What is responsible for the outperformance by your fund in the last one year?
The consistent performance of the Reliance Multi Cap Fund can be attributed to buying sustainable-growth businesses at reasonable price as an investment philosophy, avoiding momentum investing, and being disciplined on valuations. The emphasis on right businesses, along with right valuations and a medium-term investment horizon, has been critical to long-term wealth creation. Over the years, we have consciously avoided overpaying for growth, while giving high importance to sustainability of growth.
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How do you pick stocks for this fund?
Reliance Multi Cap Fund follows the investment philosophy of growth at reasonable valuations. Our focus is on investing in good-quality businesses with long-term growth potential, available at rational valuations. We seek to participate in good-quality structural-growth businesses without overpaying for growth.
We like companies with established or scalable business models, long-term sustainable growth and a high ROE or a potentially high ROE.
When do you sell a stock?
The fund has a medium-term investment horizon of three to five years. Investments are considered with the thought of these businesses scaling up faster over the medium to long term. Thus, investments continue to be in the portfolio if they are growing as per expectations and do not disappoint consistently.
We decide to sell our holdings in the following instances: current valuations already reflect the expected medium-term growth and change in medium-term growth outlook.
What kinds of stocks do you generally avoid?
We avoid pure momentum bets where the current valuations largely reflect the estimated medium-term growth. Also, we avoid businesses with corporate-governance challenges or fractured balance sheets.
Which sectors are you bullish on?
Corporate lenders, capital goods and engineering, and domestic cyclicals appear well-placed to capture the anticipated recovery. There are also opportunities in areas which can witness mean reversion, like healthcare, or return of operating leverage, like hospitality.
How do you allocate capital across large, mid and small caps?
Growth at reasonable valuations is an important guiding principle to determine our allocations across market caps. Within the market-capitalisation range, our allocation is based on relative valuations. Portfolio shifts can take advantage of prevailing market distortions in terms of valuation differential between large, mid and small caps.
About 50 per cent of your fund is invested in mid and small caps. This is at a time when mid/small caps are witnessing a correction. How do you see that?
Valuation differential provides an opportunity to capture potential growth opportunities at reasonable prices. Over the last few months, we have witnessed a significant correction in the mid- and small-cap space, providing an opportunity to capture the market shift. In line with the same, we have increased our allocations to this segment.
How do you contain volatility in mid and small caps?
We attempt to use volatility to our advantage by shifting weights across the market-cap sub-segments based on the market conditions and a medium-term investment horizon. The fund maintains a well-diversified portfolio in general. Specifically, within the mid- and small-cap space, allocations to individual holdings usually do not exceed 3 per cent at the time of investment. Further, within mid and small caps, significant allocations are made to companies with market capitalisation of more than Rs 10,000 crore, thereby ensuring adequate flexibility to manage the portfolio.