ETMarkets Fund Manager Talk: A balanced diversified strategy helped this smallcase manager give index-beating returns

What’s your overall view on equities? Is the risk and reward evenly balanced?
Yes, we are very bullish on Indian equities over the next 3-5 year time frame. Valuation-wise, equity markets are rightly priced. We have seen flat markets over the last 18 months or so. Historically, whenever past returns are flat, the next 3 year returns are higher than average.

Has your smallcase managed to beat the benchmark in the last 1 year?
Yes, we have convincingly beaten the benchmark for the 3rd year in a row.

We generated 15% returns when compared to -2% from multi-cap index. This is the result of following a well-balanced diversified strategy and not running after the short term themes in the markets.

Also, our algos take into account fundamentals, technical as well as macro-economic factors while allocating capital.

What are your top holdings? Have you rejigged your portfolio significantly in the last 6 months?
Last year, IT was the worst performing sector and we were underweight on that sector. Meanwhile, consumer durables was the best performing sector and we had 18% allocation to it as compared to only 8% in the benchmark.

As of now, we are overweight on IT and industrials. We are underweight on financials. Having said that, we tend to move fast when we see situations changing in the market and this allocation can change pretty fast.

Have you increased your cash holdings or you stay fully invested?
There are two ways of reducing risk in a portfolio. One is by shifting from equity to cash/debt. The problem with this approach is that there is another decision that you will need to take down the line, which is, when do you shift back from debt to equity.

So you have got to make 2 decisions right in order to benefit, and the downside is large, in the sense that if you are late in shifting back from debt to equity you are going to miss the upside.

Another approach, which we follow, is by shifting to defensive stocks and sectors.

In this case the downside is not that huge. If you see in the past 18 months, since October 2021, markets are flat, and our flagship Gulaq Gear-6 has been able to generate about 30% in such flat markets.

So, our asset allocation remains the same in our portfolios. Gulaq Gear-6 portfolio would always have 100% equity, but we do keep varying our allocation to safer stocks if we see the risks higher.

If investors want to reduce their equity allocation we have Gear-5 which has 80% equity and 20% debt and Gear-4 which is our all weather portfolio having 60% allocation to equity and 40% to debt.

Have you seen any major change in the retail investor behaviour amid the volatile market conditions?
What we are now seeing is the expectations of the investors are more reasonable now. Till about a year back, investors were having unreasonable expectations from the markets.

Now those expectations are much more toned down. This is also impacting the SIPs and new demat account numbers, both of them coming down with markets not giving any returns for the last 18 months.

But this is also a very good time to invest as we are seeing the corporate earnings have been rising steadily and with prices flat, the valuations are much more reasonable.

Smallcaps have seen a good correction over the last 1 year when compared to the largecaps.

What kind of portfolio allocation would you recommend for FY24?
Irrespective of the time or valuations, we feel that investors should know about their risk appetite and follow a specific asset allocation which is suitable for them. Following a well-diversified approach in the long term

What are your top sector bets for FY24?
As of now we are bullish on IT and Industrials. We are underweight on Banks. But this view can and does change across the year as and when we see market conditions changing.

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