Mid and small caps have seen quite a rollercoaster ride over the last 5 years. It is to Vinay's credit that through all these ups and downs, he has managed to consistently deliver alpha and 1st /2nd quartile performance. What now is Vinay doing to maintain his winning ways in the Religare Invesco Mid & Small Cap Fund, now that the segment has rallied sharply? Read on as Vinay gives rich insights into how he is maneuvering his portfolio strategy to align with the current market context and his outlook.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF : Your performance since 2010 has been commendable - in terms of robust alpha generation on a year-on-year basis as well as healthy 1st and 2nd quartile performances compared to peers. What are the key factors that have contributed to this consistently superior performance?

Vinay : We follow a strategy of buying into good quality midcap companies which are available at reasonable valuations. We are looking for companies that preferably have a good track record in terms of return on capital and can grow in size and scale over time. We do not buy midcaps solely because they are cheaper than their large cap peers. For this fund, we follow a bottom-up investment approach. The returns are a function of the stocks we own but the identification of stocks and consistency is a result of the investment process.

Using our investment process, we identify companies with better growth trajectory and healthy capital return ratios. These form the core of the Portfolio and the Portfolio has a growth bias.

WF : A noteworthy feature within your performance was 2013 - where you delivered a double digit positive performance when your benchmark gave a negative return. What were some of the calls that helped you deliver this last year?

Vinay : Our top 5 attributors in CY13 were Britannia, Tech Mahindra, PI Industries, Biocon and Torrent Pharma. A common thread in most of the good performers was good business quality, consistent financial performance and reasonable valuations.

WF : Now that mid and small caps have run up appreciably, what are the changes you are making in portfolio strategy and composition to continue to stay ahead of your benchmark?

Vinay : While the broad strategy of buying into good quality small and midcap companies at reasonable valuations does not change, of late we have booked profits in some of the high flying industrial names and rotated the portfolio into consumer discretionary stocks.

Currently, the portfolio is well balanced across the consumption, investment and export themes.

Companies in the consumption theme are direct or indirect plays on the growth in consumption expenditure and, which are experiencing a structural growth and demand spread across different consumption categories. Some of the portfolio companies in this theme are Britannia, DB Corp and VIP Industries.

In the Investment theme are companies exposed to "investment demand" related businesses, which are available at attractive valuations and have a solid balance sheet. We feel that such companies can weather the current weak economic conditions and experience a 'burst' of growth whenever the economy recovers from its cyclical downturn. Some of the portfolio companies in this theme are Voltas, Grindwell Norton, Sadbhav Engineering and VA Tech Wabag.

We also have exposure to the exports through a portfolio of companies, which are globally competitive and benefit from international trade. These companies, by the virtue of their competitive advantage, are able to retain a higher share of benefits from currency movements thereby enhancing their RoCE over time.Some of the portfolio companies in this theme are Torrent Pharma, AIA Engineering, Biocon and PI Industries.

WF : What is the investment argument for mid and small caps now, after this sharp run up?

Vinay : Midcaps are currently trading at par with their large cap peers in terms of trailing twelve-month valuation. Over long periods of time, a diversified portfolio of good quality Midcaps brought at reasonable valuations have delivered attractive returns. Thus, investment in this sub-asset class is suitable for a long-term investor. Midcaps tend to perform better in an improving macro-economic environment and when interest rates are in a downward trajectory. We feel that over the next five years, we can experience a more benign monetary environment and an improvement in economic growth.

WF : What is the split between mid and small caps in your fund now? How has it changed in the last year?

Vinay : The fund is invested about 75% of its assets in MidCaps and rest in Smallcaps. Over the past one year, we have increased our weightage in Smallcaps as we were able to find some good quality companies at reasonable valuations in that space. Also note that our fund's weighted average market capitalization is about US $1.5bn compared to US $2.6bn for the benchmark.

WF : Which sectors are you significantly over and underweight in your fund now and why?

Vinay : We are overweight Consumer Discretionary and Industrials Sectors and are underweight Healthcare and Financials sectors. The fund is constructed on a bottom-up basis with a portfolio of stocks with an attractive risk-reward ratio. Thus, sector allocation is a result of stock selection, and not vice-versa. We are overweight/ underweight the above sectors as we have been able to identify and allocate more /less assets to stocks in those sectors.

WF : Your fund is around Rs. 200 crores in AuM. What size can it reach to, before it starts becoming unwieldy to manage a fund with this kind of a mandate?

Vinay : We run a significantly diversified portfolio of 45-50 stocks. Our liquidity analysis of the underlying portfolio suggests that the capacity of the fund is significantly larger than its current AUM. We do not envisage any headwinds from an increase in size of the fund. Even in our peer group funds, we see funds that have a significantly larger fund size.

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