IN CONVERSATION WITH Ankit Jain Fund Manager - Mirae Asset Midcap Fund

Mirae Asset Midcap Fund (An open-ended scheme predominantly investing in midcap stocks) has completed 1 year track record. The last 1 year has been quite challenging, can you share your experience over the past 1 year?

During the last 1 year, the market has been extremely volatile led by the COVID pandemic. To discuss the last 1 year journey, it is important to take a step back at the time of Midcap fund launch during same time last year, we argued about the cyclical economic recovery led by 3 factors; 1) Improving rural demand; 2) Improving NBFC liquidity; and 3) Reduced global volatility on the wake of positive development in the US China trade deal. This along-with favourable valuation for midcaps trading at ~20% discount to large cap made an attractive proposition to invest.

During the course of the year, we have witnessed a positive progress on all of these 3 counts with good monsoon aiding onto rural income, RBI rate cut adding onto system liquidity and progress on the trade deal between the US and China aiding onto global sentiments. This is followed by the bazooka given by the Indian government in the form of corporate tax rate cut which straight-away added around 10% to the corporate earnings. There were enough data points which suggest that the Indian economy was on improving trajectory during Jan-Feb’20 which suggests cyclical recovery in earnings growth until COVID pandemic hitting us, which in our view has further pushed back corporate earnings recovery by 9-12 months across different businesses.

Can you explain the investment process and strategy for Mirae Asset Midcap Fund?

As per the mandate, the midcap fund has to invest 65% in midcap stocks (out of the 150 stocks based on the last 6 month average market cap). For, the remaining 35%, there is flexibility to invest across any market-cap. In this fund, apart from the midcap weightage of 70% (+/-5%), we do have the large cap weightage of around 20% (+/-5%), in order to manage overall portfolio liquidity.

Our investment orientation is mainly towards the growth of businesses with a focus on capital efficiency and quality management. We follow a bottom-up approach in our investing. We prefer businesses with large growth opportunities, good returns on invested capital, competent management and reasonable valuation. With regard to portfolio construction, we seek to construct a diversified portfolio, which could handle mistakes and deliver decent risk adjusted return.

Our stock selection process has three aspects: business selection, management analysis, and valuation. We look at quality businesses with decent growth prospects as well as return characteristics (i.e. Return on capital employed - ROCE). This is a crucial initial filter. The second filter is with respect to management analysis, which is a bit subjective but you have to look at the track record and corporate governance. A well-managed company will have better capital efficiency, so the (Return on Equity) ROE's tend to be better than other companies in the same sector. The last factor is to arrive at a particular value. The value has to be more than the market price so that there is enough 'Margin of Safety'. The idea is not to buy cheap companies, but good companies at a reasonable valuation. One of the key concerns for Midcap has been liquidity. Can you share how are you managing this issue, especially considering that the midcap volumes would have dried in this crisis? Yes, typically midcap tends to have lower liquidity in comparison to large cap because of lower free float. Portfolio liquidity is one of the most important parameters while managing midcap mandate. We have done a detailed calculation pertaining to the midcap capacity as a fund house assuming criterias like, the percentage of portfolio liquidation in 15 trading days, threshold ownership of free float, etc. which suggest enough headroom.

What are the changes made in the Mirae Asset Midcap Fund portfolio considering the current crisis? Just a step back, when the fund was launched, we argued about cyclical recovery in the economy and favourable valuation. In that context, we were overweight on financials, consumer discretionary, pharmaceutical, PSU names across OMCs/capital goods/utilities etc. Now post COVID scenario, our fundamental view remains unchanged as we are taking current disruption as cash flow loss for 9-12 months for most of the businesses. We have made certain changes in the portfolio while reducing weightage in businesses with relatively weaker balance sheets and a longer road to business normalcy, particularly in financials and consumer discretionary sector. At the same time, we have increased weightage in businesses like AMC/insurance, chemicals, IT and utilities.

How are valuations for Midcap compared to Large Cap and historical trends? In our base case, we are building in H1FY21 earnings to be a washout with gradual recovery settling in during H2FY21. Earnings recovery could be sharper in FY22 led by lower interest rates, government stimulus and continued strong rural demand, assuming things don't alter severely because of the COVID outbreak. At this point, we are of the view that FY22 aggregate earnings cut could be relatively benign (10-15% range) in comparison to pre-COVID estimates. On FY22 estimates, Nifty Midcap100 trades at around 16x which is at around 7% discount to large cap Nifty50 which is fair in our view.

