In an interaction with Shweta Papriwal, Editor, indiainfoline.com, Mr. Ankit Agarwal, Fund Manager – Equity, UTI AMC said, "Looking at P/E valuations in the current context may not give you the right picture considering a significant near-term disruption in earnings".
Market has turned volatile again. What is your outlook for midterm future?
Forecasting near-term market movements is not part of our investment process, nor do we claim any expertise in predicting near term moves. Our focus has been and will continue to find high-quality businesses with a long runway of growth that exhibit leadership in their segments and are run by able management. Any near term volatility is an opportunity to accumulate such quality franchises. We also look to add companies that are otherwise good businesses but are going thru a temporary phase of cyclical downturn and where the valuations could mean revert once the cycle reverses.
What are the changes in strategy that you have made for post-covid environment?
We believe that covid has only reinforced the trends that were visible before any of the disruptions happened. High digitization, the shift from unorganized to organized segment, and consolidation in market share towards market leaders are trends further buttressed in the post covid world. Hence, our strategy has not drastically changed in the post-covid environment. Our investment horizon is long term in nature, and the current volatility in earnings will be only a small blip in the company's long-term cash flow profile. In fact, in some cases, opportunities may emerge from a supply-side perspective where the marginal players become much weaker in a fragile macro-environment, making the survivors gain significant market share as the economy revives. The only distinction that we make is we don't take balance sheet risks in the portfolio and avoid companies with high leverage.
With the US election conclusion out, is Covid vaccine the major market trigger right now?
It is difficult to predict near term moves. However, our investment philosophy focuses on a balanced approach to investing where we own quality businesses that form the portfolio's core and would be consistent compounders across market cycles. A part of the portfolio also focuses on profitable companies going through a temporary disruption and benefit from the mean reversion in valuations playing out as the individual business cycle recovers. This part of the portfolio would stand to benefit from any recovery play post a covid vaccine.
Several midcap and small cap stocks have been rising recently. What is your take on this and what sharp corrections are expected in near future?
Looking at P/E valuations in the current context may not give you the right picture considering a significant near-term disruption in earnings. Hence, looking at a more stable P/B metric might be better. P/B multiples are still close to their long-term averages for the mid and small-cap space and therefore don't seem overvalued at this point. Moreover, let's look at markets from a 3-5 year horizon. There are still opportunities that can outperform the larger cap peers simply because the runway for growth for some of the bottom-up ideas in midcap and small-cap space is much longer. Small caps, even post the recent runup is still underperforming the large caps from a 3-5 year period, and as the broader economy recovers in the next 2-3 years, the catch up to longer-term trends should be visible. Moreover, supportive monetary policy and improving liquidity/capital access along with ease of doing business are likely to benefit mid and small cap companies more.
Which are the preferred sectors to include for a midcap portfolio?
We have a bottom-up approach to investing and believe that one can find opportunities in even sectors with an overall negative view. Our portfolio is currently positioned to benefit from a recovery in the auto and consumer discretionary plays. The portfolio is also well-positioned in the outperforming themes in IT, specialty chemicals, healthcare, non-lending financials, and rural space.
What are the key drivers contributing to your fund’s top quartile performance over the recent past?
The performance is just an outcome. Our focus is on the process and adherence to our internal research framework to find good businesses (ones with high return on invested capital) and hopefully weed out poor companies. As long as we can stick to the discipline of our investment strategy and internal risk management framework, the performance outcome should follow.