Motilal Oswal Focussed Midcap Strategy

Fund Snapshot

Investment Philosophy

Motilal Oswal Focussed Midcap Strategy seeks to invest in a concentrated portfolio of their top mid-cap ideas (15-20 stocks) (companies ranked 101-400 in market capitalisation). The emphasis is on evolving business firms that can benefit from earnings growth and valuation re-rating. The mid-cap focus stems from the premise that most multi-baggers are found in the mid and small-cap space.

This fund has a clear investment philosophy focusing on long-term investments in high-quality firms that meet their QGLP investment framework. They have followed this strategy for over two decades, with little style drift.

Investment Methodology

The Motilal Oswal Focused Midcap Strategy aims to invest in a small number of their best mid-cap ideas (15–20 equities) (companies ranked 101-400 in market capitalization). The focus is on growing companies that stand to gain from valuation increases and earnings growth. The idea behind the mid-cap concentration is that small- and mid-cap companies tend to have the most multi-baggers.

With an emphasis on long-term investments in reputable companies that adhere to their QGLP investing framework, this fund has a distinct investment strategy. They have maintained this method for over 20 years with little change in aesthetics.

The Strategy Framework

• Quality of the Company and Quality of Management: Stable consumer-facing businesses with large business opportunities and long-term competitive advantages. Competent management runs businesses.
• Growth earnings: It is driven by volume growth, price growth, mix changes, and operational and financial leverage.
• Longevity (of Quality and Growth): Determined by the business’s long-term relevance, extending the period of competitive advantage, and maintaining growth momentum.
• Price: Reasonably priced concerning quality and growth prospects, with a high margin of safety.

This focused mid-cap fund strategy intends to Sit Tight once they have identified stocks that meet their stringent QGLP criteria. It follows a long-term buy-and-hold proceed in concentrated stock portfolios. The framework is based on the idea of identifying great businesses (defined as long-term quality and growth) and purchasing them at a reasonable price. This mid-cap fund guarantees that they only engage in high-quality businesses with appealing growth prospects by strictly adhering to the QGLP approach.

Portfolio Construction

• Strategy: Growth of 20%+ at the portfolio level, with a portfolio level ROE of 15%+.
• Reversion to mean: Invest in companies whose valuations have corrected in the last two years while maintaining their earnings profile.
• Sector: Commodities and global cyclical receive little or no allocation.
• Allocation: based on convictions about companies and not necessarily on price.
• Price movement-based action: Mismatches in price and timelines should result in folio action on both sides, i.e. selling and buying. Positions are regularly trimmed if price targets exceed timelines.

Portfolio Positioning

Manufacturing with an export focus – 26%

A significant increase in contract manufacturing, combined with Production Linked Incentives schemes, is focusing attention on this topic.

IT Services – 15%

Covid has played a critical role in reducing the five-year spend on digitisation to less than three years. Many companies across industries were forced to migrate and embrace digital operations, resulting in increased digitisation spending.

Infrastructure – 9%

Insurance should be observed as a multi-decadal growth story. For example, Max Financials is the fourth largest private life insurer and has the best-in-class matrix. They believe it is an attractively priced opportunity, given the overhang on Axis Bank and the collapse of the hold-co structure.

NBFC – 3%

The cost of capital is decreasing, asset quality is excellent, and companies are available at reasonable valuations.

Cyclical Recovery – 16%

A cyclical recovery bet and a proxy for infrastructure or real estate play.

Unique Feature

India’s growth story forms the central theme of this mid-cap fund.

What Makes FMS the Winning Construct?

Primary Investment universe: 101–400 stocks, based on market capitalization, with a 20% weighted average of large-cap stocks at the portfolio level.

Maintaining Positions in Businesses with Relatively Less/Low Leverage Growth Outlook of 20%+ at Portfolio Level throughout FY20-23 with Portfolio level ROE of 15%+ Reversion to Mean – Invest in Businesses where Valuations Have Corrected in the Last 2 Years While They Have Maintained Their Earnings Profile.

Finding Winners: Finding Multibaggers and stocks in the winning category across the wider markets.

Little to no allocations to commodities and international cyclical due to sector agnosticism.

Discretion over Discipline

The allocation should be based on company convictions rather than solely on pricing.

Keep your stock price and profit targets active throughout the next 1, 2, and 3 years.

Price and time discrepancies should prompt purchasing and selling actions on the folio.

regular position reduction if price targets exceed timelines

If profits are on par with or ahead of schedule and stock prices are not reacting, positions are regularly added.

The Framework for Strategy

The company’s and management’s quality are high: stable consumer-facing companies with significant market potential and sustainable competitive advantages. Companies are run by competent management.

Earnings growth is fueled by changes in mix, price increases, volume expansion, and operational and financial leverage.

Longevity (of Quality and Growth): Measured by the company’s ability to remain relevant over the long term, hold onto its competitive edge, and accelerate growth.

Price: Reasonably priced with a large margin of safety, given the quality and development possibilities. Once equities have been found that satisfy their strict QGLP criteria, this targeted mid-cap fund strategy plans to Sit Tight. In concentrated stock portfolios, it adopts a long-term buy-and-hold strategy.