ETMarkets Fund Manager Talk: 2023 is an opportune time to start building positions in select small cap stocks: Harshad Patil

In an interview with ETMarkets, Patil, said: “If the Indian economy generates superior GDP growth over the long term, new all-time is more of a given then an aberration, as the index would be tracking long-term earnings growth” Edited excerpts:

Tell us more about the Emerging Opportunities Fund, the new NFO which is launched to tap stocks in midcap space?

The Emerging Opportunity Fund is predominantly a mid-cap fund with ample flexibility for the fund manager to invest in the large-cap or small-cap category depending upon business cycles, market opportunity, and relative valuations.

Though the fund retains a mid-cap bias, it has the flexibility of investing up to 30% in either small-cap or large-cap stocks.

We have noted that at various points of time, large caps have significantly outperformed the small caps and vice versa, hence we believe the Fund is well poised to capture opportunities across market caps.

Why NFO now especially at a time when markets are near record highs?

Data shows us that stock markets tend to make long-term highs on a fairly consistent basis. The index has made more than 25 distinct all-time highs over the last 2 decades.

As Sensex has surged from 100 to above 60,000 in 43 years, using all-time highs as an investing measure has very little practical value.

Moreover, if the Indian economy generates superior GDP growth over the long term, new all-time is more of a given then an aberration, as the index would be tracking long-term earnings growth.

If we look at midcap space, it has underperformed in 2022 after 2 years of double-digit returns.

We tend to focus on a long-term investment horizon, defined as 5 years or more. We have observed that the midcap category has outperformed other categories over the long term.

For example, as of Oct-22, the midcap index has generated 3.6x returns on a total return basis over the last 10 years as against 2.6x returns of the large-cap index and 2.2x by the small-cap index.

Midcap space has several companies that are leaders in their industry and have a long runway for growth, available at reasonable valuations.

How do you pick stocks for the fund? What is the strategy or the evaluation style?

Our investment philosophy has been Bottom-up stock picking based on fundamental research with a long-term orientation. We perform strict due diligence of stocks irrespective of sector or market cap.

This disciplined and inclusive approach to our investment process has resulted in consistent performance of our funds across bull and bear phases of the market and delivered good long-term returns to our policyholders.

This philosophy has helped us so far, as indicated by the superior performance of our funds which have outperformed the index over different time frames and have remained top quartile as shown by Morningstar 5 year and 10-year ratings


Who should invest in this fund?

Though Emerging Opportunities Fund is an equity fund predominantly in the midcap space and most suitable for consumers who have a high-risk appetite, we believe that even investors with a relatively lower risk appetite can have a smaller allocation in this fund provided they stay invested for the long term.

Midcap stocks usually go through relatively higher market volatility which tends to even out in long term. An investor participating in this NFO should be comfortable averaging out the market volatility and staying invested for benefiting from long-term compounding returns.


How do you manage risk?

We believe our investment process which adheres to the strict due diligence of companies is expected to minimize the drawdowns due to adverse selection.

Some of the filters like focussing on positive operating cash, low leverage, high governance standards etc. help us refine our investment universe.

Moreover, continuous evaluation of investee companies and periodically re-visiting our investment hypothesis on individual stocks, help us course correct and make alterations in our portfolios in a timely manner.


How should investors play the mid and Small cap theme in 2023?

Small caps have underperformed in other categories in the recent past. With international crude oil prices trending lower, inflation stabilizing albeit at still reasonably elevated levels, we believe this can be an opportune time to start building positions in select small-cap stocks.

Our NFO has the ability to seamlessly move from large-cap bias to small-cap bias and vice versa hence capturing such opportunities.

If someone is in the age bracket of 30-40 years what is the kind of portfolio allocation should one do for mid and Smallcap space?

An investor starting early, can have portfolio bias towards mid and small-cap space. Just to reiterate, Midcap stocks usually go through relatively high market volatility which tends to even out in the long term.

A long-term investor should be comfortable averaging out the market volatility and staying invested for benefiting from long-term compounding returns.

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