What are the suggestions that you would like to give to investors when they invest in a Midcap Fund? Given situation being fluid globally led by COVID pandemic has resulted in huge volatility. Moreover, Midcap tends to underperform large cap in such uncertain times which has been the case during this time around as well. Over the last 1 year, Midcap (-3.7% YoY) has under-performed large cap (-0.7% YoY) by 300bps. From bottom of Mar 23, 2020, Midcap (+41.7% YoY) has again underperformed large cap (+47.2% YoY) by 550bps. Historically, over a reasonable time frame of 5 years+, midcap tends to outperform large cap. Given the increasing volatility worldwide, midcap investors should have a time frame of 5 years to withstand near term shocks and possibly generate reasonable risk adjusted returns.

Source: Bloomberg

In the past, we have seen midcap funds giving decent returns in 3 ‒ 5 years after a deep correction. Are you seeing attractive investment opportunities and industry sectors you like in the midcap segment in the current conditions with a 3 to 5 year view? Historically, midcap funds have offered decent returns after every down-cycle and so is true in case of midcap underperforming during uncertain times. Post the COVID scenario, our fundamental view remains unchanged as we are taking current disruption as cash flow loss for 9-12 months for most of the businesses. We are positive on 4-5 themes; 1) Domestic consumption (including financials) because of the secular story of favourable demographics, increased penetration and market share gain providing comfort on longevity of growth; 2) Export led businesses (in sectors like chemical, auto ancs, etc), because of good growth visibility; 3) Certain PSU names across ultility and industrials because of attractive valuations; 4) Unorganized to organized segment theme helps in gaining market share and higher growth for organized players in sectors like building material, electricals, packaged food, etc; and 5) Pharmaceuticals because of favourable valuations. From the COVID led disruption stand-point, we have made certain changes in the portfolio while reducing weightages in businesses with relatively weaker balance sheets and a longer road to business normalcy particularly in financials and consumer discretionary sector. At the same time, we have increased weightage in businesses like AMC/insurance, chemicals, IT and utilities. Portfolio Psychographics

Portfolio Top 10 holdings % Allocation Stock Concentration % Allocation Limited 3.97% Top 10 34%

The Limited 3.90% Top 20 59%

SRF Limited 3.82% Top 30 78%

MindTree Limited 3.69% Top 40 92% Gujarat State Petronet Limited 3.62%

Tata Consumer Products Limited 3.56%

Max Financial Services Limited 3.31%

Axis Bank Limited 2.91%

Syngene International Limited 2.76%

Balkrishna Industries Limited 2.69%

Other Equities 63.82%

Equity Holding Total 98.05%

Cash & Other Receivables 1.95%

Total 100.00%

Source: Bloomberg, Data as on 30th June 2020. *Classification as per SEBI circular (SEBI/HO/IMD/DF3/CIR/P/2017/114) dated October 6th, 2017, the universe of "Midcap" shall consist of 101st to 250th company in terms of full market capitalization. The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the fund may or may not have any future position in these sector(s)/stock(s)/issuer(s).

Sector Allocation

Portfolio Top 10 Sectors^ % Allocation Market Cap Allocation Banks 11.35%

Pharmaceuticals 11.31%

Consumer Non Durables 8.78% AAUM ₹ 2,031 Industrial Products 8.49% Crore Finance 8.31%

Consumer Durables 7.73% 17.68% 70.19% 8.73% 3.40% Software 5.19% Large Cap Mid Cap Small Cap Cash Industrial Capital Goods 5.16%

Auto 4.94%

Auto Ancillaries 4.49%

Other Sectors 22.30%

Sectoral Holding Total 98.05%

Cash & Other Receivables 1.95%

Total 100.00%

Source: Bloomberg, Data as on 30th June 2020. ^Industry wise classification as recommended by AMFI. The sector(s)/stock(s)/issuer(s) mentioned in this presentation do not constitute any research report/recommendation of the same and the fund may or may not have any future position in these sector(s)/stock(s)/issuer(s). Mirae Asset Midcap Fund Midcap Fund: An open ended scheme predominantly investing in midcap stocks

Mirae Asset Midcap Fund is suitable for investors who are seeking*

• To generate long term capital appreciation/income • Investments predominantly in equity and equity related securities of midcap companies

*Investors should consult their financial advisers if they are not clear about the suitability of the product.

Disclaimer: The information contained in this document is compiled from third party and publically available sources and is included for general information purposes only. There can be no assurance and guarantee on the yields. Views expressed by the Fund Manager cannot be construed to be a decision to invest. The statements contained herein are based on current views and involve known and unknown risks and uncertainties. Whilst Mirae Asset Investment Managers () Private Limited (the AMC) shall have no responsibility/liability whatsoever for the accuracy or any use or reliance thereof of such information. The AMC, its associate or sponsors or group companies, its Directors or employees accepts no liability for any loss or damage of any kind resulting out of the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. Any reliance on the accuracy or use of such information shall be done only after consultation to the financial consultant to understand the specific legal, tax or financial implications.

For further information about other schemes (product labelling and performance of the fund) please visit www.miraeassetmf.co.in

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