Rising stars in mutual funds: Shreyash Devalkar on picking investments in big and not-so-big companies

Note to readers: Although most fund houses are process-driven and mutual fund schemes are driven by many guidelines, a money manager’s role cannot be undermined. At the heart of fund management is a core team of analysts and fund managers who track multiple sectors and companies on a day-to-day basis. And every scheme has a designated fund manager who is responsible for its long-term performance.

Shreyash Devalkar, 42, who in his early days worked as a credit analyst and sector analyst, today manages more than Rs 40,000 crore worth of investor assets at Axis MF.

According to data from Value Research, all the three funds managed by Devalkar -- Axis Bluechip, Axis Mid Cap and Axis Flexi Cap (name changed from Axis Multicap) -- have been top-quintile performing funds in their categories in last three-year period.

Devalkar was first intrigued by stock markets in late-90s when equity investors flocked towards shares of internet companies. “I was curious to know how these companies were getting valued during this time and later how the dotcom bubble went bust,” he says.

After graduating from UDCT College (now Institute of Chemical Technology), Mumbai, in 1999, Devalkar joined Larsen & Toubro as a project manager.

His curiosity in financial markets turned into a serious interest two years later, when he started to pursue MBA in Finance at Jamnalal Bajaj Institute of Management Studies.

However, Devalkar had to wait a while before managing funds. Between 2003 and 2011, he worked as an analyst -- first a credit analyst and then sector analyst covering IT and telecom. He got his break at fund management in 2011 when he moved from IDFC Mutual Fund to join BNP Paribas MF. While he joined as an analyst, he was soon given multiple funds.

Devalkar says at BNP Paribas MF he got the opportunity to handle funds that invested across market caps. In 2016, he moved to Axis MF.

Managing both large-caps and mid-caps

Devalkar has shown ability to spot investment ideas in bluechip companies (large-cap companies with market caps of over Rs 1 trillion), as well as mid-cap companies with market caps of under Rs 30,000 crore.

In the last one-year, the number of companies in Axis Bluechip Fund has been increased, to gain from the wider market rally post-last year’s market crash. Bluechip stocks did quite well, especially two years back when only stock prices of select quality names were going up.

Devalkar looks for high-quality high-growth businesses, with free cash flows, high return on equity, low debt-levels, and good corporate governance.

He says his investment philosophy for large-sized and mid-sized companies is more or less similar, but he does some more checks for the latter.

“Within mid-caps, we try to look for companies with differentiated products or services or those operating in areas where larger-sized companies cannot operate,” he says.

Devalkar also looks for companies that can challenge the leadership status of larger-sized companies in the large sectors, by providing a unique product or service.

He says real wealth can be created, if the mid-sized company can turn into a large-cap by changing its orbit or scope of operations.

A company can do this by changing its product or service or venturing into international markets with huge export orders.

Additionally, Devalkar checks if there is enough depth in the management in the mid-sized company. “Larger corporates usually have a lot more people in their management teams,” he points out.

Reading the signs in sector for profit-taking

When it comes to taking profits from his investments, Devalkar looks for cues in the sector in which the company operates. If the investment is in a sector where the business cycle tends to be short, Devalkar tries to be more agile in taking profits. He says that companies in the metal sector has shorter business cycles as the companies’ fortunes are tied to the demand-supply equations. A company in financial services tends to have a longer business cycle, though.

Devalkar says this approach helps him to understand if he should continue to hold onto a business even if its valuations have gone up. As explained earlier, he checks whether the company has changed its scope of business, in which case too he’d stay put even if stock price has run-up.

Devalkar says while he is more comfortable with companies with longer business cycles, companies with short business cycles can also give good investment opportunities.

Investments that did well, missing out on few

In the last one year. Devalkar’s investments in Information Technology (IT) sector have done well. With Covid-19 forcing everyone to work from home, but also stay connected, stock prices of technology companies rose as the sector became more important. Over the years, Devalkar says his investments in financial services companies have done well for his funds.

“We have been able to take advantage of retail credit growth with the help of our investments,” he says. HDFC Bank and Bajaj Finance are Devalkar’s top investments in both Axis Bluechip Fund and Axis Flexi Cap Fund, Cholamandalam Investment and Finance Company is top investment in Axis Midcap Fund.

Investments in financial services companies have a large share in Devalkar’s funds. In Axis Bluechip Fund, the sector has 41.1 percent share of investments, in Axis Flexi Cap Fund it is 39.2 percent and 21.5 percent in Axis Midcap Fund.

Devalkar says he was not able to take advantage of the run-up in metal stocks over the last one year. He says it is tricky to spot the bottom, or peaks in such cyclical sectors, and so one needs to tread with caution when analysing such sectors.