How to select equity mutual funds the Eighty Twenty Investor way – Part 3

In the first two articles of this series (part 1, part 2) we had selected fund managers for both the investment styles – Value and the Growth/Quality bucket.

In today’s article, we will choose fund managers for the “Blended” investment style bucket i.e a mix of both value and growth/quality.

UTI Mutual Fund – Vetri Subramaniam – UTI Value Opportunities Fund

Vetri Subramaniam is the CIO of UTI Mutual Fund and he manages the fund UTI Value Opportunities. He is a veteran with 24 years of work experience. Phew, I was an 8 year old kid playing video games when he started his career!

Prior to joining UTI in January 2017 he was the Chief Investment officer at Invesco Asset Management Ltd. He was part of the start-up team at Invesco (then Religare Asset Management) in 2008 and helped establish the firm’s investment process and the team. During his tenure, the firm established a strong track record.

The firm also launched several offshore funds investing into India from Japan, Mauritius & Luxembourg.

Source: Linkedin Profile

We need to keep in mind that he joined UTI only in the beginning of 2017 and hence UTI Value Opportunities fund’s long term performance won’t be relevant to evaluate his style.

What is his investment style?

• Core Philosophy – Buy something cheap relative to expectations
  
• Focus on two types of “value” (read as mix of value and quality/growth)
  • High quality companies with slightly higher valuations – as market may be under appreciating the sustainability of competitive advantages and/or the length of the growth runway for the company. These companies defy the norm of cyclicality and reversion to mean.
  • Companies experiencing temporary challenges due to cyclical factors, changes in the environment or their own past actions. But if the core business is healthy and a path to a better future (cash flows, return ratios) is visible then their depressed valuations offer an attractive entry point.

• Combines both stock level analysis and sector level calls to build portfolio

Investment Strategy

“I prefer to manage the portfolio with all positions carrying an active positive weight. That is to say if the fund owns a company that is in the benchmark index – the position in the fund would be in excess of the benchmark weightage i.e overweight. Otherwise the position would be zero. In other words the strategy would either be overweight an index stock or have a zero position. As for stocks that are in the fund but not in the benchmark, it is by definition an overweight position.

As a result the active risk in the strategy is high and performance deviation relative to the benchmark can also be high. This higher risk is consistent with a strategy targeting a higher Alpha.”

For a detailed understanding you can refer the below links..

https://www.utimf.com/articles/q-a-with-fund-manager-vetri-subramaniam

http://beyondbasics.wai.in/the-investment-philosophy-of-vetri-subramaniam/

You can also refer to all his interviews here

Wow Factors

• 24 years of experience
• Clearly defined strategy – active position weights (refer above)
• Clear communication via the AMC website
• Strong performance track record in his earlier fund – Invesco Contra fund

Performance across market cycles

Since he managed the Invesco Contra fund from Jun-2008 till Jan-2017, I have listed the top performers for that period (excluding mid and small cap funds)

Now unfortunately, all funds in the list except Mirae Asset India Opportunities, BNP Paribas Multicap, Invesco India Contra Fund and Reliance Multicap were running mid/small cap strategies due to which their performance is not comparable.

So if we exclude them and consider only the flexi cap strategies, the fund was the amongst the top 5 performers.

Further the performance has also been reasonably consistent.

Also he has started to turn around the performance of UTI Value Opportunities fund which he has recently taken over.

Communication

All communications on the investment philosophy and strategy is available in their website thereby making our life easier
https://www.utimf.com/articles/?filter-type=category&filter-value=blog

Concerns

• Top Management is unstable: The leadership is still not stable, with a divided board on who should take control. The CEO also quit this month. Read here.
• Contrarian bets might take longer than expected to play out

My View

• This fund will fit perfectly in the blended portion of the style spectrum as it combines both the value and the quality/growth styles.
• The fund manager has been in the markets for 24 years and has experienced several cycles.
• The fund house clearly communicates its strategy and I hope they will continue to proactively communicate even while the style is out of favor
• The track record in the earlier fund (Invesco Contra Fund) has been very good and there are signs of performance turnaround in his currently managed fund – UTI Value Opportunities
• Summing it up, Vetri is a solid and grounded fund manager with tremendous experience and good track record. Hence I am adding him to my final list in the blended style bucket.

