Buy only if valuation is reasonable

G Pradeepkumar, chief executive officer of Union Asset Management Company, is a veteran of the mutual fund industry, with nearly three decades of experience in structuring and marketing products like mutual funds, offshore funds, private equity, portfolio management services (PMS), hedge funds and fund management.

Pradeepkumar started his career as a management trainee in 1991 at the erstwhile Unit Trust of India (UTI), where he spent 15 years, going on to become senior vice-president and director and CEO for UTI International based in London. He returned to India to head the western region and international sales for UTI AMC. He later moved to IDFC Investment Advisors as its chief marketing officer.

In view of his vast experience in the mutual funds industry, Pradeepkumar, a B Tech with PGDM from IIM-Ahmedabad, was asked to set up an asset management business for the Union Bank and its Belgian partner KBC Renta. He played a pivotal role in launching Union Asset Management Company, formerly know as Union KBC AMC, in 2010.

Investment strategy

The investment strategy at Union AMC is fundamentals driven where the team does not consider momentum or technical factors. Stocks are chosen on three parameters—business, management quality and valuation. “We look at the strength of the business, sustainability and competitive advantage. Management quality is judged by its past track record of decision making, allocation of capital, treatment of minority shareholders, governance standards, execution and delivery on past promises. In the case of valuation, even if a business or management is good, we would buy only if the valuations are reasonable. The key question is what is the intrinsic value of a business as per our internal model” says Pradeepkumar.

The fund house arrives at an intrinsic value to the company based on a model that studies the expected cash flows and perpetual growth rates, besides other factors. The intrinsic value is then compared to the current market value of the stock and a decision is taken to buy or not. The fund house considers only stocks that have a minimum market capitalisation of Rs 500 crore.

The next step is portfolio creation, where companies that meet the above parameters are included in the ‘investment universe’, a universe of stocks. According to the investment objective of the fund, companies from this investment universe are

selected. The strategy was created in April 2018 when the fund house got its new investment officer, Vinay Paharia, and has worked well so far. For example, when most mutual funds were gung-ho about investing in a housing finance company, Union MF did not take any exposure as the HFC did not fit in its model and this saved its funds from making losses.

“While running a fund house, I am not worried so much about CAGR as about ensuring that people who invest in mutual funds build enough corpus to meet their financial goals. We want to make a difference to the quality of the life of our investors and that is where the real charm is,” said Pradeepkumar.