Neelesh Surana’s wealth formula: Buy when near term is impaired and long term intact

Neelesh Surana is the chief investment officer (CIO) of one of the fastest growing mutual funds in the country. Mirae Asset Mutual Fund, among the top 10 mutual fund houses in the country with $19 billion assets under management, has built its heft with sheer performance.

Surana, the man behind Mirae’s success, talked about his investment strategy in The Wealth Formula Vodcast. Here is his playbook:

1) Two key aspects to investing: the stock selection process and the portfolio construction process.

2) On stock selection, the core is that you buy good quality business at a reasonable price. We look at all three aspects of stock selection: business, management, and valuation. It’s very bottom up.

3) On business, we look for high growth, longevity of growth and superior return on capital employed. Longevity is very important, particularly in this era of disruption.

Watch video on: Winning Strategies To Beat The Market Consistently with Neelesh Surana | The Wealth Formula

4) Management evaluation is nuanced, can’t quantify it. Softer aspects like thought leadership of the management, how is the top team, how is the board, the culture, do they have fire in the belly to capitalise on the growth etc, are vital.  Unlike growth or ROE (return on equity), management evaluation needs a bit of experience, a lot of due diligence and ground level checks. We collectively discuss and discard the outliers.

5) We buy when the value is higher and the price is low and you have margin of safety.

6)  The fund house has multiples mandates on for portfolio construction. The approach is to have a risk-adjusted portfolio, which can weather ups and downs but you don’t take significant divergence versus a benchmark.

7)  ROE is for management what ROCE (return on capital employed) is for business. But see if the management is taking too much leverage — it distorts capital allocation.

8)  The past 15-20 years have shown that any sector you pick, there are winners and losers. There is a lot of difference in stock returns within a sector. Thus, we build sector-neutral portfolios where we don’t take a call on the sector but just focus on which stocks within that on a three, five-year basis will do better than the others.

9)  Market is about incremental growth and ROE which a company can deliver compared to what the consensus suggests. The job of primary research or the research team is to identify that.

10) Wealth creation is the end result of growth, along with better capital efficiency, and low starting point of valuation reflecting disbelief. Disbelief plus growth always leads to disproportionate wealth creation.

11) The time-tested method of valuing a company is to discount the cash flow but DCF can be misused and can have various ranges depending on assumptions. Have to be very clear about the longevity of the business and the importance of the company in terms of its existence/ right to win.

12) While doing DCF, two things are important. You need to have enough margin of safety because your assumptions can go wrong. Second, things are fluid — assumptions can and do change internally as well as due to external factors. We do both DCF and reverse DCF to understand market expectations.

13) Look at stocks with a three-year timeframe. Our analysts track the numbers six months ahead of the Street. For example, FY26 number by the team was built in September 2023. We don’t take short-term calls.

14) Look for stocks when near term is impaired but longer term is intact. Only when good franchise goes through bad times, you get valuation in favour. These make for good contra calls that you can hold for a few years or a few quarters. Stocks with good businesses, growth, ROE and excellent management are not available cheap otherwise.

15) The decision to sell is a systematic and continuous process. Constantly review the price-value gap. While we are longer term investors, whenever we see that the medium to longer-term assumptions of the value is impaired, whether we are in profit or making loss, take course correction by going underweight or reducing exposure.

16) Always think of the current market price as the cost.

17) Most of our mistakes are to do with errors of omission because generally we were unable to comprehend the scale of the business and the wealth it could create, or we were conservative or a combination.

18) Markets are inefficient. Seen that in 1999 and 2007. What is overvalued can become excessively valued. If a stock is 15-20 percent overvalued, the value may be not be right but it’s okay. When it crosses about 50 percent, we take corrective action.

19) To avoid selling too early or end up being too conservative, spread sales over time, go slightly underweight and watch it for a couple of quarters. Fundamental template remains the same, price and value must match overtime.

20) When a company is dressed for IPO, it will put its best foot forward. Can’t be totally sure of a new sector, a new set of companies… This should get adjusted in the weights we assign to them in the portfolio. There should be a clear right-to-win for a position size to be increased. On day one, a new stock cannot have the same weight a company with established track record. If it’s 10-15 year story, it’s okay to miss a year or two in the beginning

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