'The focus is on secular growth businesses rather than cyclicals'

We caught up with Ajay Tyagi, Fund Manager, UTI Equity Fund to discuss the fund's outperformance, the AMC's bottom-up stock-picking approach, sectors to avoid, and the outlook for mid and small caps

Over the last one year, your fund has beaten the category and the benchmark by a wide margin. What's responsible for this?
We attribute this to our relentless focus on being bottom- up in our approach and taking a view on businesses from a longer-term perspective, rather than being driven by narratives around which sectors may or may not do well over the next few quarters. It is precisely because of this reason that we have stayed bullish on our holdings in the IT and pharma sectors and they have been suitably rewarded over the last six months. We feel that once deep fundamental research is done on businesses, one must hold onto them patiently with conviction in order to generate sustainable alpha.

What's your stock-selection criteria? What kind of stocks would you avoid in the aftermath of the pandemic?
Our stock selection is driven by buying high-quality businesses that have a sustainable growth runway in front of them. 'Quality' signifies businesses that generate a high return on capital through the cycle and as a result generate strong cash flows. These cash flows are the source of strong economic value creation by the businesses and this economic value in turn is the source of sustainable long-term wealth for investors. Therefore, we focus on buying great businesses and staying invested in them for the long term and letting their economic value compound. After solving for quality and defining the universe sharply, we look for businesses which would witness strong long-term growth by riding on India's consumption boom over the coming decades. The focus is clearly on secular growth businesses rather than cyclicals.

Because of the focus on quality attributes and strong balance sheets with low to no debt, the portfolio by design is very resilient and can survive sudden economic shocks. Weak businesses don't find a place in our portfolio anyway and therefore, there is nothing much that we had to do in the last six months to tweak our portfolio.

Which sectors would you prefer in the medium term? Which would you avoid?
UTI Equity Fund follows a bottom-up philosophy and the sectoral weightages are therefore an outcome of our stock selection rather than any view on sectors. As stated above, we like businesses that have the ability to create economic value by the way of generating high ROCEs and high cash flows. Given this prerequisite, most of our investments fall into sectors like consumer goods, IT, pharma, private-sector banks and auto.

Equally, businesses that lack these characteristics are the ones where we don't make any investments. That is precisely why the fund doesn't have investments in sectors like metals, oil and gas, utilities, real estate and infrastructure as we are unable to find businesses with strong economic characteristics in these sectors. Across time periods, you would find the fund being bullish on the former and bearish on the latter.

What's your outlook for the mid/small-cap segment? Are you planning to raise your allocations there?
UTI Equity fund is a multi-cap fund and is truly agnostic towards investing in large, mid or small caps. The fund does not take a call on which market- cap bucket will do well over the next few quarters but true to its philosophy, it builds exposure in the best businesses across market-cap buckets. Like the sectoral exposure, the market-cap exposure of the fund is also an outcome based on our stock selection.

Having said that, over the years, we have seen that our exposure to mid and small caps has been between 30-40 per cent and it should remain in the same ballpark in the foreseeable future as well