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Overweight on Pvt Banks, IT, Pharma & Consumer Staples: Ajay Tyagi
Wed, Feb 10, 2016
Source : Jeni Shukla, Citrus Interactive

Mr. Ajay Tyagi is a Fund Manager and Executive Vice President at UTI Asset Management Company. He is a CFA Charterholder from The CFA Institute, USA and also holds a Masters degree in Finance from Delhi University. He joined UTI in the year 2000 and has been working in the equity research and fund management functions since then.

Following the exit if Anoop Bhaskar from UTI Mr. Tyagi has taken over as the fund manager for the flagship UTI Equity Fund and UTI Bluechip Flexicap Fund.

In a candid interview with Citrus Interactive he shares his fund management philosophy and outlook on the markets.

Some excerpts of the interview:

You have recently taken charge as the fund manager of UTI Equity and UTI Bluechip Flexicap Fund. What will be the positioning and strategy of the funds going forward?

I was running offshore funds and a small book on the HNI PMS side.  The thought process with which I run all my equity schemes (and therefore UTI Equity and UTI Bluechip Flexicap will be no different) is that companies exist to create value. If they don’t create value then obviously you have to write an obituary at some point in future. Value, in the simplest way, is measured by the Return on Capital Employed (ROCE) generated basis the cost of capital. Cost of capital could vary between countries. A company will survive in the long run only if it gives return on capital higher than the cost of capital. For the purpose of determining whether the business has the potential to generate wealth you have to look at sustainable long term ROCE compared to the cost of capital. This approach is easy to comprehend but difficult to practise.

You will be surprised to know that 80% of businesses in India don’t meet this criterion.

The second most important thing is whether the business has an ability to grow. If a business is generating huge ROCE  means it will generate a huge amount of cash. An excellent business is one which is able to deploy this cash for future growth.

The last thing I look at is valuations. Everything is right and wrong at a particular price. At the same time, valuation is a double-edged sword. Some businesses will never trade cheap while some will always trade cheap.

When I find such an idea we take small exposure and gradually build it over time.

 

Based on your stock selection philosophy, do you find more ideas in the large cap or mid cap space? 

Bluechips are the companies which generate the maximum amount of wealth for investors.

Bluechip is not about large, mid or small market capitalisation. It is about having sustainable ROCs over long term. At any point in time you will always find bluechips across categories. In the last 12-18 months the midcap segment had run up too much. The amount of inflows in mid and small cap category of MFs in India is the sole reason for midcaps rallying so much. After some correction I see value returning in midcaps. I am beginning to see ideas in the midcap space now at the right valuations.

 

Both the funds have a very high large cap exposure (78% for UTI Bluechip Flexicap and 76% for UTI Equity). Are you bullish on large caps compared to mid caps?

UTI Equity has been run by Anoop Bhaskar as 80-20 large-mid allocation. I will continue to maintain that. UTI Equity is a very old fund for us and I do not want to disturb the asset allocation of that fund. It has always been known as a conservative large cap fund. It will continue to remain that. However, I could change the constitution within the fund. Over time I will reduce exposure to PSU banks. The fund has been low on Pharma and Healthcare allocation which I might increase. The fund has a lot of energy stocks and some amount of commodity stocks. I tend to remain underweight on these sectors so I will change this over time.

Currently UTI Bluechip Flexicap has 20-22% midcap exposure. I see mid caps getting corrected significantly over time. If this process continues for the next 6 months the midcap allocation could increase to 35-40% in the portfolio. I am comfortable going upto 40% in midcaps in this fund. The fund will be more aggressive.

 

Currently UTI Equity Fund has 81 stocks in the portfolio. Do you feel the need to reduce the number of holdings?

The stock count has already been reduced to 71. I think I will be more comfortable to have 50-60 stocks.

 

UTI Equity had a 7% cash allocation by end of December 2015. Is that likely to be maintained or do you see some buying opportunities?

I have already reduced the cash allocation to 3.5%. If you observe portfolios managed by me you will never see large cash calls. It never ever goes beyond 5% but 5% is also a very rare instance – when dividends have to be paid, liquidity requirement etc. My philosophy is that if the client has given me money to invest in equities I should not be taking the asset allocation calls at my end. This call should be taken by the advisor.

 

With equities having a shaky start this year, what is your outlook on the market?

What happens in the beginning of the year never determines the course of the market for the remaining year. The valuations at which we are today are average valuations of the last 20 years which is about 15 times. Last year at the same time we were trading at 19-20 times forward. We were trading at 20-25% higher than the average at 30,000 levels. So the valuation correction itself has been 20%. Earnings have moved at least 5%. So adding both the factors we are talking about the markets being cheaper by at least 25% from the peak. In terms of expectations, the froth has moved out. The expectations have moved slightly towards pessimism. I always feel more confident when I keep hearing negative noises. The probability of the markets surprising us in 2016 is on the higher side.

 

Which sectors are you currently betting on? Which sectors are you avoiding in your portfolio?

Sectors more amenable to wealth creation are private sector banks, IT, consumer staples, pharmaceuticals and to some extent auto. I usually tend to remain underweight on energy, commodities and industrials. Any business in the clutches of government in terms of valuation is not likely to be part of my portfolio.

 

What are your hobbies?

I like driving and watching old Bollywood movies.

 
 
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