investment strategy: Stay focused on asset allocation and risk management: Vetri Subramaniam
The party continues and I have been told that the new definition of party is that it continues till the sunrise if you are in India and if you are in Goa. So, looks like the party which started three years ago will extend itself.
Vetri Subramaniam: Well, bull markets have a way of continuing, but they also have a way of ending abruptly. So, you do not want to be the last one to leave the party. What should one do because anybody has made a case that valuations are rich, there is froth building up in small and midcap stocks, watch out there is bubble and trouble coming because of the way how central banks have been following a loose monetary policy, those concerns, in a sense, have not disturbed the market. These concerns existed three months ago, six months ago, one year ago. But markets perhaps have learned to live with it. So, what should one do in this kind of a market when you know concerns are there, but markets are ignoring them?
Vetri Subramaniam: Good question and I would actually say that you are asking a question about things which are unknown. You will never know when a market makes a bottom. You are never going to know when it makes a top. These things are known only post-facto.
So, my suggestion to investors, and this is my experience over 25-30 years, nobody can tell you exactly when, where and how the market is going to inflect.
The only thing under your control as an investor is your asset allocation, your financial goals and your ability to manage your risk. What the market will do is outside your control, it is outside your knowledge, it is in the realm of unknown. So, I prefer not to now focus on this issue of what will the market do, but look at the valuations, manage your asset allocation and manage your risk.
Let the market do what it does. If somebody’s shirt is whiter than yours and they are partying longer than you are, so be it, that may not be for you.
So, let us talk about pockets where you think irrespective of the market, you would say that, look, my experience and my understanding of market cycle tells me one should avoid them. Where are those excesses in the market where irrespective of if somebody puts a gun to your head also, you will say, I will better die and take a bullet rather than buying these stocks.
Vetri Subramaniam: Well, honestly, when you look at the marketplace today, if you look at the largecaps, let us say we use the Nifty 50 as a benchmark for valuations, it is rich, but this is one of the unusual times in my career where I am actually seeing the Smallcap Index. I am not referring to one or two smallcaps. I am referring to Small Cap 250 Index actually trading at a premium to the Largecap Index. And nothing that we have experienced in the past, either in India or elsewhere, tells us that these smallcaps can hold a valuation premium.
There are multiple reasons why small caps face pressures. One is because they are more susceptible to economic cycles, access to capital tends to be more limited, breadth and depth of management tends to be limited, and finally, their ability to manage changes in regulations, changes in cycles is again limited.
For that reason, I would submit that this kind of over premium to the largecaps, the smallcaps is one of the most disconcerting things that I am seeing and that is one area that I would be very-very concerned about.
I also wanted to take a minute to discuss the new fund launches, the two index funds. Can you just walk us through a little bit more about them?
Vetri Subramaniam: So, we have actually got two index funds which are currently open. One is the Nifty200 Quality 30 Index. The premise of this index is that it only invests in companies screened out of the Nifty200 based on quality. What is quality? It is essentially companies with high return on equity, low debt to equity, and finally, low variability of EPS.
So, it is not EPS growth, it is low variability year-on-year in terms of EPS change, so you could think of it as low EPS growth volatility. Now, this quality and at the other end you could think about value tend to sort of rotate in terms of market cycles.
And if you look at the last four years, it has actually been value which has been at the forefront in terms of not only outperforming the benchmark, but a significant outperformance relative to quality. And this is an inversion of what happened in the three- to four-year period leading up to 2020, 2021.
So, in our opinion, the market is now quite well placed for style rotation to kick in again, because this has been the pattern over almost 20 years where we have data that every few years, the market sort of rotates in terms of moving away from quality towards value and then back and forth again. So, we think this is a great time to sort of be looking at quality and it can pull out an alpha relative to the Nifty200 and also relative to value where many investors may be exposed quite significantly.
So, that is the logic behind the Nifty200 Quality 30 Index. The other index fund that we have launched is actually a little bit of a contrarian bet at this point of time. I talked about the challenges and valuations.
The banks in general, if I were to put it that way, actually are one of the few sectors where valuations are reasonably attractive and at the same time for banks, most importantly, fundamentals are very-very healthy, balance sheets are very healthy.
So, this is one sector where we think it is actually calling out in terms of its valuations and fundamentals and we actually think this is a great contrarian bet at this point of time.
Of course, there are multiple issues that banks are facing in terms of headwinds, but it is only when you have headwinds that you end up getting attractive valuation opportunities and this is the pattern that we have seen over time, go back and think about which were the sectors which were ignored, unloved three to four years ago and see how much they are loved today. And we think banks are very well placed for a similar kind of rotation.
link