IDFC Mutual Fund –  Anoop Bhaskar – IDFC Core Equity Fund

For those hearing his name for the first time, here is a detailed article on his investment journey.

Post this, he joined IDFC Mutual fund in Feb-2016

What is his investment style?

• Quality stocks + Stable growth + moderate valuations (you can read about the logic behind this thought process here
• Flexible in moving across Large, mid and small caps based on the market environment
• Key focus – To limit downside and still participate in market rallies
• Usually has very diversified portfolios with large no of stocks – earlier portfolios used have more than 80-90 stocks.
• Let us hear it in his own words “The way to look at concentration is to look at the number of sectors in the portfolio, rather than the number of stocks. Now, if I decide to own tyre companies, I may prefer to own three-four tyre stocks at 2-2.5 per cent each instead of one stock at 9 per cent. That controls liquidity risk” Source: Value Research Interview
  

“I try to buy companies where the growth is higher than what the market is forecasting and where valuations on a relative basis are comparable” – Anoop Bhaskar

Wow Factors

• Has been managing mutual funds since 2004 – 14 years of real time fund management experience (one amongst the longest in the Industry)
• Solid track record in his previous tenures at various AMCs- Sundaram Mutual Fund, UTI Mutual Fund
• Conservative by nature – never takes concentration bets in stocks + he does not push his luck too far by staying overexposed to a high-performing stock – Source: Forbes interview)

Performance across market cycles

He joined UTI AMC in April 2007 and served till January 2016

Source: Value Research

As seen above, both his funds UTI Value Opportunities (started managing from mid of 2011) and UTI Equity Fund have been in the top 10 flexi and large cap funds during his period in UTI.

In his earlier stint in Sundaram AMC, he managed the Sundaram Mid Cap fund. Between 2003 and 2007, the Sundaram Select Mid-Cap Fund’s NAV grew on average by 74% every year and was amongst the most popular funds of that time.

Thus he has built a solid long term track record across his career.

Communication

• Anoop gets interviewed regularly and the interviews are easily found via ValueResearch, Morningstar, Outlook Business etc.
• IDFC AMC website communicates reasonably well on the investment philosophy and strategy
• The best part is, they are extremely pro-active and communicate immediately if in case of any performance issues

Concerns

• Difficult to track: While it has worked historically, the fact that there are a large no of stocks means, it is impossible for us to understand the strategy (unless communicated). If in case of an under performance it is too difficult to pinpoint the cause unlike a concentrated fund where it is much easier to track. So our ability to hold the fund is based on the faith on the fund manager and the trust that they would communicate in plain english if something goes wrong
• AMC might get sold: There is a possibility that the AMC might get sold. So the continuity of the fund management team will be the key to watch out for if in case something like that happens. You can read more about it here
• The investment philosophy is not static and adapts to market conditions
  • “I don’t have a core investment philosophy that remains stagnant across different market phases. Instead, I would rather say that my core philosophy is based on a few principles; the importance given to each individual principle varies across different market phases.”
  • “One has to decide what percentage of the portfolio they want to take a higher risk on. And depending on the 6-12 month view on the market, that percentage can change up or down.”
• This is a lot easier said than done as constantly evaluating the next 1-2 years and positioning the portfolio is very difficult. Their recent note highlights this

Source: https://www.morningstar.in/posts/46379/anoop-bhaskar-relevant-money-manager.aspx

My View

• This fund will fit perfectly in the blended portion of the style spectrum as it combines both the value and the quality/growth styles
• The fund manager has been in the mutual fund industry managing funds for 14+ years and has successfully navigated several cycles.
• The fund house clearly communicates its strategy both during good and bad times
• The track record in the earlier fund (UTI Equity) has been very good and there are signs of performance turnaround in his currently managed fund – IDFC Core Equity Fund
• Summing it up, Anoop is a grounded fund manager with tremendous experience and solid long term track record. Hence I am adding him to my final list in the blended style bucket.

Now that we are done with selecting fund managers for all the style categories, let us see the final list

Thus we have 5 funds representing various investment styles.

Now typically a good equity portfolio will need 3-4 funds. So you can pick your funds from each of the styles and create your own portfolio.

In the next week, I will choose a few funds from the above list and will be starting a live SIP portfolio where I will be investing my own money every month. (otherwise all this will still remain mumbo jumbo)

Till then, cheers and happy investing 🙂

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Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments