Citywire AA-rated Ajay Tyagi says his team’s stock selection is driven by buying high quality businesses that have a sustainable growth runway in front of them. “We don’t look for opportunities where we can make a quick 30-40% return. Rather, we buy for keeps and this enables us to keep the turnover low and therefore not worry about size,” says Ajay Tyagi, without mincing his words. The Citywire AA-rated fund manager has been through the equity market’s peaks and troughs for over two decades.
Speaking to Citywire Middle East, Tyagi, a fund manager at UTI AMC, one of India’s largest asset management firms, runs the UTI’s flagship Quality-Growth equity strategy. This style of picking stocks is reflected in UTI India Dynamic Equity fund and as well as the UTI India Balanced fund — both of which are registered for sale in the UAE. Back in 2000, when he joined UTI, Tyagi was an equity analyst tracking the IT, telecom and media sectors. Today, he manages both offshore funds and onshore mutual funds with assets under management of approximately $3.34 billion. “We also don’t try to predict the impact of macro-economic factors like interest rates, inflation, currency etc. on the markets or certain sectors etc. Instead, we channelize all our energy on identifying great businesses which have a strong competitive advantage and a long growth runway in front of them.” “Once identified we slowly and gradually build positions in such companies and then sit patiently on them for a very long time in order to generate sustainable alpha,” he continued.
The UTI India Dynamic Equity fund invests primarily in growth-oriented Indian stocks listed on the BSE (formerly Bombay Stock Exchange) and the National Stock Exchange in India. Over one year, the fund delivered a hefty 39% return while it is up more than 14% over last 3 years (as of March 8, 2021). In 2020 alone, the fund returned 27.4% in USD terms, beating the benchmark MSCI India’s return of 15.6%. Similar is the performance of the UTI India Balanced fund – returning 15.06% in one year (with dividend). “We attribute the performance of our funds 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,” Tyagi explains.
Long on India
UTI is one of the oldest asset managers in India and Tyagi says his investment team, (which comprises of 19 fund managers and research analysts), has an average experience of over 10 years. Tyagi says his team’s relentless focus on quality and long-term orientation has led it to identify some of the ‘great businesses’ in Indian equity markets, such as Motherson Sumi, Page Industries, Larsen & Toubro Infotech Ltd, Shree Cement, Info Edge, Astral Poly, Bajaj Finance, Pidilite, Marico etc. at various points in time over the past 10 years. “We realise that is the most sustainable way of alpha generation and we want to continue pursuing this strategy. We have a portfolio turnover ratio of about 10%-20% which shows that once we identify a company that fits our investment philosophy, we maintain our exposure for long periods rather than being reactive to each and every news in the marketplace which is more often than not just noise,” he reasons.
He further notes his team has a robust investment process focused around understanding cash flows and return on capital across business cycles which helps it narrow down the investment universe to extremely resilient businesses. “While for others, India could be a small fraction of their business but for us it is the only business that we do and we do it with a relentless focus,” he admits.
Secular growth Vs. cyclicals
Speaking about his fund’s investment processes, Tyagi said his team’s stock selection is driven by buying high quality businesses that have a sustainable growth runway in front of them. “Quality signifies businesses that generate high return on capital through the cycle and as a result generate strong cash flows.” These cash flows, he says, 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.” He however adds that the focus clearly is to buy 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,” he maintains. Having said that, he says, his team is aware that carefully chosen mid and small caps provide long term growth and hence the portfolio always has a reasonable mix of them.
“We focus on the underlying businesses that are part of the portfolio rather than on the state of the market, global / local macro factors, etc. We are averse to market timing in terms of sector calls but are not averse to taking big sectorial underweight / overweight positions if longer term drivers are absent/ favourable.”
There are however certain risk factors to the Indian equity markets, Tyagi admits. The key risk is a sharp and sudden rise in commodity prices, especially crude oil, as India is a net importer. “While a gradual rise in commodity prices gives an opportunity to the economy and businesses to absorb the impact, a sudden rise impacts the current account deficit significantly and in turn has a negative impact on inflation, the currency and interest rates.” Another risk is the fear of virus comeback. “While India has so far been able to prevent a second wave of the Covid-19 pandemic, a resurgence of the virus can impact the economic recovery seen over the past few months and hence poses a risk to the equity market, Tyagi adds. The third risk that he envisages is the potential risk-off environment. He said the Indian equity market has benefited from rising allocation to emerging markets in general and India in particular due to better long term growth prospects which has led to high inflows in the market. “Any event however which can trigger a global risk-off trade may potentially impact the Indian market negatively in the short term,” he cautions.
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