It is a common fishermen belief that it is easy to catch fish when the water is "troubled" or rough. Some believe that the fish come to the surface at this time and therefore it is easier to catch them. Over the past few weeks we have seen the global markets go through some really turbulent times. Indian markets were not far behind as they also saw a bit of correction. However, India fared much better than the rest of the Emerging Market pack with most of the selling being concentrated around large caps. The Mid & Small caps also saw corrections where there was build up of excess steam. While the current volatility in the equity markets seems unnerving, is inherent of our markets along with the higher growth over full market cycles. We strongly feel that India's macro outlook remains constructive and more resilient compared to other markets and it is the right time to start 'fishing'.
We feel that there is a lot of money to be made in Indian markets by focusing on a few specific areas because of our 2- 3 beliefs – A. Gradual recovery is already underway in India (green shoots key data points)leading to a rerating in markets that will gradually eventually reward investors for investing when others seem to be scared. B. The rerating will happen in sectors where higher growth and scalability of business is very visible. The RBI has already stated their bias growth through rate cuts and expected further rate cuts. C. While it is important to buy the right companies it is also very important to buy them at the right Valuations. The recent corrections have brought the markets to a strong resistance level.
Given our beliefs, we are launching BSL Emerging Leaders Fund – Series 7 that seeks to 'concentrate' on few ideas and a strategy that checks all the boxes as mentioned in the above belief system. In a nutshell, it is a Small & Midcap focused concentrated portfolio that seeks to benefit from a largely bottom up investment approach looking to juice out the maximum alpha from its portfolio holdings.
Since there is a bit of concern about valuations & correction in the small & midcap segment, it is important to note that this segment is quite different from Large Caps. During 2003-07, the same Small & Midcaps were more expensive compared to large caps, yet they delivered significantly higher returns. Further, over the past 3 months (since Oct '15), large caps (Nifty 50) have corrected by ~10% while Small & Midcaps have corrected by ~8% & ~9%. One of the key reasons for the same is that the large cap indices derive 53% of their revenues from global economy linked sectors while Small Midcap indices have a concentration of sectors that are more domestic economy inclined (source - Credit Suisse). It is however impacted by a bit of sentiment & a bit by liquidity.
We present, BSL Emerging Leaders Fund – Series 7, (NFO period: 5 February – 19 February 2016) a concentrated Small & Midcap portfolio with the following salient features –
- CONCENTRATED PORTFOLIO – While diversification helps diversify risk, concentration helps accumulate alpha. It does also build in higher volatility but pays off handsomely if the concentration is reasonable enough. Research has shown that the sweet spot lies between 20-30 stock. The fund is targeting to have ~25-30 stocks, spread across 5-8 sectors.
- Small & Midcap bias – It's a Small & Midcap focus fund but has the ability to ride through volatility by allocating upto 40% in large caps also.
- Bottom up stock picking – Investment approach is largely stock selection based and seeks to select long term winners. Over the past few months, we have been able to demonstrate our stock picking ability through success of similar portfolios. The portfolio will be focusing on companies with sustainably higher than industry growth rates as well as businesses run by managements that are focused.
- Themes in focus – The fund seeks to focus on themes that are either beneficiaries of Government action / reforms like Defence, Railways & roads or themes which are expected to have significantly high growth rates due to the inherent drives – Discrete consumption, Ecommerce, new age banking etc. As a fund that focuses on long term value, it will also look at companies / businesses that are going through special situations like agrochemical, whose valuations have suffered due to poor back to back monsoons. Statistically, this is not expected to happen again and hence the case for bottom fishing for cheap valuations in this sector.
History teaches that the best investments are made when there is scepticism & fear in markets. It is one of those times. Rather than look at the present market environment as a time to panic, it is advisable to embrace the opportunity.
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For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
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