Sciences, Biocon and Syngene International. It needs to be noted here that Biocon was a part of this portfolio during the time period, June 2014-August 2014 and Decmember 2014-June 2015.
Fund Manager Speaks:
"While the pharma sector continues to see challenges on the generic business front from the point of view of increasing competition and price erosion, the fund is focusing on R&D driven names instead of generics."
Minda Industries was added to the portfolio in September 2016 and since January 2017, it has been one of the top holdings of the fund. The company designs, develops and manufactures switches for two and three wheelers and off-road vehicles. The company also manufactures batteries for two, three and four wheelers.
Housing finance companies like Can Fin Homes and Housing Development Finance Corporation (HDFC) Ltd have been added in the portfolio. As of May 2017, Can Fin Homes is one of the top holdings of the fund with an allocation of 2.36%.
We are also seeing Mehta showing an interest in newly listed stocks like Precision Camshafts, Thyrocare Technologies, Mahanagar Gas, RBL Bank and L&T Technology Services. However, no exposure has been taken in any of the IPOs announced in 2017.
An investment of INR 10,000 into Canara Robeco Emerging Equities on May 30,2014, would have grown to INR 21,703 by May 31, 2017, while a similar investment in the benchmark index, Nifty Free Float Midcap 100 would have grown to and INR 17,266 in the same time.
This is a midcap fund that stays true to its mandate, and is a part of our portfolios with balanced/moderately aggressive and aggressive risk profiles. We recommended a 10% allocation to this fund in our balanced portfolios as we believe that our moderate investors who take a 50% allocation into equities can benefit from the alpha generated by this fund. Three years into our system, this fund continues to be a top performer despite a major change at the fund manager level, which ideally would have led to volatility for some time. What we like about the fund is the ability to do a prompt bottom up picking of stocks on the basis of a sound understanding of the macro-economic dynamics with a clear focus on the risks that can impact the economy in the long term and short term. The fund is clearly playing on themes which are on the priority list for the Government of India and hence this should hold it in good stead for the next few years. We recommend our balanced /moderately aggressive and aggressive investors to take an exposure into this fund for five years and more.
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