ETMarkets Fund Manager Talk: Eyeing consistent returns in your portfolio? This PMS manager recommends “QVG” strategy

While this strategy could be one of the best, Sarin added that there could be instances of underperformance. Edited excerpts:
After the smart rebound we have seen in markets since April, do you think stability is returning and so is investor confidence?
We tend to agree. Markets have determined that with bank failures threatening market stability in the US, there is increasing pressure on the Fed to moderate the pace of interest rate hikes, or to pause.

Domestically, high frequency data seems to indicate continuing pick up in industrial activity. Markets expect rising gross margins for consumption-oriented companies from Q1 FY24 onwards, thanks to moderating inflation data.

Putting all this together, markets are discounting a softening of interest rates and slight increase in global liquidity, both of which are positive for equity markets.

Will the often repeated market proverb “Sell in May and Go Away” play this time around eventhough the month has kicked off on a high note?
Hard to say. Poor rainfall may cause a market drawdown while continuing softening of commodities excluding sugar and few others is positive for markets, as it will help FMCG companies increase profit margins.

We are cautiously optimistic about the month of May. Although the phrase ‘sell in May’ is quite popular for the right reasons, we’d like to differ for this time around.

The recent data shared by PMS Bazaar showed that your “MICRO” smallcap fund has given positive returns in the last 1 year despite the sell-off in smallcap stocks. What has driven this outperformance?
Micro caps are driven much more by company-specific data than by overall macro conditions. We have chosen high growth micro-cap stocks that are performing well, and this is reflecting in their share price performance.

What’s your strategy for stock selection in a portfolio if one is looking for an average 10% returns every year?
Our strategy is QVG – Quality, Value and Growth stocks in roughly equal proportion, has a high chance of delivering consistently high returns. When we say value stocks, we mean turnaround stocks, corporate action stocks (merger, demerger, split etc.) and counter-cyclical investing.

This combination results in stable operational and stock price performance from Quality stocks, strong Alpha generation from Growth stocks and back-ended returns from Value stocks. But there can be intervening periods of underperformance, too.

Quality stocks could get de-rated during rising interest rate regime, Value stocks could have delayed value unlocking due to delays in getting demerger approvals, or due to delayed turnaround etc.

Growth stocks are also vulnerable to sharp market reactions when they miss their numbers temporarily.

But our excellent long-term track record testifies to the usefulness of the QVG approach to investing.

Small and midcap stocks have seen a good rally in the last couple of months. Which pockets have attracted you?
Small and midcap stocks had suffered majorly due to post-covid slowdown in demand, inflation related input cost increases, and general sell-off due to rapid interest rate rises.

March 2023 also saw widespread tax loss-booking by HNIs. All these events had made SMID caps oversold.

The month of April possibly marks the end of these concerns, as perceived by the equity market participants.

We continue to be bottom-up focused, with a diversified exposure to building materials, consumption, chemicals, banks/NBFCs, hospitals, real estate, technology, garment exports and hotels, amongst others.

What are your key takeaways from the March quarter earnings? Which sectors indicate there is more pain left?
We are hearing about inflation having peaked, and a better outlook on gross margins, going forward. Bank results have been strong. While we hear a lot about falling outlook on profitability front (NIMs), we note that bank valuations are much below their FY17 peak.

As such, we remain bullish on banks going forward. We also note that the FY23 actual EPS is much lower than what was projected at the beginning of FY23. Now, FY24 holds more promise due to falling inflation and potential for falling interest rates.

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