How do you see the valuations in midcap space at this point? How do you read the impact of coronavirus outbreak and the sharp correction in the past few days?
Global markets have corrected sharply as a group, with extreme risk-off strategy coming to the fore. Equities are being sold and safe haven assets like German Bunds or US treasury bonds are being bought at record low rates. In such a scenario, Indian markets have also corrected since hitting fresh highs in January 2020. However, we do not see signs of froth in market. On the contrary, overall valuations including those for midcaps remain attractive for long-term investors.
We have seen deep short-term shocks in our economy twice in the last 5 years; first in 2016 in the form of demonetisation and second in 2017 when nationwide Goods and Services Tax was rolled out. Our economy was able to grow out of both the shocks and I expect a similar outcome even in the current situation.
What is the rationale for launching a midcap fund?
Midcaps lie in a sweet spot between large caps and small caps. They are reasonably sized, hence offer reasonable stability like larger companies, and are fast growing businesses like many smaller companies. Thus, midcaps are typically characterized by growth potential but may also exhibit volatility. In the current market environment, midcaps are reasonably priced and offer investors the opportunity to compound their capital over a long period of time.
Why do you think a midcap fund makes sense in an investor’s portfolio?
Since midcaps are generally characterized by stronger growth potential but with relatively more volatility as compared to large caps, they are necessary in an investor’s portfolio. It is just like spice in our food, without which, our food will be bland.
Why should advisors recommend Union Midcap Fund to their clients?
At Union AMC, we utilize our internal Fair Value Approach to spot attractive investment opportunities. This approach helps us identity growing companies at reasonable valuation. While most investors tend to utilize traditional methods like P/E or Price/Book, our approach is comprehensive and accounts for four factors:
a) Returns on Equity
b) Earnings Growth
c) Risk Free Rate of Return
d) Riskiness of Security
We believe that due to our superior investment process, we should be able to enhance the returns of investors over a long period of time.
Tell us about the fund management philosophy of the fund. How it is different from existing midcap funds?
Our fund management philosophy is ingrained in our belief in fundamental analysis. We believe that stock prices track intrinsic values over time. Hence, our focus is to a) understand the fair value of the asset, b) estimate the growth in fair value, and c) identify margin of safety in purchase price. This philosophy is practised using our internal fair value approach, which differentiates us from our peer group.
Since midcap funds are prone to volatility, what are the risk mitigation strategies that you will deploy in this fund?
We intend to do deep due-diligence on each of our investee companies across three factors: a) Business- we intend to buy good businesses, b) Management – the companies should be run by good managements which we identify using both qualitative and quantitative factors and c) Valuation – we intend to buy reasonably priced companies using our internal fair value approach.
In addition to above, we intend to build a diversified portfolio of such well-researched companies, which should help reduce risk for investors.
Which are the sectors you are overweight and underweight at this point?
The fund is completely focused on bottom-up stock selection. Hence, stock selection shall drive sector allocation.
What is the ideal time horizon to invest in midcap funds?
Investors should invest for at least a three-year time horizon in midcap Funds.
The New Fund Offer (NFO) of Union Midcap Fund opened on 2nd March 2020 and closes on 16th March 2020. The allotment would be on 23rd March 2020. The Scheme will re-open for continuous sale and repurchase on 30th March 2020.
Disclaimer: The views expressed or statements made in this document are purely the views of the author and do not necessarily represent the views of either Union Asset Management Company Private Limited or its affiliates. The views, facts and figures in this document are as of 12th March 2020, unless stated otherwise.
