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    Mark Mobius' 3 ground rules for picking a multibagger among smallcaps

    Synopsis

    One area that deserves mention is banking because India is a growing country which reflects on bank’s earnings, said Mark Mobius.

    ET Now
    In an interview with ET Now's Tanvir Gill, Mark Mobius, Executive Chairman, Templeton EM, says there are an incredible number of listed companies in India and it has always been a tempting target. The problem has been liquidity but that is changing. As people's income increases, they will be investing more in markets and small and midcaps. Edited excerpts


    Is the outperformance in India largely driven by improving domestic fundamentals? Can it happen in isolation to the rest of the emerging market world?

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    It can, look at China. China has surged ahead far faster than every other emerging market except India and India now could become a leader. It could really drive the growth of other markets because the other thing that is happening is that as India opens, they will begin to see the impact of trade and investment into other markets around the world particularly emerging markets. Already that is happening but I think it will happen to a great extent going forward.


    You have highlighted that in the last 28 years you have been credited for making emerging markets literally an asset class. In the last 28 years, the data suggest that 61% of the time, emerging markets have outperformed developed markets barring the last three years. I know historical performance is never really an indication of what will happen in the future but can one extrapolate that for the next 20 years as well emerging markets hold the potential to stand out?

    Over the long term, there is no question in my mind that emerging markets will outperform and India is a good example. India’s growth is tremendous and will continue to be very fast.

    Is that also the reason why other than a horizontal view of the market which is essentially country allocations and largecap allocations, now you are studying the depth of these markets and researching more on midcaps and small caps and unlocking value there which is reflected in your small companies funds?

    As the per capita incomes in India rise more and more, people will have access to stock markets, bond markets and therefore the liquidity, the trading turnover of the small and medium size companies will rise. That will enable large funds to invest more frequently in those markets. I think it is a very, very important factor.

    Lot of those companies which are family owned may also dilute equity which would increase the total tradable equity in the market, bringing in more investors in your small cap fund. Your small cap fund has given a return of 47% over the last five years outperforming the benchmark by 12%. So that has been a standout performance. India has more than doubled the benchmark allocation which is essentially your top allocation as far as the small cap fund is concerned. Does that mean that India is a small cap treasure house for you compared to the rest of the region?

    We have always felt that because we see the incredible number of listed companies in India and it has always been a tempting target. The problem has been liquidity. But all that is changing and it is very exciting for me, going forward.

    ET Now: I know you are not going to talk stocks though I would want you to talk stocks but some of your holdings in the small cap fund are Bajaj Holdings, Tata Chemicals, Vardhman Textiles, Federal Bank. For a lot of people out there, the perception about small caps and midcaps are that these are risky businesses with unpredictable business cycles. There are management integrity issues which private equity investors always crib about. Add to that, these are promoter owned companies, family run businesses. Give three ground rules that have never failed you while picking up a multibagger idea within the small cap universe?

    The names that you just mentioned probably personify the things I am going to mention.

    Of the three things, number one is very good management and a sense of people with integrity, people with good management know-how, people who understand the market, understand how to relate to investors and good corporate governance. I think that is number one very very important which is why we do a lot of intensive research into the people behind these companies.

    Second, a vision for growth or in other words, a management that tells us where they are going in five years and that they are on a growth path.

    Three, awareness of the country environment where they are working. In other words, as you know the rules and regulations in India can be very complicated in India and awareness of how to work within that framework is very important.

    If I were to ask you what is the one segment or stock perhaps because it is Diwali time in India so you could help our viewers perhaps the Diwali gift and a stock idea or stock investment that has worked for you very well or segment that you very bullish on within the small cap universe that would be great?

    The names that you just mentioned represent a variety four different sectors but I think one area that deserves mention is banking because you have a growing country which reflects on bank’s earnings. You have a central bank who have been very astute and very disciplined in making sure that banks account for their non-performing loans so that combination is very very positive and if you compare it to other countries it is usually not present in many other countries so I would say the banking sector and you mentioned Federal Bank but I am now recommending it because at any point in time we have been….

    You have just invested in it not recommending it...that is saying a lot..

    For people who want to get some insights it is good to look up for because we do not trade very much, we are not in and out of these stocks very rapidly.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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