Sharekhan strategist shares stocks, strategy that help 7 baskets beat the Street

“Apart from stock picking, we also focus on a top down approach which means having exposure in the right sectors depending upon macro conditions. This helps us invest in high quality stocks with structural growth prospects resulting in handsome gains for the investors,” says Gaurav Dua, Sr VP & Head – Capital Market Strategy, Sharekhan by BNP Paribas.

In his stock baskets, stocks that have given disproportionately high returns are ITC, M&M, Cummins India, L&T and DLF.
Edited excerpts from a chat:

A lot of market players have shown interest in the concept of having a curated basket of stocks. What is the kind of response that InvesTiger is getting from your investors and what makes it different from mutual funds?
Curated stock baskets are a hassle-free and cost-effective way to leverage on in-house research expertise to help retail investors invest in a disciplined manner. It requires a lot of time and effort to process and take required & timely action given the information overload in the digitally connected world and the fast-changing macro dynamics domestically and globally.

The 3 things that the InvesTiger app is designed to make effortless are: 1) identify the right stocks form the right sector; 2) active track the stocks; 3) Provide research alerts to take timely action (in terms of booking profits or even loss, if required) which is essential part of disciplined investment approach.

Given the ease to use fully digital customer journey along with index beating performance of stock baskets, we have seen very enthusiastic response from retail investors and have close to 11,000 clients have invested in the stock baskets since the introduction about a year back.Unlike mutual funds, the curated stock baskets are offered as a non-discretionary product and no transaction can be done without the approval of retail investors. Also, all the rebalancing alerts are backed by research notes and it helps investors to understand the reasons for the suggested action to be taken by them. Hence, the objective of curated stock baskets is not only to help investors generate index-beating returns but also empower investors to understand and effectively use research to tap the promising investment opportunities in the Indian equity market.

InvesTiger has just completed a year. Please share your performance and the strategy that helped beat the market.
In curated stock baskets, we invest only in companies that are well researched by our in-house research team. The 12-member fundamental research team has active coverage on 228 companies across market breadth and sectors. Along with the research team the investment team shortlists the 10 stocks for each of the stock baskets based on the defined mandate and rules of each stock basket. More importantly, the stocks are tracked actively and investors are given research alerts on their holdings to make timely decisions which is an essential part of a disciplined investment approach. Hence, except for one stock basket, all the rest of seven stock baskets have beaten their respective index by 4-12% since inception after factoring the transaction cost. Apart from stock picking, we also focus on a top down approach which means having exposure in the right sectors depending upon macro conditions. This helps us invest in high quality stocks with structural growth prospects resulting in handsome gains for the investors. All stock baskets are low churn products with focus on investment for wealth creation over a period of time rather than short-term trading or chasing momentum.

The 8 different strategies that you currently have are meant to suit different needs of investors or are based on different market-related themes?
Currently, the InvesTiger offers eight curated stock baskets spread over two categories, Premier and Thematic portfolios. In the Premier category, we offer balanced portfolios in large-cap, multi-cap, flexi-cap and midcap/small-call space. While in the thematic category the objective is to raise certain macro trends and investment themes like Economic Recovery Picks, Green Portfolio, MNC Picks and Exports Picks.

To further widen the range of investment solutions for retail investors, we plan to introduce an ETF basket and three solution oriented mutual fund baskets. Our endeavour is to continuously innovate both in terms of better features and range of offerings, to enhance the customer experience and provide a cost effective & a delightful investment journey to retail investors. Investors can start to invest at a relatively small ticket size of Rs50,000 lumpsum initial investment currently which we intend to bring down to Rs20,000-25,000 by introduction of ETF and mutual fund baskets.

Which are some of the stocks that have worked well in the portfolios?
In large-cap, investors have seen disproportionately high returns in stocks like ITC, M&M, Cummins India, L&T, DLF among others. In the midcap/smallcap space, we had many winners like Varun Beverages, Supreme Industries, Wonderla Holidays, Jupiter Wagon, CIE India, Mahindra Life, Suntech among others.

How frequently is the portfolio rebalancing done and under what circumstances?
The objective is to buy high quality stocks with structural growth outlook and hold them for wealth creation over a period of time. So there is very limited churn in the portfolios. Out of 10 stocks, we normally have an average of 5-6 trades annually across the curated stocks baskets. The churn could be higher in small-cap stock baskets (Emerging Star) while relatively lower in large-cap stock baskets (Power Portfolio). The churn rate is also dependent upon market conditions. There could be higher churn in an upward trending market as many stocks hit the fair value estimated by our research team. The churn rate is generally lower in range-bound market conditions.

How has your outlook changed on banks and IT stocks following the quarterly results and management commentary? Do you see more pain in IT and green shoots in banks?
We have been bullish on banks & financials for quite some time now. Banks have seen clean up of balance sheets and are beginning to see strong growth in their core business led by mid double-digit growth in advances for the past one year or so. Moreover, banks & financials always do well in an economic upcycle as the growth needs to be supported by credit growth by banks. Thus, to play the economic upcycle in the Indian economy, it is advisable to have overweight positions in banks & financials, real estate & building material, industrial/engineering and select consumer companies. We also believe that pharma & healthcare could outperform over the next couple of years, both in the domestic formulations and generic formulation space.

On the other hand, we are underweight on IT services due to a challenging demand environment led by aggressive rate hikes in developed countries. The rate hikes are leading to delay in IT spending by many clients in banking, retail & other key segments in US & Europe. Consequently, we see continued pressure on growth and margins to continue in the near term.