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Don’t want to diversify in too many funds? Multi-cap is for you: Shreyas Devalkar


Shreyas Devalkar, Head-Equity, Axis MF, says All these categories – large, mid and small – are complementary to each other. They are not either or. The largecap is more about consumption, mid and smallcap is more about manufacturing stories of India and investment story of India. These all are complementary and that gets reflected more in multi-caps as a category because here one has to have 25, 25, 25 in large, mid, small. This category represents the exposure individually to all elements of the India growth story and not just tilted towards consumption in case of largecap category or towards mid and smallcap category which are more in investment and exports. Let’s begin with the current market movement since last week where we have seen the market moving in a very range-bound territory. What according to you could be the triggers behind the trajectory going ahead and also will this pace continue?
If we look at market from a long-term perspective, when the post-Covid rally started especially, it went one-way till somewhere around October of 21 and after that it consolidated a lot and then from the peaks of October 21 to Jan 22 we are somewhere around 8% to 10% up. Why I am just bringing in this perspective is when we use words like rally, the point is that the market has consolidated a lot in the last one, one-and-a-half year and then in the last few months the rally we have seen. has yielded additional 8-10% return at the indices levels from the peak of October 21 to Jan 22. If we look at that behaviour or pattern, considering the earning growth, considering overall valuation, one should expect the markets to consolidate and give you an earning growth based trajectory which is generally closer to the nominal GDP growth.

Going ahead, we also have the policy announcement this week. What are your expectations on that?
RBI has been highlighting that the risk of inflation has not gone behind yet and even now if we look at some of the food item related inflation, it is up. In that sense, one can remain hawkish but having said that, some of these items and the inflation here is transitory and that is where one need not take a step of hiking. In that context, it would be a neutralish stance.

Let us talk about the multi-cap space and your exposure in the fund and your strategy for the fund. The multi-cap space has been a very exciting space for investors, especially the run-up in the midcap and small cap has really caught on to investors. But do you think there is steam still left in midcap and small cap space? Are the valuations overstretched?
When I look at large, mid and smallcap spaces, one probably needs to look at them in terms of the content that you own rather than just trying to say that these large companies versus mid and small and then high beta, low beta or high risk and low risk.

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The other way to look at it is if you see the consumption part of the economy has more representation in largecap companies and largecap indices and largecap funds. The B2B part of the economy is investment and exports and especially manufacturing exports, these two parts have more representation in mid and smallcap categories.

Chemical, auto ancillary exports or manufacturing goods exports have more representation in mid and smallcap categories. All these categories – large, mid and small – are complementary to each other. They are not either or. The largecap is more about consumption, mid and smallcap is more about manufacturing stories of India and investment story of India. In that context, these all are complementary and that gets reflected more in multi-caps as a category because here you have to have 25, 25, 25 in large, mid, small.

So, in that sense, this category actually represents the exposure individually to all elements of the India growth story and not just tilted towards consumption in case of largecap category or towards mid and smallcap category which are more in investment and exports. So, in that context, one should look at it in a holistic manner as it gives one exposure to the overall economy of India and that is where this fund category definitely stands out.

When it comes to valuation, definitely the B2B categories are way higher than their pre-Covid levels and that is where again its representation more being mid and small that is what is getting reflected. In case of largecaps, which has more representation in consumption-oriented sectors, the valuations are not way higher than their pre-Covid levels and in that context, the re-rating of the consumption oriented sector has not happened because some of them probably were already pricey even earlier.

The re-rating has happened in the mid and small categories and so there is definitely no risk reward based on valuation in choosing one category versus other. That is where I commented that one should look at it more as a representation of the economy rather than a risk reward or a trade-off of one versus the other.

Talking about the sectors that you have in the portfolio, what is the kind of allocation across market caps and sectors?
Broadly we should be somewhere around one-third, one-third in large and smallcap category and somewhere around 25-26% in midcap categories as of last month.

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And sector-wise allocation in the fund?
Sector-wise, for exposure, one should look at it more from the B2B versus B2C and so on. So, in that context, obviously the financial services sector is absolutely high though not compared to the relative. So, it is somewhere around 25% plus, while the sectors which are in the B2B part of economy or manufacturing part of economy, are more in auto, auto accessories.

Some of them are from healthcare. Actually in healthcare we have a good exposure to hospitals as well. We have a good exposure to consumer durable, real estate companies and consumer services. So, it is broadly diversified across sub-segments of the economy.

Do you also see largecaps coming back in the focus in coming months? Right now what is driving is definitely the midcap and smallcap space but then will largecaps take a lead on?
Largecaps in my opinion will definitely outperform in a scenario when consumption oriented stocks do well. If you look at largecap composition of say Nifty or any other benchmark large cap indices, then you will notice that the representation of financial services is very high. The combined representation of financial services, auto OEMs and FMCG companies would be closer to 60% as such. This is the bigger pack whose growth is more dependent on the consumption story of India. If that starts delivering consistently across the board and if that growth comes widespread, then there is a high probability that the largecap as a segment will do well.

The valuation of largecap oriented sectors are closer to their pre-Covid levels compared to the B2B segments, which are more in mid and small. And that provides additional tailwinds.

The midcaps and smallcaps category has a wider universe compared to largecaps. How do you try to mitigate the risk involved in this particular market cap category to reduce the volatility and to keep up with the momentum of return that the investors are witnessing now?
The fallback is always process and philosophy. There we have quality and growth as a philosophy. If you try to adhere to good quality companies, when you buy any mid or small and for that matter large as well, you carry a business risk. You carry management risk and valuation risk. Generally, what is observed as lesser is the risk on the management side, the lesser is the risk on the business quality side. We cannot predict business cycle risk.

In that scenario, having companies which are basically good businesses with good management would always help. That helps in reducing risk in the portfolio.

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Looking at the way you are strategizing the fund and the kind of view you have across market caps, is it time to increase your allocation in multi-cap to reap all the benefits that you have predicted for the coming quarters?
When it comes to allocation part, it is said that it is an individual’s decision based on his risk appetite and how much one should have exposure to large, mid, small based on time horizons, etc. In my judgment, this 25-25-25 plus kind of model of multi-cap is broadly all-encompassing because it gives representation across the board.

In that sense, if someone does not want to diversify into too many funds in his portfolio, then multi-cap definitely stands out as a good option, whereas one does not take a call on large versus mid versus small. When you are in a certain percentage in large, mid, small, it is always helpful rather than taking a call and now I want to go more in large or more in mid. Those things are seldom successful. In that context, multi-cap as a category definitely would be considered if you do not want to diversify in too many funds as such.

What is your view on the current earnings season and the expectation for the next quarters?
The earnings season has already passed in most of the segments, especially in the largecap and so far we have observed that on the exports part of the businesses, earlier IT showed signs of slowdown; then the chemical companies showed a sign of slowdown. Now, in this earnings season, some of the manufacturing exports are also showing some sign of slowdown. That is how the export part of stories have panned out.

The consumption part of stories are yet to give the positivity which the market wants at the current valuation. So, that is where it is. Otherwise, the result season has been good for those sectors as well. Definitely, many of the companies have shown a margin expansion because of the lower commodity costs in respective sectors. That has been the great performance driver and earnings growth driver for most of the companies. It is in both consumption-oriented as well as industrial companies. When it comes to the investment part of the economy, even now, most of the companies are showing good results the way they were showing for the last few quarters.



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