PGIM India Midcap Opportunities Fund has won the Morningstar Fund Award in the Mid Cap category in 2022. The fund has outperformed the category and the index over the past three consecutive years. Aniruddha Naha, Head of Equities, PGIM India Mutual Fund, talks about how he is navigating the fund.
PGIM India Mid Cap has outperformed its category and benchmark in 2019, 2020, and 2021. 2020 and 2021 have been particularly good for the fund. Can you take us through the strategy of the fund?
The fund has focused on investing in businesses with strong Operating Cash Flows (OCF), clean balance sheets, and corporate with good governance. Besides that, the fund has followed a strategy of investing in businesses where valuations are reasonable for the growth they offer. Hence, the fund has stayed away from very expensive names and also companies where their outlook might be great, but lack cashflows to support it. Over the last 2 to 3 years, other than strong stock selection, the fund has generally been quite underweight financials and overweight Information Technology (IT) as a strategy which played out very well. Lastly, the fund has a low overlap with the benchmark and some exposure to the small-cap space, which has helped the performance.
What helped the fund witness a comparatively lower drawdown in CY 2021 and 2020?
The fund has generally focused on good businesses with earnings visibility, available at reasonable valuations. Given this fact, in a fall, these companies had earnings and valuation support, which helped restrict the drawdowns. The call to be underweight financials and overweight IT also contributed well during falling markets.
Given the headwinds like inflation, rising crude oil prices, Fed tapering, Foreign institutional investors (FII) exit, and the ongoing Ukraine-Russia war, the mid-cap space could witness relatively higher volatility. In such a scenario, how do you plan to protect the downside and yet sustain the performance?
The near-term outlook is challenged due to a lot of macro factors, including geopolitical, monetary policy and flows, which will invariably lead to volatility. The fund continues to have IT and pharma as a preferred sector along with an underweight position on financials. Volatile macros are not very conducive to financials and an underweight position should help in protecting drawdowns. The fund has decent exposure to some high-quality industrials and material names, which should do well in case of industrial recovery. The focus will primarily be on trying to gauge earnings growth for the companies and check out valuations relative to that. Mid Caps and Small Caps have corrected reasonably well, giving a good opportunity to build long-term portfolios.
What can be the impact of the ongoing Russia-Ukraine war on the Indian economy?
India is an importer of commodities and energy and higher energy prices have a triple whammy of higher inflation, higher trade deficit and higher Current Account Deficit (CAD), which are all detrimental to the macros. Higher inflation will invariably see higher interest rates and a widening CAD could lead to currency depreciation. Hence, there could be an impact on the overall Gross Domestic Product (GDP) growth numbers. Sectors which have raw material linkages to crude would be susceptible to margin pressures and impact near-term profitability. The good part of corporate India is that their balance sheet is underleveraged and hence they are far more resilient to face a challenging commodity and energy environment.
In which pockets are you finding opportunities at this juncture?
The mid-cap and small-cap segments have seen decent correction in the recent past. Sectors that have linkages to crude as raw material has seen decent corrections. If one takes a 3-to-4-year view, there are reasonably good opportunities in auto and auto ancillary, industrial goods, real estate, and home building products.
Winners of Morningstar Fund Awards 2022