High returns in a buoyant market: Decoding money managers' strategies for affluent investors

The wealthy investor in India has never had it so good. For that, they must thank the robustness and resilience of the country’s financial markets. And their money managers. While not a single portfolio manager catering to the affluent class in India saw a fall in their portfolios in the past 12 months till February 2024, almost 99% of portfolio management services (PMS) schemes delivered double-digit returns, mirroring the vitality of the benchmark BSE Sensex that surged 23%. The broader indices—BSE MidCap and BSE SmallCap—advanced more than 60% each, providing support to multi-cap, flexi-cap, small- and mid-cap schemes, which delivered high returns to investors. In fact, the Top 5 alpha generators recorded gains of more than 100%. Fund managers say the domestic equity market will deliver similar performance in the long run, with the market sentiment being buoyed by the robust economy and the government’s thrust on capex. Alpha returns are returns higher than the benchmark index.

Despite the stiff minimum investment of Rs 50 lakh, the PMS space has been gaining momentum—visible in the rising assets under management (AUM). According to markets regulator Securities and Exchange Board of India (Sebi), the AUM of the PMS industry has grown by 438% to over Rs 6.2 lakh crore as of January 2024 from Rs 1.15 lakh crore at the end of FY15.

The Winning Strategies

Let’s take a closer look at the top alpha generators. Topping the list is Invasset LLP’s Growth Pro Max scheme, which gave returns of 134.95% in the past year, and 50.78% CAGR returns in the past two years, according to portal PMS Bazaar. Anirudh Garg, Partner and Fund Manager at Invasset, says the outperformance in the past year can be attributed to its focus on understanding market biases. “The foundation of our AAID (advanced algorithm for investment decisions) strategy is built upon an unbiased selection of one of four key investment styles—value, growth, quality, and safety,” he explains, adding that the strategy benefitted from identifying a shift towards traditional sectors. “Our investment thesis was further validated by the government’s substantial capex commitment in its Budget announcement,” adds Garg.

The ACE-Multicap scheme of Asit C Mehta Investment Interrmediates is the next big gainer on the list. It delivered returns of 112.01% in the past one year and 55.89% CAGR returns in the past two years. Director Prasanna Pathak says the company has devised a scientific investing framework that employs quantitative techniques to mitigate portfolio risk. “Additionally, we use fundamental and qualitative methods through vector-based investing strategies to enhance returns. The composite investment framework helps us in identifying mispriced stocks and hidden investment themes,” he says, adding that identifying a theme at the take-off stage is the key to generating supernormal returns. “We could identify themes like capex-cycle, defence, railways and PSU, which is reflected in the significant outperformance of our schemes.”

Data collated by PMS Bazaar shows that the next two on the list are Green Lantern Capital’s small- and mid-cap focussed Growth Fund, and Samvitti Capital’s multi-cap PMS Active Alpha Multicap schemes, which delivered 109.96% and 109.05%, respectively, in the last one year. “The strategy is to look for changes in earnings tailwinds or perception of earnings over the next four to six quarters. Then we build a basket of such opportunities and review them periodically,” says Prabhakar Kudva, Director and Portfolio Manager at Samvitti Capital.

“The return has been a function of three things—the overall market performance, the overweight stance to mid- and small-caps as well as the stock selection.” Kudva adds that he expects the next couple of years to be decent but not as good as the last year.

The next four on the list are Investsavvy Portfolio Management LLP’s Alpha Fund, Badjate Stock & Shares’ Aggressive scheme, Asit C Mehta Investment Interrmediates’ ACE Midcap, and Bonanza Portfolio’s Multicap schemes. (See table ‘Rich Pickings’)

“Identification of business idea and active fund management are two critical aspects of all Bonanza PMS strategies,” says Achin Goel, Vice President at Bonanza Portfolio, adding that its multi-cap strategy is focussed on “GARP—growth at a reasonable price”. He adds that stocks are picked from emerging sectors where it sees immediate growth triggers. “This strategy is risky due to its orientation towards small- and mid-cap stocks and one has to be prepared for bouts of volatility.”

Green Portfolio’s Dividend Yield and Carnelian Asset Management and Advisors’ YnG Strategy round off the Top 10 PMS schemes by returns in the past one year, according to PMS Bazaar. “Most of our picks have done well in terms of business performance. In the Dividend Yield strategy, we have showcased an outperformance of more than 200% versus the benchmark as a result of careful stock-picking, patience, and careful exits. Whichever the fund, we follow a solid fundamental-based approach,” says Divam Sharma, CEO & Co-founder of Green Portfolio, adding that only one out of the 10 stocks his firm analyses makes it to the next stage of scrutiny. “More than picking the right stocks, it has been about rejecting the feeble ones,” he says, adding that he prefers firms with a debt-to-equity ratio below 1x and those that have operating margins of 15%-plus.

Vikas Khemani, Founder of Carnelian Asset Advisors, agrees that it is about picking the right stocks. He reveals that for YnG Strategy, his firm focusses on bottom-up stock picking. “These are all high-quality companies with a good dividend yield and decent growth. The stocks we bought in the past one year turned out to be in our favour,” he says. Khemani, who manages Rs 5,500 crore of assets, is positive on sectors such as banking, manufacturing, pharmaceuticals and automobiles.

