ETMarkets Fund Manager Talk: A bottom-up & top-down combo strategy helped this PMS manager generate alpha returns

Using a combination of bottom-up and top-down strategy for stock selection, Axis Securities PMS’ Pure Growth and Contra funds have given alpha returns on a 1-year and 2-year CAGR basis.

After the 18-24 months of time correction, the PMS firm is seeing a lot of opportunities in varied sectors, and portfolio manager Nishit Master finds good traction in sectors like hospitality, utilities, capital goods, auto and auto ancillaries and financials.

“Some stocks we like and own in one or both of our strategies from these sectors include EIH, Kirloskar Brothers, Carborundum Universal, Mahindra CIE, NTPC, Bank of Baroda, ICICI Bank, Can Fin Homes etc,” he told ETMarkets in an interview. Edited excerpts:


What's your take on equities after the smart rally we have seen since April?
We have witnessed a strong rally in equities since April 2023 after lacklustre market returns over the last 18-24 months. After two years of subdued returns, we could witness strong returns this year or the next.

This will be on the back of market valuations being reasonable after two years of time correction while earnings growth continues to be relatively strong.

In between, one might still get corrections in the markets due to mainly the external environment concerning global liquidity, inflation and interest rates and their impact on the global financial sector.

As long as the underlying growth and earnings momentum remain strong for Indian corporates, which we believe is the case currently, those corrections will be bought into by investors. We thus, are very constructive on the markets for the next year or two.


What kind of bottom-up opportunities do you see after this time correction in equities?
We are witnessing good traction in sectors like hospitality, utilities, capital goods, auto and auto ancillaries and financials.

Some stocks we like and own in one or both of our strategies from these sectors include EIH Ltd, Kirloskar Brothers, Carborundum Universal, Mahindra CIE, NTPC, Bank of Baroda, ICICI Bank, Can Fin Homes etc.

Some of the NBFCs, after a relatively subdued performance compared to banks in the last couple of quarters, could witness accelerated growth with margin expansion.

We like Can Fin Homes in this space. We believe Mahindra CIE is also turning out to be an excellent bottom-up play with solid capabilities.

We are witnessing a robust capex cycle with order books of most capital goods companies at record highs and thus own companies like Kirloskar Brothers and Carborundum Universal.

On the hospitality side, we have witnessed a significant change in consumption patterns where taking short holidays is now a lifestyle choice of a significant population, and with business travel also increasing, the sector is poised to do well, especially with lower capacity growth.

We own EIH in the space due to the quality of properties owned or operated, especially in the leisure space.


Can you tell us how your Contra and Growth funds have performed since inception? What's the strategy for stock selection, and how often does reshuffling happen?
Our Pure Growth and Pure Contra funds have performed exceptionally well across timeframes with close to 4% alpha generation (returns higher than the benchmark, i.e. BSE500 TRI) on a CAGR basis since inception.

On a 2-year CAGR basis, they have generated more than 5% alpha; on a 1-year basis, they have generated close to 9% alpha.

We follow an active fund management strategy where we understand that we will make mistakes while investing. Thus, the idea is to cut losses early if we realize that we have made a mistake while riding our winners till valuations become prohibitive or it increases portfolio risk significantly.

For stock selection, we use a combination of bottom-up and top-down fundamental approaches with a quantitative overlay to minimize risk to the portfolio.


What's your mantra for compounding returns, and what kind of investment strategy will you recommend to investors?
Compounding is slated to be the sixth wonder of the world. From a portfolio perspective, if one can consistently beat the benchmark by a decent margin after cost, then the returns from that portfolio on an absolute basis in the long term will be significantly ahead of market returns, leading to significant wealth generation for the investor.

Any equity investor must have a long-term horizon while investing in equities for wealth generation. It is also crucial for investors to continuously monitor their holdings for any changes in the external environment or business model and take appropriate action.


How do you manage the risk-reward matrix in your funds?
We take various steps to manage the risk-reward matrix in our funds. From a diversification point of view, we typically have close to 20 stocks in our portfolio. We typically don't take big cash calls in the portfolio and keep an eye on the market volatility and expected volatility for market cap allocation. If we believe the markets may be volatile in the short- to medium term, we increase our large cap allocation in the portfolio.

On the other hand, if we believe that volatility will reduce in future, then we increase our small and mid-cap allocation. We take the help of our quantitative team to understand the correlation between portfolio stocks and, thus, try and minimize portfolio beta for targeted returns.


Which sectors have you recently increased your bets on, and which areas are you less comfortable with respect to valuations and growth?
We continue to like sectors like hospitality, capital goods, auto, utilities and financials. We have recently increased our exposure to the NBFC sector in the Pure Contra portfolio.

Currently, we are significantly underweight in the Pure Contra portfolio's IT, FMCG (excluding ITC) and oil & gas sectors.

Which themes do you expect to play well in FY24?
FY24 could be good for sectors like hospitality, NBFCs, banks, capital goods and auto. The pharmaceutical sector could be a dark horse for the year, but there are risks attached to it concerning the regulatory environment and pricing pressure in the US.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)