Valuations improving as IT and energy offer selective opportunities, says V. Srivatsa, fund manager, equity, UTI AMC

In an environment where new themes and flashy fund categories are grabbing investor attention — from consumption funds driven by GST benefits to multi-asset funds riding gold’s volatility — traditional large- and mid-cap funds still have much to offer. V. Srivatsa, fund manager of equity at UTI AMC, believes that long-term wealth creation still lies in a well-balanced approach built on valuation discipline and diversification.

In an exclusive conversation with Fortune India, Srivatsa shares why he prefers value over hype, how he navigates market cycles, and what keeps his fund resilient amid changing investor sentiments.

Edited excerpts:

Q. With so much investor buzz around consumption and multi-asset funds, how can investors still benefit from large- and mid-cap funds?

A. Broadly, there are two types of funds — diversified and thematic. Diversified funds include large-cap, mid-cap, or a mix of both, such as the one I manage. Thematic funds, like consumption or technology funds, are more concentrated and therefore riskier.

The consumption theme looks strong, driven by the GST benefits and income tax reductions announced in February. GST, in particular, will have a more profound impact because when product prices fall by around 10%, people are more likely to spend on cars or durable goods. However, the consumption sector, except for automobiles, is already expensive. Many stocks are trading at 40–50 times earnings, limiting potential upside.

That’s why I find the automobile segment attractive — it still offers reasonable valuations and looks well placed for steady growth. Overall, I would advise investors not to allocate more than 15–20% of their portfolio to thematic funds. They should primarily stay invested in diversified funds, such as large- and mid-cap or flexi-cap funds, which can balance stability and growth.

Q. How much do long-term themes like digital transformation or manufacturing expansion influence your investment approach?

A. My strategy is largely value-driven. Whenever a new theme emerges, most of its potential gets priced in even before it plays out fully. That makes it difficult for value investors like me to find a comfortable entry point.

Take electronic manufacturing services, defence, or renewables. These sectors clearly have government support and visibility over the next five years. But most companies here are trading at high valuations — 30 to 40 times earnings — and have yet to prove they can scale their operations profitably.

For example, a mobile manufacturer with a ₹20,000 crore turnover may target ₹60,000 crore by FY30. But whether it can achieve that is uncertain. Despite that, the market already prices in such optimistic expectations. I invest in such opportunities only if I’m convinced the company can consistently deliver 25–30% earnings growth. Otherwise, I prefer to wait.

Ultimately, it’s about how much to pay for future growth. When high growth is already priced in, the margin of safety disappears.

Q. The UTI Large & Mid Cap Fund has shown strong performance, with a 5-year CAGR of around 17% in large caps and 22% in mid caps. What’s driving this consistency?

A. Our focus is always on valuations. We invest in well-established companies trading below their long-term valuation averages. Currently, our largest overweight is in the IT sector. Valuations there are at multi-year lows, free cash flow yields are strong, and earnings downgrades have finally stopped.

The near-term outlook might still look muted, but I believe the worst is over. As the sector returns to 8–9% CAGR growth, these companies will be rewarded.

In previous years, our strategy has worked well. Two years ago, we increased exposure to large-cap banks when they were undervalued, and that decision paid off. Earlier, we were overweight autos after COVID, when volumes were weak — that, too, worked as the sector recovered. We’ve also found value in pharmaceuticals in earlier cycles.

Right now, we see selective opportunities in IT and in oil and gas companies that benefit from lower crude prices.

Q. How does your approach differ when it comes to mid- and small-cap investments?

A. In mid and small caps, we look for growth-oriented companies available at reasonable valuations, especially those overlooked by the market. These are often businesses in an improvement phase — showing better returns on capital, higher margins, or recovering revenues.

Such companies may have underperformed over the past three to five years, making them undervalued. Through research and regular engagement with management, we identify those on the verge of a turnaround. That’s where we often generate alpha for the fund.

Our approach blends three elements — value, selective growth, and operational improvement — but our core principle never changes: we don’t overpay for growth.

Q. How much time do you spend reviewing companies that haven’t performed well for a year or two?

A. Rather than the time, what matters to me is whether my investment thesis is still valid. For example, if I buy an IT stock today expecting improvement next year, I will monitor progress every quarter. If I start seeing positive signs, like I did this quarter, it strengthens my conviction.

But if a stock disappoints, I go back to management to understand why. If I’m convinced it’s a temporary issue, I stay invested. If not, I exit. In cyclical or commodity sectors, it’s even more straightforward — if I realise I have got the cycle wrong, I just accept my mistake and get out because there’s no point in fighting the cycle.

Q. How do you manage downside risk, especially when dealing with smaller companies?

A. We always maintain a margin of safety when buying. But small caps are naturally more volatile. When a small-cap company misses expectations, its stock can fall sharply because there aren’t many strong institutional holders.

To limit such risks, we keep exposure small. For a large-cap like Infosys, the weight might be 4%–4.5%. But for a small-cap IT stock, it will never be more than 1%. So, even if it drops 20%, the impact on the overall portfolio is minimal.

That’s how we balance conviction with caution — by managing position sizes and avoiding overexposure to any single risk.

Q. What’s the key takeaway for investors looking at large- and mid-cap opportunities today?

A. Every fund category — large, mid, or small — has a place in a well-constructed portfolio. The key is aligning it with your risk–return profile rather than chasing new themes. Large- and mid-cap funds, in particular, offer a balance of stability and growth, making them ideal for long-term wealth creation.

My guiding rule remains simple — stay focused on value, be patient with conviction, and never overpay for hype.