Fund Manager Talk | Why V Srivatsa is cutting back on financials in UTI Large & Mid Cap Fund

Synopsis

V. Srivatsa of UTI AMC is strategically reducing exposure to financial services within the UTI Large & Mid Cap Fund due to rising valuations. While maintaining a focus on stability and growth, the fund is selectively diversifying into other sectors.

V. Srivatsa, Executive Vice President & Fund Manager – Equity at UTI AMC, is paring exposure to financial services in the UTI Large & Mid Cap Fund after years of overweight positioning. With sector valuations inching up, Srivatsa is selectively diversifying into other areas while maintaining focus on stability and growth.

Edited excerpts from a chat:

Markets have been through bouts of volatility in the past year. How are you positioning UTI Large & Mid Cap Fund to navigate this environment?
Equity markets are volatile in nature, and equity funds will be subject to their bout of volatility. While we do not take cash calls to protect downside, we take care to ensure that our active calls are within the range of maximum 2-3% and share of high beta stocks is on the lower side as compared to the benchmark. In case of drawdowns in the last five years, we have generally outperformed the benchmark.

Your large and midcap fund has delivered a strong 5-year CAGR of over 26%, well ahead of the benchmark. What do you attribute this outperformance to — stock selection, sector calls, or portfolio construction?
Our investment philosophy is driven by relative value style and we focus on companies/sectors trading at attractive relative valuations versus history and in case of mid and small caps, we focus on stocks which are mispriced vis-a-vis the fundamentals. The outperformance is outcome of both top down and bottom-up approach where in case of large caps, it is sector driven based on the relative valuations versus the long term history and in case of mid and small caps, we focus on good fundamental companies where the valuations are mispriced vis-a-vis the fundamentals. Our portfolio construction is done keeping the benchmark in mind and generally we have around 85% of the portfolio in benchmark stocks.

Large & mid-cap funds straddle two very different universes. How do you decide the balance between stability from large caps and growth potential from mid caps?
We have an allocation of around 45-50% in large caps, 35-38% in mid caps and 10-15% in small caps depending on the relative valuations. The exposure in large caps is to impart stability to the fund and the reason why we have exposure far higher than the minimum level of 35%. In case of mid-caps, while the growth opportunities are higher than large caps, relative valuations are higher than large caps which has limited our mid exposure to near minimum levels. We have decent small cap exposure where we are able to invest in companies with good fundamentals and attractive valuations.

Financial services account for about 30% of your portfolio. Do you see this overweight continuing, or are you looking at diversification into other emerging sectors?
In case of financial services, we have had overweight positions for last couple of years as this was one of the few key benchmark sectors trading below the long-term valuations and sector had decent visibility on earnings. We had exposures across the entire spectrum of financial services comprising of banks, NBFC, Asset management companies and Life insurance companies. However, the valuations of the sector have inched up and we are reducing our weights in the sectors as per our strategy.

What’s your view on the current earnings cycle? Are you seeing broad-based growth or still concentrated in a few sectors?
In the first quarter of the year, while the headline earnings growth was in line with expectations, the earnings growth was led by oil and gas, metals and mining, capital goods and cement, while muted growth was seen in Information technology, healthcare, banks and consumer staples. We do not see signs of broad based recovery and this year growth would be largely driven by commodity sectors of oil and gas, metals and cyclical sectors such as capital goods. However, with the initiatives by the government in the last six months of rate cuts, improvement in liquidity and GST reforms would pave the way for broader earnings growth in FY27.

Given the rise of themes like manufacturing, digital, and healthcare in India, do you believe large & mid-cap funds are better placed to capture such opportunities compared to pure large-cap or pure mid-cap funds?
All the themes of manufacturing, digital and healthcare are either in large caps or mid caps depending on the company. A large & mid cap fund would have more flexibility and more leeway to add large set of companies in these sectors as compared to pure large and pure midcap company.

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