Tahir Badshah, Senior Fund Manager, Motilal Oswal MF talks about the AMC’s philosophy ‘Buy Right and Sit Tight’ and explains why it is not a passive strategy.
Can you briefly explain the investment
philosophy of MOSL Mutual Fund i.e. buy right and sit tight?
We believe that wealth can be only created by a long term approach. As the name suggests, ‘Buy Right Sit Tight’ means picking up the right stocks and holding them for long term.
‘Buy right sit tight’ comprises two components. The first part i.e. buy right - is about picking a good company. We pick up stocks on the basis of four parameters – quality, growth, longevity and price. Firstly, we look into management and the nature of business to determine the quality of business. However, our main focus is to assess competitive advantage of a company. Take for instance, Bosch which manufactures a unique auto component - fuel injection. Not many players manufacture this kind of fuel injection. The less the number of players higher the market share. Hence, Bosch has an edge over others.
Our second filter is sustainability of growth. Quality ensures you may not lose money but growth tells how long the company will take to deliver performance. Similarly, our third key filter is longevity. We try to find where the company stands after five to eight years. Both these filters can be figured out by looking at its size of opportunity, ability to take tough pricing decision and commitment for the business.
Finally, we look at reasonable price while buying any company. Second part of our philosophy is to just stay the course for long term.
So you avoid new entrants like e-commerce etc. as it doesn’t suit your philosophy…
We prefer companies with track record. Our stock picking process is philosophy driven. However, if a promoter of a new company has a good track record in some other business/sector, we may consider buying that stock.
Also, if a company has a good track record of three years in any sector or an evolving business such as e-commerce, we would like to find the growth potential of business in future.
How can ‘Buy right sit tight’ be termed as active fund management if the philosophy is to hold the stock for long term?
Active fund management doesn’t mean churning the portfolio frequently. Also, it’s not about trying to find the next big thing. Frequent churning of portfolio affects fund performance.
Holding the stock for long term means that we actively monitor the company’s performance. If the company doesn’t meet our expectations, we may move out of it.
There are many factors which affect the businesses such as external and internal factor (regulation, policy change and global competition), sustainability of competitive advantage with advent of new technology and so on. We check whether such advantages are still intact for the company.
Though two years is very short term to judge a performance of any equity fund, your first actively managed fund i.e. MOSL focused 25 fund has given close to 47% returns as on December which is at par with its category average. What strategies have you put in place to revive its fortune and take it to one of the top performing funds in the large and mid-cap category?
Firstly, MOSL Focused 25 Fund is purely a large cap fund. However, a few rating websites have put it in large and mid-cap category. Equity large cap funds have delivered an absolute returns of 42% over a one year period. We have not only outperformed the benchmark but also are among the top ten funds in the large cap category, in terms of performance. Holding a concentrated portfolio of 25-30 stocks gives us adequate time to monitor the investee companies and helps us to do better due diligence.
Also, we started with an AUM of Rs. 80 crore. In less than two years, our AUM has grown to Rs.1,400 crore in equity funds. We have achieved this without compromising on our mandate.
Though we are still a small AMC in terms of size, our investment philosophy is well defined compared to our larger peers. We will always stick to our philosophy to deliver better performance.
Five years down the line, we will be an equity power house in the mutual fund industry.
Markets have rallied over 29k level, what are the key factors driving the market from here? What risks does the market have currently?
From here onwards, government’s policy, interest rates and global factors will drive the market. The new government has done a good job as it has come out with some reform measures like FDI and Make in India. The government is likely to come out with GST which will encourage corporates to do business in India. From here on, plummeting commodity prices will accelerate the growth.
For a couple of years, the corporate earnings have been in the range of 9-10%. The earnings can grow to 15% in such a conducive environment.
The key risks in the market are issues related to policymaking and global factors like geopolitical risks and volatility in crude oil prices. However, it may cause short term correction only. Given the strong macro-economic cues, the market would remain quite upbeat at least for 3-5 years.
Over a three year period, we can expect a CAGR of 15-20% from the market.
With mid & small cap stocks having rallied over 81% and 62% over the last one year period, do you think there’s still some steam left in this space?
There are still many companies in the small and mid-cap space which are yet to catch up with their fundamentals. Currently, a few such companies are going through a rough patch due to issues related to change in management, and so forth.
