Investment strategy

2020 marks as one of the most distinguished years with equity market performance divided into several phases as -- pre-covid, during covid and post-covid. While we all wish to come out of the pandemic situation soon, the chaotic stock markets have gained investor interest even more. Most investors are curious to find the best stocks, the best sectors to bet on to ride this volatile phase smoothly. In an interview, Akash Singhania, Fund Manager, Motilal Oswal AMC shares the best investment strategy to sail through the pandemic. He also speaks about the fall in performance of the most popular scheme of the fund house, Motilal Oswal Multicap 35 Fund and what lies ahead for the investors.

What is your view on the top-performing sector- the pharmaceutical sector which has run over 50% year to date. Is the sector still attractive? Any special stocks that you prefer in the sector? Is there any exit period?

The pharmaceutical sector is a defensive sector and companies in the sector will report robust earnings growth this year. However, valuations of most of the companies have become fair and rich in some cases and so one has to be purely bottoms up and stock-specific in selection. Companies which are focused on the domestic Indian market should continue to do well in our view.

Which are the most favoured sectors during Covid and post Covid for investors?

During Covid, investors have been favouring defensive sectors like software, pharmaceuticals and consumer staples as these sectors are defensive and have earnings resilience. Post-Covid, as we see recovery, initially automobiles and consumer discretionary will pick up and in later stages, financials would be a direct play on growth. Telecom and insurance should continue to be a favoured sector in all stages whether during Covid, or post Covid, recovery.

What should be the Covid, and post Covid, investment strategy of a retail investor? Any special advice.

Investors should allocate money to equities as per a systematic investment plan according to their risk appetite and invest for long term horizon. Rather than guessing or timing the market, it is more fruitful to be disciplined and consistent in investing approach. Longer-term investment horizon reduces volatility and enhances prospects of better returns. Asset allocation should be done in a way that risk and reward are balanced and as per the needs of the investor.

Moving to the most popular equity scheme of the AMC, the Motilal Oswal Multicap 35 Fund slipped to the third quartile in 2018 and 2019, after staying in the top quartile for three years- 2015 to 2017 . Year to date also, the fund stands in the third quartile. What went wrong?

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The fund has completed six years since inception from FY2014 to FY2020. It is among the few select funds to consistently beat the benchmark in five out of the past six financial years (except FY19). After the first three years of top quartile performance, in FY19, few companies in the portfolio suffered due to over-valuation and few companies had growth issues mostly linked to the external environment. Not owning some index heavyweights also hurt performance.

Motilal Multicap 35 fund started with superior performance and soon became one of the favourites for investors. The scheme became one of the top three largest fund in the multi cap category within a few years of its launch. What lies ahead for the scheme? How much returns can investors expect from Motilal Multicap 35 Fund in an investment horizon of five years or seven years?

Motilal Multicap 35 fund follows the QGLP style of investing where QGLP stands for Quality Growth Longevity and Price. We have a disciplined and robust investment process and we believe performance is an outcome of following a superior and consistent process. Firstly we invest with a long term horizon in mind. Secondly, we have a focused approach to investing where we invest in around 25 companies in the portfolio.

The fund has a mix of companies which stand high in terms of quality and growth as well as longevity of growth. Quality to us means a strong business model, great management and execution and good corporate governance. The fund has an average return on equity of more than 20%, return on capital employed (ex-financials) of 24% and net debt to equity (ex-financials) of close to zero. Growth is denoted by profit (PAT) growth and the fund has delivered over 16% earnings growth compounded in the past few years which is much higher compared to the broader market earnings growth.

The fund invests primarily in companies with stable and structural growth which have a long runway ahead. The price paid should be reasonable compared to the value derived and margin of safety attained. Investors can expect this disciplined investment process and high-quality high growth portfolio to continue in future to achieve steady compounding of earnings and consequently returns in the long term. We believe that longer-term earnings growth is the primary driver of stock returns and hence maximizing the growth potential with pristine quality as the backbone of the portfolio will create superior returns for the investors in the longer run.