We are not chasing momentum just for the sake of it, says Mirae Asset's head of equity

Only after working in sales, marketing and managing a manufacturing unit did Gaurav Misra realise his true calling: recognising undervalued companies and research.

Misra has traversed many terrains in the investment world as well, from working in a private equity firm to rubbing shoulders with the legendary Bharat Shah at ASK Investment Managers.

With such diverse experience, it was intriguing to delve into the investing philosophy of Misra, who is currently the head of equity at Mirae Asset Investment Managers and the fund manager of Mirae Asset Large Cap Fund and the Mirae Asset Focused Fund. During our conversation, he also explains the reasons behind the recent dip in his funds' performances and his strategy to overcome the slump.

Here is the edited excerpt...

What first got you interested in equities?

It was a bit of a departure from my experience thus far. It was after I had gathered assorted experience in sales, marketing and in running a small-scale manufacturing unit that I became increasingly convinced that my true calling was in identifying situations, recognising undervalued opportunities, and conducting research. That was the driving force behind my decision to enter this industry. When I joined, the industry was fairly fledgling with only a handful of domestic brokers and a few AMCs in the country. But it was really the deep desire to find potentially hidden or mispriced ideas and opportunities that was my driving force.

What was it like to be on the sell side before joining ASK Investment?

As an analyst on the sell side of the industry, the most important lesson I learned was that you must conduct bottom-up research and develop a comprehensive understanding of how to identify companies in various industries. In my early career, I worked in the pharmaceutical sector, where each firm had its own unique dynamic.

There are a lot of different business models, strategies and other aspects such as regulatory overhang in the sector. I think that experience helped me stand in good stead going forward. With the passage of time, I learned about several other sectors and figured out how the dynamics in each of them were different. So that's how the initial experience helped me in my career. I even had the opportunity to work with a private equity firm during those years and once again the depth of exposure, the modelling and the interaction with different consultants, line management and promoters greatly influenced my journey.

You worked for a long time at ASK Investment Managers. How was working with Bharat Shah, and what were your key learnings from your time there?

After working at sell-side and private equity, I transitioned to the buy side by joining ASK Investment Managers, which was essentially a long-only portfolio manager. My intention was to learn and strengthen myself as an investment professional. Therefore, working at ASK was not only a reinforcement of what I was comfortable doing but also stretching myself to look at diverse industries and businesses. I had the opportunity to interact with companies from various industries, market capitalisations and to identify winning firms. The breadth of exposure across industries expanded significantly when compared to a more straightforward approach on the sell-side. We also looked at other matters such as quality of management (including aspects of capital allocation, etc) , corporate governance, ethics and management integrity.

Can you describe your overall investment philosophy? What kind of stocks or market conditions get you excited?

When it comes to an investment philosophy, I believe in investing in businesses with superior economic character, that create value as they grow and to invest in them at a price-value gap or with a margin of safety. I believe that growth is a sub-set of value and a part of value discovery. But within growth, I look at the quality of the growth and the character of the underlying business. If certain companies can sustain a strong economic character like high returns on capital employed then surely, they have a certain sustainable competitive advantage. So that's the first line of preference for me. Having said that, we try to find value in special situations, cyclicals and deep-value circumstances. As a fund manager, my goal is to have a portfolio achieve a balance between quality growth at a reasonable price and the opportunity to take advantage of special situations. I am fine working with all market conditions except for strongly surging, overheated and overvalued markets. When markets surge sharply and are stretched, it becomes challenging, especially for the investment style that I follow.

Mirae's equity funds have been known to successfully manage various market cycles over the last 15 years. What has happened to the performance of the key funds, particularly the Large Cap, ELSS, Focused and Midcap Funds, over the last two years?
As a house, we have remained fairly disciplined about the investment criteria that we use. This includes not chasing stocks where valuations have gone ahead of fundamentals and conversely selling portfolio businesses where valuations cannot be justified. In that context, funds might have missed out in the ongoing rally led by strong rerating across certain sectors ranging from capital goods to defence. Performance over longer periods such as five years while being ok could have been better in the more recent past. In that sense, the portfolio has not benefited from the surge in rerating across some cohorts of the market.

How do you plan to improve the performance?

There is a twofold approach going forward. First is patience with some of the businesses we have in the portfolio. We have to wait for sectors and stocks where we are comfortable with the quality, growth outlook and valuations. During the last two years, we may have built in exposures to consumer-facing discretionary businesses as well as banks because they were available at attractive valuations and had solid franchises. We track each of the investments closely and we would like to remain invested unless the business character or initial hypothesis has changed. So this is one part where we have to be patient with the business that we have maintained.

In addition, we believe that in infrastructure and real estate the capex upcycle is underway. While it might not be identical to prior cycles, we have reinforced and added names which still have an absolute upside and are a play on this part of the economy. We have actively incorporated such ideas into the portfolio and that's the two-fold approach. Having said that, we are not chasing momentum just for the sake of it; the stocks in which we are looking to invest should have merit. We recently had election results and, in the days to follow, we will have a budget session, so we have to be mindful of everything and patient with our conviction.

Large caps are spread across a universe of 100 stocks. What is your game plan to generate alpha for Mirae Asset Large Cap Fund?

From the top 100 I believe selecting stocks with appropriate strong over weights depending on the degree of conviction is the first step. Within this the core approach to stock selection has already been outlined before. Furthermore, at the portfolio level keeping a blend of quality, structural growth opportunities and deep value, cyclical and special situation plays should be appropriate ways to capture the opportunity presented by the market. Lastly, large caps can also invest upto 20 per cent in non-top 100 stocks and good stock selection from this cohort will also help.

Under what circumstances do you exit a stock?

There are a few circumstances under which we exit the stocks. We have built models of fair value and stock exits are considered when the current market price exceeds those fair values even after the more liberal operating and profitability assumptions. In another scenario, if a better idea or value proposition emerges, we may choose to reduce our positions in that specific stock and instead invest in the new venture. Finally, if the character of the business or the initial assumptions we have had change and are going to remain the same way for a prolonged period of time, then we would like to exit those situations.

You continue to hold new-age tech stocks despite regulatory challenges. How do you justify these investments to your investors and what's your long-term view of these companies?

The business models of new-age companies are evolving but if executed well they should be fairly asset light, high return on capital employed (ROCE) models in steady state. There are some stocks, for example in the food tech industry, that have done well and created value for us when we picked them at lows and we have taken profits in them as well. These stocks are broadly, operationally in line with our expectations, so we would want to remain invested. Most of these businesses are essentially platform models where the capital intensity is relatively low. So, you have a low-capital-intensive model with reasonably strong growth because, in many cases, penetration levels are still low. However, in one of our holdings in the fintech space, we have had to see unfortunate regulatory actions on an associate company of the listed entity. This was unfortunate as the business model had yet to stabilise but has become undone before that. Of course, stock price volatility can often be more extreme than the underlying damage to business. Besides the value of the platform, underlying cash and investments all add to what might be the fair value. Thus, going forward, management and leadership will have to navigate the challenges, pivot and create value. We will accordingly evolve our position.

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