Rising stars in mutual funds: Ajay Tyagi on why paying a premium for a stock is not such a bad thing

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Note to readers: Although most fund houses are process-driven and mutual fund schemes are driven by many guidelines, a money manager’s role cannot be undermined. At the heart of fund management is a core team of analysts and fund managers who track multiple sectors and companies on a day-to-day basis. And every scheme has a designated fund manager who is responsible for its long-term performance.

In this five-part series, we have identified the next generation of fund managers who hold the potential to become top performers. All of them are under 45 years of age. Yesterday, we met Pankaj Tibrewal, Executive Vice-President and Fund Manager, Equity, at Kotak Mahindra Mutual Fund. Today, meet Ajay Tyagi, EVP and Fund Manager, Equity, UTI MF

Ajay Tyagi is 44 years old, but he is still on his first job. He has now spent over two decades at UTI Mutual Fund (MF). He manages the UTI Flexi Cap Fund (formerly UTI Equity Fund), which is among the largest scheme in its category.

According to data from Value Research, the fund has been among the top performers in its category in both three-year and five-year periods.

Equity markets caught Tyagi’s attention in 1994, as markets saw a sharp run-up with entry of foreign institutional investors. While Tyagi was still pursuing his engineering degree from Delhi University (DU), he started reading books on stock markets. In 2000, he joined UTI as an analyst through campus placement after finishing his Masters in Finance from DU.

After three-four years, Tyagi was appointed as an assistant fund manager in UTI’s offshore funds division. Over the years, he has handled several schemes at UTI, including India-dedicated offshore funds, UTI Flexi Cap Fund, the equity portion of UTI ULIP and UTI Regular Savings Fund.

Quality first, valuations last

Tyagi likes to keep his investment style simple and looks for companies that can consistently generate value for at least a decade or longer. “I have never tried to figure out what the markets will do over next six to twelve months. I don’t believe that to be a successful fund manager, one has to necessarily buy something before it gets known,” he says.

Tyagi first looks for high-quality businesses with strong balance-sheets and cash flows, which can grow fast. He says valuations only come last on his check list.

“If you put valuations as the starting point, it would not be possible to create a high-quality investment portfolio. If valuations are the driving force, more often than not you would end up buying low-quality businesses, which are available cheap,” Tyagi says. In other words, Tyagi believes that paying a slightly higher price in some cases, is justified.

Focusing on growth, not market caps

UTI Flexi Cap has investments in well-known large-cap companies such as Bajaj Finance, HDFC Bank, Larsen & Toubro, Infosys, HDFC, Kotak Mahindra Bank and TCS. Around one-third of the fund’s investments are in these companies.

The fund also has investments in more recently-listed mid- and small-cap companies like Dr. Lal Pathlabs and Metropolis Healthcare, which operate in smaller sectors.

“High-growth companies can also be found in industries where there are several small companies, and one large player can increase market share by taking business from these smaller players,” Tyagi says.

In the diagnostics sector, where several smaller companies are operating, Dr. Lal Pathlabs and Metropolis are among the larger players.

Tyagi says he looks for companies that can grow at a much higher rate than India’s nominal GDP growth rate, which is estimated to grow at 15.4 percent in financial year 2021-2022.

So, a company has to have growth potential of 15-20 percent, to get Tyagi interested.

Taking long-term calls

The portfolio turnover ratio of UTI Flexi Cap Fund has been in the low-range of between 10-15 percent, compared the category’s turnover ratio of 61 percent. This, Tyagi says is because his average holding period is eight-ten years.

“We like to buy companies and stick with them for long periods. At least 80 percent of stocks in our portfolio are there from five years or more,” Tyagi says.

He says the 2008 financial crisis thought him importance of having a really long-term view. “One can end up making mistakes by getting carried in either directions because of short-term events,” Tyagi says.

Successes and learning from mistakes

While Tyagi doesn’t obsess over being among the first few investors to discover a stock, his portfolios have benefitted from his ability to spot ideas, when others are shying away because of valuations or avoiding a newly-listed business.

For example, when Tyagi bought Bajaj Finance in 2016, many investors saw it as an expensive stock as it was trading at price-to-book value of over 4-times. However, seeing the growth potential of the company, Tyagi bought the stock.

Today, the stock is four-times higher than his average buying price of Rs 1,200.

Info Edge, the company that owns Naukri.com and other portals, is another example. Back in 2011, the company was India’s first listed internet company. Tyagi bought it in an offshore fund at Rs 500, and the stock is today eight-times from that price. Later, he bought the stock in UTI Bluechip Flexicap (scheme merged into UTI Equity Fund, renamed later UTI Flexi Cap Fund), at around Rs 1,200 and the stock has gained 3-times.

Tyagi says he has also made quite a few mistakes, where he may have not understood the business well, or whether or not it can generate consistent profits. “You will never get 10/10 right, but you can still be successful. One has to go through the tough exercise of making mistakes and learning from them. So long as these mistakes happen, I get to learn,” he says.