Picking It Right

Most fund managers agree that choosing the right stocks is the key to handsome returns. Besides the Top 10 alpha generators, Equitree Capital Advisors’ Emerging Opportunities, Aequitas Investment Consultancy’s India Opportunity Product, Shepherd’s Hill Financial Advisors LLP’s Value Magno, Ambit Global Private Client’s Alpha Growth and Bonanza Portfolio’s Edge PMS schemes have also given returns of 90-94% in the past one year. In fact, with annualised returns of 36.36%, Aequitas Investment’s India Opportunity Product has been the top wealth creator in the past 10 years.

“Our multi-bagger approach is a combination of value, growth and contrarian. We focus on sectors that are currently being ignored by the rest of the market players,” says Aequitas MD & CIO Siddhartha Bhaiya. He adds that it picks stocks after analysing fundamental aspects such as the total addressable market, growth potential, profitability, dividend track record, quality of management, major capital allocation decision and change in promoter ownership as well as a detailed deep dive into valuations to ensure they have an optimal margin of safety, which ensures capital protection.

On its Edge PMS strategy, Bonanza’s Goel says the multi-cap strategy gives them the flexibility to shift within different market caps depending upon volatility and opportunity. “This strategy primarily focusses on the near-term opportunity presented by the business. It’s mostly a tactical portfolio and driven by the opportunity expected to crystallise in the near future. We look for a strong driver that has the capability to increase the business by at least 2-3x,” he says, adding that under the Edge strategy, the firm continues to remain invested in business as long as “the conviction sustains”. Goel is positive on healthcare, information technology, renewables, manufacturing, infrastructure, and defence sectors.

Gurpreet Sidana, CEO of Religare Broking, says while investing in mid- and small-cap stocks, one should prefer counters with reasonable valuations, healthy future growth prospects, and better financials—either debt-free or with low debt. “At present, many large-cap companies are trading at an attractive valuation as compared to mid-cap and small-cap, which gives comfort for investment.”

Besides the equity segment, PMS players also operate in the debt segment, where the best performer was Maximal Capital’s Income Fund, which delivered 34.39% returns in the last one year, per PMS Bazaar. Next on the list are Profusion Investment Advisors’ Income Enhancer (with 12.84%), Karvy Capital’s Excel (11.77%), Estee Advisors’ I-Alpha (11.69%), and Northern Arc Investment Managers’ Income Builder Series B (11.53%). “Markets tend to react before the start of a rate-cutting cycle, and the current yields offer a good opportunity for investors to increase their allocation to fixed income as slowing growth and moderating inflation are likely to lead to rate cuts in 2024,” says Puneet Pal, Head of Fixed Income, PGIM India Mutual Fund. In general, when interest rates are cut by the central bank, the prices of existing bonds in the market tend to rise. This is because newly issued bonds offer lower interest rates compared to older bonds.

Benchmark indices such as the BSE 500 Total Return Index (TRI) and the Nifty 50 TRI gained 39.47% and 28.49%, respectively, in the past one year. On the debt side, the CRISIL Composite Bond Fund index and the CRISIL Credit index gained 8.57% and 11.68%, respectively, during the same period.

The Way Ahead

Experts believe that in 2024, the equity markets will be shaped by a confluence of factors. The trajectory of the interest rate cycle, particularly actions by the US Federal Reserve, will remain paramount. An early pivot towards rate cuts could bolster markets, while a continued hawkish stance will dampen sentiments. Additionally, major elections, particularly the US presidential race and the General Elections in India, will be closely watched to determine the market’s trajectory. Corporate earnings for Q3FY24 in India painted a sanguine outlook for FY25, making the valuation of markets attractive.

Geopolitical tensions, specifically the Red Sea crisis and instability in the Middle East, pose significant risks. Disruptions to energy supplies or a broader conflict could trigger market volatility, along with a delay in expected rate cuts, say experts. In the short term, there are expectations that the markets can face some more correction in the micro-, small-, and mid-cap space.

“We are bracing for a possible 20% decline from the highs in the mid-cap index, suggesting a period of adjustment and realignment within these segments. Conversely, large caps present a more stable investment avenue where we still identify intrinsic value,” says Garg of Invasset, adding that gold is another asset class where he foresees potential. Gold gained 12% to Rs 62,010 per 10 gm in the last one year till February 2024. Of late, gold scaled its lifetime high of more than Rs 70,000 per 10 gm in April. “In these turbulent times, the adage to ‘be fearful when others are greedy’ resonates profoundly with our investment philosophy. We advise investors to navigate the market landscape with caution, emphasising the importance of capital preservation and the judicious identification of opportune moments for investment.”

Pathak of Asit C Mehta says the markets would remain volatile in the next few months due to major domestic events. “Any disappointment in quarterly results could keep the markets under pressure. Global events and geopolitics will also play an important role,” he says, adding that FY25 is expected to be a year of consolidation after the run-up over the past one or two years. “Having said that, there will be pockets and themes where decent returns can be made.”

For the investor, there is much to look forward to.

 

@iamrahuloberoi